August 3, 2017    5 minute read

Why a Bitcoin Hard Fork Is Unlikely to Faze Investors

Going Separate Ways    August 3, 2017    5 minute read

Why a Bitcoin Hard Fork Is Unlikely to Faze Investors

Bitcoin has undergone a hard fork, August 1st, 2017, splitting the currency in two, with Bitcoin Cash emerging. Initially, Bitcoin Cash was slow to get out of the gates, perhaps due to a lack of mining support, but it is unlikely to dethrone the 8-year-old house name Bitcoin any time soon.

According to Saxo Bank analyst Kay Van-Petersen, Bitcoin could be responsible for 10% of the $5trn average daily volume in the foreign exchange market within 10 years. Whilst such a prediction pre-dates Bitcoin’s fork, the currency still leads in market share and the prices remain largely unscathed.

Potential of Bitcoin Cash

Bitcoin Cash was borne out of indecision in how to deal with the scaling issue present on Bitcoin which caused transaction delays, stoppages and blockages, because of the block limit. The popularity of Bitcoin is what caused such an issue, the blocks simply could not be created fast enough to facilitate the rising popularity of transactions. With more blocks to facilitate greater amounts of transactions – 8mb compared to Bitcoin’s 1mb – Bitcoin Cash solves this fundamental difficulty.

Bitcoin Cash will only hold value if people are willing to trade it and currently, exchanges such as BitMEX, Bitstamp and Coinbase, stated they will not support Bitcoin Cash, meaning investors holding Bitcoins with these exchanges will not receive any new tokens. Conversely, many exchanges have pledged support, alongside Bitcoin investors already owning Bitcoin Cash, this will lead to the new currency existing for a long while.

Even if the investors simply hold their new tokens to see how value appreciates, the currency will survive the initial doubt. An early market dump by unenthused investors would certainly decrease Bitcoin Cash’s value, but would also open the currency for a lot of cheap exchanges. If Bitcoin Cash succeeds in processing transactions quicker than Bitcoin, then the currency will naturally attract more users. Fundamentally, the market is heavily valued, with rich investors whom the market will follow to the ‘better’ currency.

The split could dilute Bitcoin’s market power, with users who favour quicker transactions over size choosing the new currency as their platform of choice. Less than a week old, Cash is already the third largest market cap, behind Ethereum and Bitcoin, at close to $7bn, ahead of Litecoin and Ripple. Should more Bitcoin users prefer Bitcoin Cash’s solution to the block limit and transfer, this could reduce Bitcoin’s market share, allowing Ethereum to catch up. More importantly, however, this can increase the market cap for the cryptocurrency, drawing in more capital to the market and offering a different platform than Bitcoin.

Bitcoin

Due to Bitcoin’s open source (readily available) software, changes can be made to the code if agreed by a consensus of users. This resulted in SegWit2x, to increase block size and reduce the pressure on transactions, allowing Bitcoin to overcome some of its previous burden in transaction speed. Whilst it was hoped that this would ‘avert a civil war,’ the fork proved otherwise.

SegWit2x proposed to move data outside of the block, parallel to the chain, to speed up transactions. Bitcoin Cash wants to directly increase block size.

However, the fork displays the prowess of Bitcoin, its ability to adapt to change and evolve to continue its decentralised currency platform will enable it to continue existing in adversity. The short-term volatility will not undo 8 years of Bitcoin in the making as the fork has not reduced Bitcoin’s reputation, reliability or convenience. The fork will not tarnish Bitcoin’s $44.4bn market cap, making it larger than Ethereum (Ether), Ripple, Litecoin, Dash and every other cryptocurrency combined.

Bitcoin Tipped to Surge

Independent stock research analyst and founder of Standpoint Research Ronnie Moas foresees, in his 1222 research report, Bitcoin surging to $5,000 by 2018, as cryptocurrencies continue to diversify and present a greater range of applications. This can also be attributed to investors and developers seeking refuge in a strong and sustainable, standardised currency.

Resultantly, investors will continue to remain with Bitcoin until other platforms prove themselves superior. There is, however, another factor at play. The currencies only have value so long as they are traded. Thus, because Bitcoin is the largest, currently, it commands the most support and therefore will remain the most supported as it has the most value.

Whilst there is clearly a speculative element to investing, this results in Bitcoin being a safer investment than Ripple or Litecoin. Until another currency can break the circle, Bitcoin is under no threat. This is also building upon the major influence that Bitcoin exerts in the crypto sphere, particularly as more regulators more to secure up laws surrounding the exchange of and investment in cryptocurrencies.

Conclusion

Ultimately, the split will result in Market Darwinism, the superior currency will rise in the currently loosely regulated market. Having two Bitcoins could help prevent infighting and fend off a potential crisis, especially if the crypto bubble continues.

Bitcoin Cash’s emergence is somewhat shrouded in doubt, from Coinsource CEO Sheffield Clark stating, ‘We have absolutely no plans to integrate Bitcoin Cash at our machines at this time,’ to ‘I think there is little chance that Bitcoin Cash will be successful in the long-term. It may have increased capacity, but several issues remain,’ relayed Ryan Taylor, CEO of Dash Core. The fork has the potential to split Bitcoin’s ecosystem, but we must wait and see if the slow adoption by miners and investors will continue or whether there will be a surge. Perhaps until big market players adopt the currency above Bitcoin, there is no danger.

The volatility presented by the split, influencing prices across the market, serves to show that Bitcoin and cryptocurrency still has some infancy to shake off before it replaces the dollar or pound. More businesses will have to accept it as tender and regulators will seek to control the spread as the sphere gains more ground and takes market share away from traditional investments.

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