Blockchain

Did the Recent Bitcoin Hard Fork Just Create Money Out of Thin Air?

The Bitcoin Blockchain underwent a hard fork on August 1, 2017, at 12.37 PM UTC with the block number 478558 being the last common block between the two chains. A hard fork results in splitting of the path of a blockchain by invalidating transactions confirmed by nodes that have not been upgraded to the new version of the protocol software, unlike a soft fork, which is a change to the software protocol where only previously valid blocks/transactions are made invalid. In Bitcoin’s case, this event was a culmination of conflicting approaches towards Bitcoin scaling among fractions of the community, the details on which have been widely written about and shall not be the focus of this piece.

How did the fork impact Bitcoin holders?

Post fork, the nodes and by extension wallets exist on both the blockchains. Users holding private keys to their wallets can access their Bitcoin Cash (BCH) and Bitcoin (BTC), while in all other cases, it depends on the private key holding entity’s discretion on whether or not to provide BCH wallets on their platform. Among prominent cryptocurrency exchanges, Kraken, Bitfinex, Bittrex, ViaBTC, Huobi, OkCoin, Bitthumb, Korbit and CoinOne supported Bitcoin Cash while Poloniex and Coinbase have announced support, but have not yet implemented trading.

Did the Recent Bitcoin Hard Fork Just Create Money out of Thin Air?

Source: Crypto Compare

From the above chart, a quick analysis can be done for a user holding private keys to his/her Bitcoin wallet. On August 1, the post fork Bitcoin traded around $2700-2800 range while the newly ‘air-dropped’ Bitcoin cash was tradable on exchanges for at least $217 which went to as high as $727 in the following days.

Did the Recent Bitcoin Hard Fork Just Create Money out of Thin Air?

Source: Crypto Compare

The 10-25% reward for just holding an asset beats any conventional paradigm of investment valuation; it would not be entirely inaccurate to say here that speculation had a substantial role to play in the “instant value” created here.

The Aftermath: Cryptocurrency market cap sees a yet another all-time high

It is notable to mention here that unlike the negative impact brought about by hard forks in the past, the Bitcoin Hard Fork seems to have scared away the bears dominating the crypto markets for the past month, thereby causing the market to shrink to $65B on July 17 before almost doubling to the current value of $120 billion in a mere 20 days.

Did the Recent Bitcoin Hard Fork Just Create Money out of Thin Air?Source: CMC

Another interesting observation here is the variation in the Bitcoin dominance index, which had seen a steep decline to ~40%, largely attributable to the ICO and subsequent altcoin explosion. The Bitcoin Hard Fork, however, momentarily, pulled the index out from its all-time low, another instance indicating towards the high stakes speculation rampant in the cryptocurrency markets

Did the Recent Bitcoin Hard Fork Just Create Money out of Thin Air?

Source: CMC

Which way is the Bitcoin Cash price headed to?

The biggest question that comes to our mind now pertains to the price of Bitcoin cash in future. Like with any conventional asset, Bitcoin Cash can be valued in two ways – one by estimating the fundamental factors affecting the demand/supply of the asset and the other by observing trends in a similar asset class.

In the cryptocurrency world, the former method would require us to gauge the miner interest in Bitcoin Cash which in turn depends on mining rewards and profitability. At the time of writing, the Hashrate or mining resources devoted to Bitcoin mining is 6542 PH/s almost 10 times of the 650 PH/s for Bitcoin Cash. Though, interestingly enough, Bitcoin cash community recently reduced the mining difficulty by 20% in an attempt to make the mining lucrative, however, the outcome of which is yet to be decided by the market.

Did the Recent Bitcoin Hard Fork Just Create Money out of Thin Air?

Source: Cryptocoin Charts

The second method involves a trend comparison with a similar asset, i.e., a forked chain of an existing blockchain. Ethereum Classic forked from Ethereum on July 20, 2017, and the price of ETC since then has ranged between 5-18% of Ethereum.

This data point provides a fairly acceptable reference to gauge Bitcoin cash price movement which has been confined in the 6-15% of Bitcoin’s price since launch, however, the reasoning behind both the forks are largely different and any correlation might be purely incidental.

Did the Recent Bitcoin Hard Fork Just Create Money out of Thin Air?

Source: Cryptocoin Charts

Where did all the new money come from?

Since the Bitcoin Hard Fork, the Cryptocurrency market has just recently been on another bull run, though maybe not as prolific as the previous one. This is also evident by Bitcoin search trends on Google which saw another spike off late.

Did the Recent Bitcoin Hard Fork Just Create Money out of Thin Air?

Source: Google Trends

The fresh fiat money can be attributed to a mix of retail interest and post-fork gradual deployment of institutional money by way of crypto-hedge funds and other investment vehicles. We have profiled a few of these new age crypto-only funds in our latest research report Evolution of the ICO. Having said all of the above and given our current constraints in differentiating the non-speculative from speculative value, it is too soon to gauge the long-term impact of the Bitcoin Hard Fork on cryptocurrency markets.

Aman Trivedi

Aman reads and writes about distributed ledger technologies and digital identity at MEDICI. He has been active in the financial technology consulting space for over two years, looking out for novel business models, markets, products and services.