Does a market react to news or does news react to a market?
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Saturday 10th November 2018: Google the search term “crypto today,” and you’ll be served up the latest news and opinions on what’s driving the cryptocurrency market. Sometimes the news is useful, but most of the time it’s a reflection of the market price action. A move up, and the news is good, a move down and it’s bad. One of the top stories this morning, among other positive headlines, was this: “Cryptocurrency valuation to hit $1 trillion this year…”
The article enthusiastically goes on to say it would only need a push of 25% past the all-time high valuation to do this. The problem is, the current cryptocurrency total market cap isn’t $800 billion, it’s 212.6 $billion.
$212.6 billion will need a 370.4% increase, not 25%, to break a trillion dollar market cap.
So, the $787.4 billion dollar question is: Have the cryptocurrency markets hit bottom? If you’re investing in a cryptocurrency, have you asked yourself why? Is it because you’ve had enough of what you see as currency devaluation and manipulation by centralised government institutions? Is it because you want to speculate on the value of the coins underlying blockchain? Maybe you don’t care about cryptocurrencies and blockchains, and you’re just out to make money.
Whatever the reason, timing is important, especially so if you are speculating over shorter time frames. If you’ve found a blockchain you want to invest in for the longer term, when do you start entering the market? Do you build up a position gradually or do you go all in?
The 5%, the most successful and consistent speculators and investors, don’t just enter randomly because of news. They wait for the moment in time when market conditions turn in their favour.
In mid-November 2018, Bitcoin and the top-ranked alt-coins are in sideways moves in a bear market. How do the 5% know when conditions have changed? Can they tell the difference between a market more likely to have put in a low, or a market that’s been pumped and is about to get dumped?
On the 31st of October, Bitcoin Cash made a new low of $410.10. Eight days later Bitcoin Cash had gone up 57%.
Has Bitcoin Cash made a significant market low? Is Bitcoin Cash positioned to take the crown and become the market leading cryptocurrency by market cap, and at the same time archive market dominance by following the ideology of Bitcoin’s founder Satoshi Nakamoto?
Hard vs. Soft Forks
Bitcoin Cash (a cryptocurrency spawned from a hard fork with Bitcoin on August 1st, 2017) is implementing another hard fork of its own on November 15th, 2018. But this time it is contentious.
Before we talk about what’s going on with Bitcoin Cash, it’s helpful to understand how changes are made to a blockchain.
Hard forks are a permanent split in a blockchain. The key points to remember about hard forks are:
They are not backwardly compatible as each chain follows a different set of rules.
You can’t send coins between chains. (because they are now incompatible)
If the hard fork occurred because of a dispute between two or more parties, duel funds are created, every coin in existence gets duplicated.
Hard forks raise the issue of reply protection. (More on this later)
Cryptocurrencies also undergo soft forks too. Think of soft forks as software upgrades and hard forks as permanent splits creating one or more different and non-compatible coins.
A Brief History of Bitcoin
To understand the reasons for the contentious hard fork of Bitcoin Cash, it helps to have a brief history of Bitcoin to hand.
“ Chancellor on brink of second bailout of banks”
The Times 3 January, 2009
On January 3rd, 2009 at 18:15:05 GMT, the genesis block of Bitcoin was mined. Nobody knows for sure what motivated Satoshi Nakamoto to develop bitcoin, but a message embedded into the first mined block gave early adopters an ideology to follow.
It reads: “The Times 3 January 2009 Chancellor on brink of second bailout of banks”
For a while, nobody was interested. In July 2010, Slashdot (the news for nerds website), posted an article naming Bitcoin as a new disruptive technology. In the next five days, Bitcoin went up 800%.
Over the next four years, support for Bitcoin grew. Stories began to emerge. In 2010, Laszlo Hanyecz famously exchanged 10,000 Bitcoins for two Papa John Pizzas. Hanyecz’s transaction proved goods could be exchanged with a digital currency. The myth was born. By the time the public got to hear this “story,” 10,000 Bitcoins had a market value of $75 million.
Between 2011 and 2013, the Silk Road website also put Bitcoin on the map. The Silk Road was an illegal online marketplace where you could purchase anything from drugs to hitmen. It was shut down, and its 26,000 Bitcoin seized. The infamy of the Silk Road is one of the reasons cryptocurrencies are still associated with money laundering and crime.
