Photo Credit: coindesk.com
In the next few weeks, Bitcoin is going to begin it’s transition through SegWit and (later) the hard fork to a 2 MB block size. While there’s a lot of technical details to go through, this article will be focusing on another question: how will this transition affect the overall valuation of Bitcoin, Litecoin, Ethereum and the market as a whole?
This article will focus on our predictions* of how the market is going to respond. We focused primarily on three cryptocurrencies: Bitcoin, Litecoin and Ethereum, largely for convienince sake. While every cryptocurrency will be affected by SegWit indirectly we believe the Ethereum (the 2nd largest cryptocurrency) and Litecoin (the most similar cryptocurrency to BTC) will be the most directly impacted.
In Summary, here’s how we think the market might be impacted under several conditions:
- Segwit/2MB Succeeds without a Chain Split
- Temporary valuation boost for everyone, followed by a continued crash with no structural changes and no new price floor post crash.
- Segwit/2MB Succeeds with a Temporary Chain Split
- Temporary structural market change, with Bitcoin collectively losing value and major alt-chains (Ethereum and Litecoin) gaining value. After a few months of activity, the market will return more or less back to normal with no long-term impact.
- Segwit/2MB Succeeds and there are Multiple Bitcoin Blockchains
- Permanent structural market change, with Ethereum and Litecoin gaining significant value (Ethereum likely the new highest value blockchain). Market will have a lower post-crash price floor due to investor confidence being shaken.
Let’s go through the possible scenarios:
Case #1: Segwit/2MB Succeeds without Chain Split
If Bitcoin is able to successfully get through the SegWit transition, it will likely lead to a temporary bump in price. Generally, positive news about Bitcoin has usually led to a positive jump in value, such as the case of Japan legalizing Bitcoin or the hearing on Bitcoin with the Senate.
However, given the massive crash happening in the market currently, it’s unlikely that even a flawless transition will overcome the price drop. After a short period of relief, Bitcoin will likely continue to fall with the rest of the market.
Rest of the Market
Success for Bitcoin has often meant success for alt-chains. For the last few weeks, the market has tended to rise and fall uniformly, with few exceptions. So if Bitcoin succeeds, the rest of the market will likely get a short boost before being overtaken by the crash.
In this particular scenario, the theoretical price floor the market is heading towards (whatever that might be) will be unaltered.
Case #2: Segwit/2MB Succeeds with a Temporary Chain Split
In the case of a hiccup in the transition, there is a possibility that there will be two Bitcoin chains that the community will have to decide between. In a scenario like this, it is very likely that the collectivley price of Bitcoin will drop dramatically as the market tries to decide which chain to support.
This scenario would not be too dis-similar to what happened with Ethereum after their hard fork in June of 2016. After part of the mining community left to start Ethereum Classic, the price of Ethereum took a noticeable downturn.
Unlike Ethereum, once a negative price impact is seen (and profits are impacted), the minor chain will be abandoned in favor of the ‘majority’ chain. The reason this might be the case is because as opposed to ETC, which split largely due to ideological issues, the BTC mining community seems more motivated by profits and revenue. If the alt-chain splits and it doesn’t lead to more $$$, the minor chain will panic and BTC Prime will be unified.
This will likely result in a temporarily depressed price for Bitcoin, as it will take a few months for the market to re-settle. However, this is unlikely to damage Bitcoin’s reputation too badly. It is still the most widely accepted cryptocurrency globally and even with a minor chain split, it will be unlikely to sway the public view. As a result, Bitcoin will remain the dominant blockchain by valuation.
When the value of Bitcoin drops, a certain percentage of investors are going to hunt for other opportunities to park their funds. Two of the most obvious blockchains to go for are Ethereum and Litecoin.
Ethereum is considered to be the ‘rival’ of Bitcoin in the blockchain world. It has the second highest valuation by market cap and is being compared in the media as the alternative cryptocurrency people should consider. If Bitcoin drops, this is naturally the place people are going to look only because it’s a safe bet.
More savvy investors would expand a bit further and consider a blockchain like Litecoin. Litecoin has had the reputation of being ‘the silver to Bitcoin’s gold’ and has proportionally grown in value with Bitcoin. The two blockchains are structurally similar and earlier this year Litecoin successfully implemented their own version of SegWit.
During the split, it’s likely these two blockchains will receive some of the valuation drop from Bitcoin. Post split, you’ll see a change in prices, but more than likely the structure of the industry will not change in the long-term. Bitcoin will eventually recover and Ethereum and Litecoin will return to their pre-SegWit positions, baring any additional shocks to the market.
Rest of the Market
The impact on the rest of the market entirely depends on people’s belief that X blockchain is a good substitute for Bitcoin. For blockchains like Ripple, Dash and Monero, it’s very likely that their price will temporarily rise as well. However, more obscure chains might not get as much attention and continue their decent due to the crash.
Ultimately, the impact of the crash in this scenario will be less noticeable, as the volatility caused by Bitcoin will make it hard to find any discernible trends in the short-term. Longer-term, the crash will still prevail and the industry will go towards the natural post-crash floor.
Case #3: Segwit/2MB Succeeds with Permanent Chain Split
While we have an example of Ethereum successfully breaking into two chains, Bitcoin is a bit different. Ethereum was a relatively unknown blockchain back in mid-2016 and was able to do it’s dirty laundry away from the main stream media. Bitcoin is the poster child of blockchain technology and cryptocurrency.
If you were to ask the average person about cryptocurrency or blockchain, they probably couldn’t tell you what it was. But they’ve very likely heard of Bitcoin.
What this means is that if Bitcoin splits it’s chain and tens of thousands of users have to figure out which chain to ‘support’, it’s going to cause a lot of confusion in the general market. Considering all the alternatives to Bitcoin, it’s likely the value of the market will move to other established blockchains, causing the combined value of the Bitcoins to diminish significantly.
Hard forks are generally a very confusing affair. Have to explain to an average trader how a hard fork works (and why the now have two kinds of BTC) is going to be complicated. If most users are in the position of having to decide between two different chains, they are likely to chose a third option of just selling out and not dealing with it. This won’t affect just Bitcoin, but the entire market as a whole.
In the scenario of Bitcoin splitting chains, Litecoin and Ethereum would probably be the major benefactors of the valuation shift for the reasons listed above. Unlike the previous scenario, it’s very likely that the power dynamic will flip and Bitcoin will no longer be the dominant force in the industry, altering the market structure.
Because of Ethereum’s current valuation at ~$20 Billion (compared to Litecoin’s $2 Billion), it will likely be the most valuable blockchain if Bitcoin splits. Litecoin may gain enough momentum as it is so similar to Bitcoin, but it has to raise in value very fast for this to be possible.
Rest of the Market
While the power structure of the major blockchains will change dramatically, the market as a whole will likely lose value beyond the crash. Because of how visible Bitcoin is, a split in the chain is likely to cause some confusion with the larger investment community and push some people away. Because of this, the price floor of the market will be lower than if the the permanent chain split did not happen.
There are a few major blockchains that may retain some of Bitcoin’s value, but overall the rest of the cryptocurrency market will drop in price due to the relative lack of activity long-term.
Regardless of your stance on Bitcoin, it is important for the image of the blockchain community. It’s the most public blockchain and, for many, is cryptocurrency. A public chain split will likely damage consumer trust and set blockchain back several years.
If Bitcoin can get through unscathed, it likely won’t fix the short-term price due to the crash, but the long-term consistency will help build trust in the public eye.