Bitcoin’s Big Test: November Fork – Winklevoss Bitcoin Trust ETF (Pending:COIN)

Just about everyone has an opinion on Bitcoin’s price ($50,000?), inherent value (“digital gold” anyone?), or implementation these days. We have our prediction ($8,000 Bitcoin by year’s end)—and we’ve been right about these calls already.

But no one knows the future with any absolute certainty, and Bitcoin’s blockchain technology means it can elude even the finest of technical analysis.

Well, there are such thing in cryptocurrency as “forks,” and Bitcoin is going to have one—another one—in mid-November.

Let’s look over some basics on what forks are and the information we have on this one, and then we’ll talk about it means as an investor (both pre and post the fork date).

That date is November 16, and the “fork” means the blockchain that powers Bitcoin will be split into two, each holding the history of all previous ledger activity (I suggest going here for a primer on blockchain).

The split will take Bitcoin (as it’s known now) and a new chain which many are calling “2x” or “S2x” or even “Segwit2x,” which refers to seg-wit, an update to the blockchain that changes the way information is sent. That piece may not seem like a big deal, but the change is profound enough to double the size of each “block” within Bitcoin’s blockchain. Many see this as a solution enabling Bitcoin to scale—to take on more transactions per second and to do it at a lower cost.

Groups within the Bitcoin ecosystem—are there are separate groups like miners, developers, investors, exchanges—actually sort of struck a deal in New York in May on implementing this change (called the New York Agreement), but some have since dropped out.

There are more details to be found about this—particularly this Forbes article—each which can explain the technological aspects of this. The piece that’s most pertinent to this discussion is that many exchanges, because of the unknowns here, is going to be offering customers that hold Bitcoin the same amount in S2X coins, meaning Bitcoin owners will own both chains, for at least some time. Important also is that this has all already happened, most notably in August, with the creation of Bitcoin Cash (BCH), which forked off of Bitcoin. Investors knew this was coming at that point, but no one knew how to value BCH.

One factor that was used for Bitcoin Cash was the futures crypto market (which is perhaps not established enough to truly be taken as a token sign). BCH followed its futures price quite closely at the time of the original fork. S2X futures are currently trading around $2,500, while Bitcoin hangs around $6,000.

So what an investor needs to know as this point is that a split is coming, and after the split there will be an urgent and serious need to establish which is going to be the “main” Bitcoin that processes the millions of transactions every day and works toward the kind of economical penetration that sustains its $100 billion market cap.

One doomsday scenario is that neither chain can become the consensus chain, and the value of each plummets. That’s a possibility, but with so much at stake, it doesn’t seem likely. Each group that’s represented here simply has too much to lose to fight an ideological war when millions, if not billions, are on the table to lose. Miners, investors, companies (exchanges) will all lean toward what’s in their self-interests, whether it represents the best long-term technical solution for Bitocin or not. This also means it’s worth keeping an eye on altcoins like Dash, Ripple, or Litecoin, because they each fill in a place Bitcoin’s technology might fail to evolve into.

People in the crypto world are split about whether these forks are a good thing or not. Some point out the confusion in how these play out with average users and investors—confusion in both the technical aspects and how to care for their money. It leads many to simply drop out of the marketplace. Others, like Bob Summerwill, chief blockchain developer at Sweetbridge, say that forks give communities the opportunity to evolve as needed. It’s just the sort of peaceful governance that can lead a decentralized currency to regulate itself.

But, again, this scenario is unlikely. So what is going to happen? We don’t know for sure, but I think a few things will likely take place.

Bitcoin’s price will rise steadily until November 16, and dramatically right before. Since the chains are being copied, it’s an offer for what some might perceive to be “free money.” This happened in August right before the Bitcoin Cash fork. Bitcoin saw its price move up nearly 10% the week before the fork, and over 20% in the first week immediately following it.

Bitcoin Cash, on the other hand, in the weeks after the fork, was volatile. It nearly tripled in price from its inception date, only to sort of fizzle out.

I doubt this November fork will see its forked-off chain survive, however. Once exchanges see that one chain is dominating (and sort of claiming the title of the “real” Bticoin, since it’s going to be used) the other chain’s value will plummet fast and furiously, and there will be little to no value in a sea of sellers.

But I do think we’ll see repeated pattern wherein a price spike occurs immediately following the settling of this fork. The reason is simple: It survived. It came out of a conflict without a central institution, and various stakeholders and lived on another day. For the hardcore fans of decentralizing, a fork is an opportunity to shine rather than mull away.

The second reason—building upon the first—is the rest of the crypto market. While Bitcoin has a 57% “dominance” in total market cap of the whole market, there are still major technologies emerging. If Bitcoin makes it through the fork cleanly, you’ll have an entire class of non-crypto investors seeing its success at moving forward and thinking about getting in. If it should fail, the rest of these coins will fight to fill the gap Bitcoin left behind.

There’s too much interest in other blockchain applications and tokens (over $70 billion of market cap) to have Bitcoin’s upgrade be a bubble-burster. Instead, a void left by Bitcoin’s fumbling can be filled with DASH, for instance, already with a market cap near where Bitcoin was after 7 years of existence.

Why do altcoins matter for Bitcoin value? Because Bitcoin is still by and far the dominant “on-ramp” to get into altcoins and buy them. Save for a few dozen, most exchanges only allow you to get these coins by exchanging Bitcoin itself.

The counterpoint here is that the core to Bitcoin aren’t likely to let this happen either. Because Bitcoin is so dominating, we can expect a peace offering to be made and had before its dominance over the world it created would fall exceptionally.

The short of it is this: There’s too much at stake within Bitcoin and outside of it —in crypto— for this to make a significant setback. And Bitcoin has risen to $6,000 with this date looming since May, so there’s no reason to think it’ll have a majorly negative impact now. Instead, it’ll be a short-term confusion that once cleared, will mean more people flock to Bitcoin, either to hold it as it grows in price or to use it to exchange for other emerging blockchain and cryptographic tokens.

Disclosure: I am/we are long BITCOIN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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