In February 2014 the Mt. Gox exchange collapsed. At the time Mt. Gox was handling 70% of all Bitcoin transactions. Approximately 850,000 Bitcoins went missing, (Although 200,000 were later found) and the company filed for bankruptcy. Bitcoin prices collapsed 85% from $1102 high, finally hitting bottom in January 2015 at a price of $160.
So, between 2010 and 2015, Bitcoin had built up a story. A hapless programmer was swapping 10,000 Bitcoins for two Pizzas. An illegal black market website had come and gone, with its owner facing (and has now received) multiple life sentences, and a bankrupted exchange, where investors lost it all.
Between July 2010 and May 2017, Bitcoin had gone through three price bubbles and was in the middle of a fourth.
Bitcoin was on the brink of a mass-market mania, as the public was about to take the stage.
But, behind the scenes, the big players were positioning themselves.
It was during this time, one Bitcoin enthusiast noticed the Suits had replaced the Hoodies at Bitcoin events in New York.
In 2017, the Digital Currency Group, a New York City based venture capital company, tried to gather support for a hard fork of the Bitcoin blockchain. The reason? Scalability.
Bitcoin’s design allowed for only a 1-megabyte block limit, and for the first few years, this 1MB limit seemed to have scalability fault tolerance covered. But by 2017, the number of transactions had grown, and the transaction costs paid to jump the queue to add a transaction to the current block had ballooned from less than fifty cents at the beginning of 2017 to over twenty dollars, that’s an increase of over 4000%.
The Digital Currency Group assembled companies who were willing to support a permanent hard fork of the Bitcoin blockchain to provide future scalability. In what was called the New York agreement, proposed changes to the Bitcoin blockchain were agreed, with changes being rolled out in two phases. They called it SEGWIT2X.
Phase 1 — SEGWIT
SEGWIT, an acronym for Segregated Witness, is a soft fork in the Bitcoin blockchain. Soft forks are different from hard forks because they do not permanently or irreversibly split a blockchain, and they’re backward compatible. (Think of soft forks as a software upgrade.)
SEGWIT removes non-essential data from a transaction. Block limits from now on would be limited by weight and not size.
After SEGWIT there are two types of nodes connected to the Bitcoin network. SEGWIT and Non-SEGWIT, also known as legacy Nodes.
Non-SEGWIT nodes receive SEGWIT transactions with non-essential data, like signatures and public keys, stripped out. The stripped out data allows for more transactions to fit onto a legacy Non-SEGWIT block, while not breaking the 1MB block size limit. But the new consensus rules of SEGWIT changed the threshold from a block size of 1MB to a block weight of 4MB.
Non-SEGWIT data has a block weight four times its size. On legacy Non-SEGWIT nodes, the data per block will always be less than or equal to 1MB, and therefore less than or equal to 4MB in weight, because the weight of Non-SEGWIT data is always four times the data size in bytes. This is what makes SEGWIT a soft fork.
Older legacy nodes that don’t upgrade to SEGWIT will be able to cram more transactions into the 1MB limit because each transaction byte size is smaller, having the segregated witness or SEGWIT data stripped out, keeping the legacy nodes compatible with SEGWIT nodes.
SEGWIT nodes adjust the weight of each transaction by multiplying the transaction size in bytes with the segregated witness data removed by 3 plus the transaction size.
(transaction size with segregated witness data removed) 3 + (transaction size)
This means the weight of each SEGWIT transaction will be less than an equivalent sized Non-SEGWIT transaction because a Non-SEGWIT transaction’s weight is always four times its size in bytes.
Therefore a 1,000-byte non-SEGWIT transaction will be, using the formula:-
(transaction size with segregated witness data removed) 3 + (transaction size)
= (1,000 bytes - 0 SEGWIT data) 3 + 1,000 bytes = 4,000 weight.
But a 1,000-byte SEGWIT transaction with 300 bytes of segregated witness data will have a weight equal to
= (1,000 bytes - 300 SEGWIT data) 3 + 1,000. = 3,100 weight.
