An Overview of How Bitcoin Forks Influence Bitcoin Value
In the Cryptocurrency World, a “fork” is a modification to the software of the digital currency that results in the creation of two separate versions of the blockchain with a shared history. When any software change is proposed to a digital currency protocol, users need to show their approval for the new, upgraded version. A fork takes place when many people agree to the need for an upgrade. Bitcoin bifurcated in two when the digital currency officially forked creating bitcoin cash. Bitcoin forked again creating bitcoin gold. The current scenario is dominated by the SegWit2x fork.
The Bitcoin Gold Fork and its Effect
Recently the bitcoin economy went through the bitcoin gold fork and made some interesting market moves as a result. For instance, on Oct. 20, 2017, bitcoin’s value reached the $6,000 mark before quickly hitting $6,200. In such instances, it is quite normal to encounter a chain split, which refers to a break from the Bitcoin network.
In simpler terms, a chain split usually occurs after a fork. Token holders can suddenly find themselves owning several split tokens which are equivalent to the number of tokens on the Bitcoin network. The main reason for this is the fact that the new chain is an exact copy of the bitcoin blockchain, till the point the fork occurs.
The chain split for the Bitcoin network is explained in the pictorial below.
Effect of Forks on User’s Wallets
For token holders who use crypto-wallets that support the forked chain’s software, the holder automatically becomes the owner of both digital tokens. In this instance, the chain results in the creation of two digital tokens: the original bitcoin (BTC) and bitcoin cash (BCH).
This results in double ownership of tokens, where existing bitcoin owners became the owners of an equivalent amount of bitcoin cash following the split. For example, if a person owned 10 BTC (bitcoin) before the split, s/he will now hold 10 units of both BTC (bitcoin) as well as BCH (bitcoin cash).
Investor Reactions after the Fork
There are many ways to handle an upcoming fork in the Bitcoin network. As an example, we will take the following scenario:
Person X owns 35,000 BTC which is valued at $5,000 per bitcoin. Hence, his total asset worth comes to $175,000,000. To remedy the situation, X follows the news and real-time events that may affect his position in a particular market. Suppose X has knowledge of the fork beforehand and knows that a new token (bitcoin cash) will be created. Coincidentally, X also learns that the crypto wallet that he uses will also support the supposed fork’s software. As mentioned earlier, this means X will get both the 35,000 BTC as well as the same amount in bitcoin cash tokens.
This may result in X creating a “buy” wall to drive the price up since X now is a large player in the market. Hence, whatever amount X increases will result in the increase of bitcoin cash tokens under his ownership.
In a case where X turns out to be an educated trader or investor, he may choose to increase his position in the bitcoin market. This is done so that X can amass 50,000 bitcoins before the fork occurs. As a result, X will have 50,000 BCH in addition to the 50,000 BTC he already owned.
Effect on Value after Fork
When a fork occurs in the Bitcoin network, the value also split into the forked chain. On July 23, 2017, the value of bitcoin dropped from $2,800 to $2,700, following the fork. This resulted in the creation of bitcoin cash, which at the time of launch was valued at $555.
Instances of Past Forks and Their Effect on Bitcoin Values
The bitcoin cash fork took place on August 1, 2017, and the SegWit took place on August 23, 2017.
Ideally, the user transactions are gathered into blocks that are turned into a complex math solution. The block miners operate high-powered computers and work out solutions to verify if the transaction is possible. Once other miners determine that the puzzle is correct, the transactions are accepted and the miners are rewarded in bitcoin. The need for high-tech machinery has necessitated the mining process to be controlled by a small group of people equipped with powerful computers. Bitcoin gold was invented to change this process. The idea is to allow more people to mine bitcoin and with less powerful machines. This would allow the process of further decentralization of the network so that it can be accessed by a wider user base. The collective minds behind bitcoin gold designed a code that creates a fork or split in the bitcoin blockchain. This split took place on Oct. 25, 2017. As a result of this fork, bitcoin gold came into existence. However, it quickly plunged 60%. Bitcoin hit a low of $5,374.60 before recovering nearly $300.
Five days prior to the bitcoin gold fork, the price of BTC reached a new all-time high; on Oct. 20, the valuation of bitcoin surpassed 6$,000 for the first time before adding another $200. There are 21 million solutions to the bitcoin encryption puzzle. Each solution represents a coin or token which affects the bitcoin price. Coinmarketcap reported that on a weekly basis BTC was up by 3.3 %, while on a monthly basis, BTC had increased by 55%. After the bitcoin gold fork, the price of BTC fell to a five-day low. Other than the creation of bitcoin gold, the drop from the record high can be blamed on overbought conditions.
Since its circulation, bitcoin gold has been getting traded at just over 161$ per coin, as per reports of Coinmarketcap data. Investors started selling-off the cryptocurrency, which indicated a lack of faith in the market about the newly-created bitcoin gold. The fork had other adverse impacts on bitcoin as well. The website for the new version of the cryptocurrency i.e. bitcoin gold, suffered a denial-of-service attack. Many cryptocurrency exchanges have not even started trading in bitcoin gold yet, signaling a lack of faith in the protocol. By comparison, the current value of the BTC/USD exchange rate is roughly $17,000.
Bitcoin had undergone a similar fork, which created bitcoin cash. As a result of the fork, the newly- created bitcoin cash witnessed an initial surge in price. The price hit an all-time high of $914.45. However, prices declined steadily after the surge and subsequently traded at only $330. Backers of SegWit, also known as the Bip141, opposed bitcoin cash on ideological grounds. Instead, they proposed SegWit as an upgrade for the following reasons:
- SegWit could effectively increase the volume of transactions that fit into each block without raising the block size parameter. This means more transactions per second can be registered on the blockchain. Thus SegWit can elevate the transactional capacity of bitcoin.
- SegWit removes transaction malleability, which is the result of a cryptographic trick to change a signature without changing what it stands for. If this issue is resolved a number of network improvements could take place.
- SegWit has the potential to decrease the data need for bitcoin nodes.
The SegWit2x hard fork and its effect on Bitcoin value
On Nov. 8, 2017, bitcoin recovered recovered north of $7,400 after briefly falling below $7,000. This dip was caused by the market’s sustained support for the original version of the cryptocurrency over the SegWit2x. Several analysts have stated recently that this subsequent surge in the price of Bitcoin should be credited to the allocation of funds from investors hoping to obtain B2X from the SegWit2x hard fork. However, it might be an exaggeration to claim that the recent upsurge in the price of bitcoin is prompted by the SegWit2x movement. That is because the majority of investors do not have the technical expertise to understand the implications of SegWit2x.
After dipping below $6,000 earlier in November, the price of bitcoin skyrocketed recently to a level as high as 8040 dollars on one of the largest exchanges in the world called Bitfinex. Bitcoins prices have made their gains since falling to a level of 7829 dollars on Bitfinex. This price was slightly lower than the globally weighted average high price.
As most readers are no doubt aware, bitcoin’s value has skyrocketed over the past month. This recent surge has triggered primarily by expectations of rising institutional interest in bitcoin. Established investors are increasingly foraying into the territory of cryptocurrency. The rise in the price of bitcoin has also been credited to the anticipation regarding the SegWit2X fork.
Featured image courtesy of Shutterstock.
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