When a 1,000-byte SEGWIT transaction is written to a SEGWIT node the data size will be 1,000 bytes, but when it’s written to a Non-SEGWIT node the transaction size in bytes will be 1,000 bytes minus the stripped out SEGWIT data of 300 bytes and equal 700 bytes.
On an upgraded SEGWIT node you can’t put more than the 1MB max limit of Non-SEGWIT nodes because Non-SEGWIT transaction sizes are always four times the weight in bytes.
Think of SEGWIT as a software upgrade. The 1MB physical block limit is replaced by a virtual block size of 4MB, allowing for more transactions to be placed into a Non-SEGWIT block because the transaction sizes are smaller. This allows for compatibility with SEGWIT nodes because legacy transactions are converted into a new metric of weight instead of byte size. Because Non-SEGWIT transactions have a weight that’s always four times the transaction size, the maximum block size on a Non-SEGWIT node is always the maximum block weight on a SEGWIT node.
This trick allows for a Bitcoin block size bigger than 1MB in size on upgraded SEGWIT nodes, but a SEGWIT block always has less than the new consensus limit which is 4MB in weight.
This is why, if you check, you’ll see block sizes greater than 1MB in the Bitcoin blockchain. The more often this occurs, the more nodes have switched over to running SEGWIT.
Earlier we discussed the scalability issue regarding transaction cost. The less room there is on a block, the more the transaction goes up because of market supply and demand dynamics. In 2017, transaction costs increased from a few cents to over $20, but some readers might be asking how could this happen given that SEGWIT was implemented in August 24th, 2017, when Bitcoin’s all-time high was under $5,000, and before the final parabolic move.
It’s because SEGWIT took time to be accepted. By early 2018, only between 10% to 15% of all Bitcoin nodes were using SEGWIT, and by October 2018, the number of SEGWIT nodes had only just broken through 50% of the total number of nodes on the Bitcoin network.
SEGWIT went live on the 24th of August 2017.
Phase 2 — SEGWIT 2X
The 2X phase of SEGWIT was due on the 16th November 2017.
Unlike SEGWIT, which was a soft fork, the 2X phase would have been a hard fork of the Bitcoin blockchain, and this means 2X would have been a permanent change.
The proposed 2X hard fork would have increased the block size from a weight of 4MB to a weight of 8MB. The maximum size of a block in bytes would have doubled from 1MB to 2MB. Remember after a hard fork, there would be no legacy Non-SEGWIT transactions because all the nodes have to upgrade. Because of the adjustment of a transaction from byte size to weight, there would be, in effect, an increase in transactions in a Bitcoin block from Bitcoin’s original 1MB to SEGWIT2X having a theoretical maximum of close to 8MB, which is possible because if the size in bytes of the SEGWIT data is a high percentage of the overall transaction size.
Bitcoin miners, seeking to extract the most profit, would mine blocks around 2MB in size with SEGWIT and 4MB in size with SEGWIT and 2X.
This was viewed by many in the Bitcoin community as a discrete corporate takeover of Bitcoin because by changing the consensus from block size to block weight and increasing the maximum block size it priced out the smaller miners and centralised control of the Bitcoin blockchain.
At the last minute, on November 8th, 2017, around one third of the companies in the New York agreement withdrew their support for the 2X hard fork phase, and 2X was cancelled.
In 2017, developers thought the future implementation of Segregated Witness, without increasing the Bitcoin block size limit, would favour classifying Bitcoin as a store of value investment, rather than a digital currency suitable for every day use.
Is Bitcoin a store of value like Gold?
Is Bitcoin a fiat currency replacement?
On August 1st, 2017, Bitcoin was hard forked by developers who wanted Bitcoin to follow what they saw as Satoshi Nakamoto’s vision for a digital replacement to fiat currency. A new currency, BitCoin Cash, was born.
Bitcoin Cash, like Bitcoin, has a maximum supply of twenty-one million coins and is mined using a proof of work incentive scheme.
If Bitcoin is going to become an everyday currency, it needs to be scalable. A new Bitcoin block is produced every 10 minutes. Data from Blockchain.info shows the average number of Bitcoin transactions per day is 269,546, and the average transaction per second is 3.11. Compare this to Visa’s 1,700 transactions per second, 146 million transactions a day throughput, and you’ll see the problem.
To become an everyday currency, replacing your fiat currency, you need fast, reliable transaction speed, and low transaction costs. Bitcoin at the end of 2017, had neither.
Bitcoin Cash was upgraded in May 2018 and now supports a block size of 32MB. On September 1st, 2018, Bitcoin Cash was stress tested with 2.1 million transactions over a twenty-four hour period. The test was successful because, during the testing, transaction fees did not increase. 2.1 million transactions in twenty-four hours sound impressive, but that’s only 24.31 transactions per second, remember, Visa transactions are around 1,700 per second, and this means the Bitcoin cash stress test resulted in only 1.43% of the number of daily Visa transactions.
If Bitcoin Cash is going to capable of replacing fiat currency, it needs to get faster — much faster.
And Then There Were Three
The original 2017 Bitcoin Cash hard fork was supported, among others, by Rodger Ver, aka Bitcoin Jesus, whose company was the first to support Bitcoin transactions; Jihan Wu, co-founder of Bitmain, the world’s largest designer of ASIC (Application Specific Integrated Circuit) chips for Bitcoin mining, who also operate, the two largest Bitcoin mining pools BTC.com and AntPool, and Craig Wright, the Australian computer scientist, who has claimed he’s the guy behind the pseudonym, Satoshi Nakamoto, and is behind nChain, a blockchain development company.
There are currently 2239 public nodes running on the Bitcoin Cash network with this number split between different Bitcoin Cash developers.
1074 nodes are run by Bitcoin ABC, 799 nodes by Bitcoin Unlimited, 163 nodes by Bitprim, 160 nodes are run by Bitcoin Satoshi’s Vision (SV), 20 nodes by Bitcoin XT, 8 by bcash, and the remaining 15 nodes run unnamed development versions of Bitcoin Cash.
All these developers run the Bitcoin Cash protocol, but they don’t agree with the Bitcoin ABC’s vision for the future direction of Bitcoin Cash.
The ABC, in Bitcoin ABC, is an acronym for “Adjustable Blocksize Cap.” Bitcoin ABC’s strategy is to enable massive scaling of Bitcoin Cash, but to achieve this they advocate developing Bitcoin Cash’s internal mechanism to gradually prepare it for massive on-chain scaling, without just increasing the size of the maximum block size.
But Bitcoin Cash Satoshi’s Vision does not support this way of scaling Bitcoin Cash, and instead supports a block size of 128MB.
Craig Wright claims Bitcoin Cash SV has the support of other mining pools including Coingeek, (who has 28.6% of the total Bitcoin Cash hash rate) Mempool, BMG, and SVP. If this is true, then Wright’s alliance will control at least 51% of the Bitcoin Cash hash power.
The upcoming Bitcoin Cash hard fork has two main actors. Bitcoin ABC, supported by Jihan Wu, and Bitcoin Satoshi’s Vision, supported by Craig Wright.
The disagreement has caused a fight. The two parties disagree on the future of Bitcoin Cash and have planned a hard fork on November 15th, 2018.
Jihan Wu initially supported on-chain scaling because his mining companies would make more profit with this method of scaling, but Wu now wants to take Bitcoin Cash down a different road. A road that could lead to smart contracts being run on a protocol called Wormhole that's being developed by Bitmain, Wu’s company. This is what has caused the split in the Bitcoin Cash community.
Bitcoin Unlimited, who are one of the main implementers of
Bitcoin Cash nodes and whose main proponent is Rodger Ver, one of the original supporters of Bitcoin Cash, is advocating a neutral wait and see approach by suggesting the miners should be given a vote on which option they want.
Another mediator involved in the Bitcoin Cash dispute is Cobra, the anonymous owner of bitcoin.org. After initially calling for no changes until an agreed resolution can be found, Cobra has recently come out in support of Bitcoin Satoshi’s vision.
The exchanges are going to freeze transactions in Bitcoin Cash, and this is due to the uncertainty over the hard fork.
Bitcoin Cash hard forks regularly, but this hard fork is different because of the two competing proposals. For example, the Coinbase and Binance exchanges have issued a notice saying they will pause (it sounds better than suspend) send and receive transactions before the hard fork event. They will then monitor the situation until the Bitcoin Cash network reaches consensus over the hard fork.
Ledger, one of the leading hardware wallets, has also issued a notice stating the Bitcoin Cash hard fork will create at least two chains without replay protection and that the wallet will pause the Bitcoin Cash service until it’s clear which of the competing chains will become dominant.
As mentioned in the notice issued by Ledger, there will be no replay protection in the upcoming Bitcoin hard fork.
This is important to understand because as a blockchain splits into two, each blockchain shares the same pre-hard fork transaction data. Without replay protection, your transaction details from one chain could be intercepted and replayed on the other chain without your permission. (Although, for this to work, the exact amount and address used in the original transaction need to be the same.)
When replay protection between the chains is implemented by making a change to the transaction format, it means sending from one chain can’t be duplicated or replayed on the other chain.
Owners of Bitcoin Cash will receive allocations of new coins in the newly forked blockchain or blockchains. Is this the reason behind the 57% move up in price?
One of the problems, especially if you’re new to the crypto markets is getting past the factoids. So far, we’ve talked about Bitcoin Cash using these interesting, but mostly useless snippets of information, yes it’s helpful to understand the people behind the cryptocurrency you’re interested in, but the problem is most articles and information out there are bipolar.
They are either a deep dive into the tech (which if you’ve not got the background IT knowledge) is frankly going to be a struggle, or they are just factoids. Snippets of information retold.
So, what can you do if you are new and don’t have a tech background?
Keep it simple and look past the factoid. Go in search of the bottleneck in the system.
The two most important questions to start with are
What problem does it solve?
Is it scalable, and how does it scale.
Take Bitcoin. What problem does it solve? — Money manipulation and devaluation by centralised authorities. But is it a store of value or is it digital cash, used for everyday living, like the all-important morning coffee.
If you view Bitcoin as a store of value, then the transaction speed and cost might not be a big problem, but if you are of the view that Bitcoin is a fiat currency replacement, then how does it scale?
Without diving into the technicals, you’ll find, with a bit of research that cryptocurrency blockchains scale in one of three ways. Yes, this is big picture and general, but it will get you in the right ballpark.
Generally, blockchains can scale either
Think of off-chains and side chains, however elegant they might sound, as a bolt-on solution.
Ask how do the transactions, when pushed off the main blockchain onto the off-chain (also called a state channel or a second layer) get settled? What infrastructure do the transactions use? No matter how fast these transactions are, what is the weakest link in the chain — the Internet perhaps?
This research can be done without in-depth technical knowledge, and you might uncover a bottleneck.
Keep it simple and look for the weakest link. Then go and look for the solution with the best shot at surmounting the obstacle.
Another technique to use as a filter for conflicting news and hype when a market is in a downtrend, (like Bitcoin Cash is now) is to look to the left for overhead supply and new incoming demand.
On September 5th, 2018, Bitcoin Cash lost $98, or 15% of its value with a turnover of 209% greater than average. This is a clue that overhead supply overwhelmed demand at around $625.
On the 11th October, Bitcoin Cash lost $88, another 15%, on 224% of average turnover. It marks $509 as another potential area of overhead supply.
On the 4th of November, Bitcoin Cash traded through the $509 area of overhead supply, going up 18.5% on the day, and doing this on 436% of average turnover.
When a market is in a downtrend, look to the left and search for overhead supply, then watch for evidence that demand is overwhelming supply.
Any move below the 4th of November demand day low on high volume would signal the presence of new overhead supply.
From the genesis block in January 2009, through four price bubbles, and the bankrupting of the leading Bitcoin exchange, controlling 70% of Bitcoin trading volume; Through the rise and fall of the infamous Silk Road, through the hard fork of Bitcoin into Bitcoin Cash, the implementation of SEGWIT on the Bitcoin blockchain, and the failed hard fork to SEGWIT2X, the next stage of the Bitcoin story is about to unfold.
Instead of getting caught up in the hype, keep it simple and look for bottlenecks in the system. Start with two questions, what problem does the technology solve and how does it scale; then, using a chart, look to the left and use supply and demand as a filter.
Combining simple questions with supply and demand is a technique to find which cryptocurrencies and blockchains have the infrastructure to be successful over the long term, and using a chart you can gauge market acceptance of the technology using the interaction of supply and demand.