Why the Drop? 3 Scenarios for Its Explanation, and Why Its the BCH Fork
In this article, we analyze some of the motivating factors behind the recent crypto sell-off, which managed to not only drag the total coin market cap below the $200 billion line but push the price of BTC down to levels not seen in over a year. Our primary suspect and main feature: the Bitcoin Cash fork, which took place on November 15th.
Crypto prices were in a tailspin across the board on the eve of the long-anticipated Bitcoin Cash (BCH) fork, though the reasons why remain largely debated. In the early morning of November 15th, a large exit from the crypto space started which saw some $26 billion move out of crypto in favor of fiat currency, making it one of the biggest drops in the market of 2018. Some are blaming a recent crackdown in China on bitcoin mining operations, some blame uncertainty created over the outcome of the BCH fork, and others are of the opinion that its was just a bad time for bitcoin price “technicals” that triggered the massive sell-off. We’ll analyze each of the 3 potential scenarios below, though to be up front, we’re going to dedicate a particularly large portion of the article to scenario #2 – the BCH fork – because its been the most dramatic and entertaining of the 3 during the last couple days.
Scenario #1: China Mining Farms Shut Down
Contrary to popular belief, China never did reverse its ban on ICOs or bitcoin mining, yet a lot of this activity continues to fly under the radar, either passively endorsed by the government or turned a blind eye to. China currently remains home to over 50% of all hash power directed to at the Bitcoin Network, but over the past few days this dominance has been slightly reduced to the fact that several mining farms have paused operations for the purpose of government inspections. Mining farms in China are being audited for both tax and regulatory compliance issues, which has had the effect of dropping the Bitcoin Network hash rate close to 10% since November 5th.
To mandate this closure, the power supply was cut off to mining farms, which was the only reliable method of ensuring that their operations could be halted. As a result, miners in 2 operations lost a total of about 1 million yuan, or $143,000, by having to cease their functioning for only 24 hours. It is still unclear if the farms are back online. One thing that is for certain is that the Bitcoin Network hash rate has yet to fully recover, leaving suspicions that at least some Chinese mining farms remain offline, for now. A benefit to this is the “de-centralization” of bitcoin mining operations, even if it is at the cost of a downtick in BTC prices.
Scenario #2: Bitcoin Cash Fork (the Main Event)
This largely contentious topic has been the main event in the crypto world for the past few days and will likely remain so at least a week or two into the future. Shortly after Bitcoin ABC, the team behind maintenance of Bitcoin Cash’s version of the Bitcoin Core client, announced they would be planning an upgrade to their client software that added a few significant changes, another faction (led by Craig Wright, the man who once famously claimed to be Satoshi Nakamoto) announced that they would not be going along with ABC’s proposals, and outlined their own upgraded version of Bitcoin Cash. This alternative client would be called Bitcoin Cash Satoshi’s Vision, or “SV” for short, a not-so-cryptic nod to Wright’s assertion that he was Satoshi Nakamoto.
For the reference of the reader, here are how the lines are currently being drawn in terms of who is siding with who on the BCH fork:
Backers of BCH ABC:
- Roger Ver (owner of the outspokenly pro-BCH bitcoin.com)
- Jihan Wu (owner of the tremendously successful mining hardware company Bitmain)
- Mining pools: BTC.com, AntPool, Bitmain, bitcoin.com
- Exchanges: Kraken, OKCoin, BitMex
- Companies: Trezor, CoinText, Keepkey, BitPay
Backers of BCH SV:
- Craig Wright (owner of blockchain research company nChain)
- Calvin Ayre (owner of cryptocurrency news site Coingeek)
- Mining pools: Coingeek, SVPool, Mempool, BMG Pool
- Exchanges: none
- Companies: nChain
Supposedly, at the core of Wright’s disagreements is his feeling that Bitcoin ABC’s new plans would make the coin stray too far from its primary purpose of acting as “cash.” These plans include adding a system to order transactions in a specific manner and also enable features that would expand its ability to utilize smart contract and “oracle”-type systems, two features Wright deems wholly unnecessary. For the weeks leading up to the fork, Wright had vowed to use hash power from SV-friendly mining pools, most notably that of billionaire Calvin Ayres’ Coingeek, vowing that there would be no compromise with the Jihan Wu-led Bitcoin ABC.
The entire premise of an SV victory rested on the assumption that if SV could “out-hash” ABC, mine more blocks faster – thereby creating a longer chain – it would be respected by crypto exchanges and the community as “the real Bitcoin Cash.” However, a couple problems have emerged since Wright’s initial claims. For one, not a single exchange seems to be backing Wright’s SV, with some heavyweights supporting ABC and most others remaining on the sidelines. The second problem came to light shortly after the fork: SV did not have the majority share of hash power Wright thought that it would have. ABC leaders were quick to voice their suspicions about the sudden drop off in the SV hash rate. During a live stream broadcast focusing on the ABC Several hours into the stream, Bitcoin Cash ABC developer Amaury Séchet joined the chat, saying:
“If you think you have a better plan, and I think with BCH we have a better plan than BTC, then you can compete on the open market, and either we’re right, and we end up winning, or we’re wrong and BTC ends up winning, and that’s all good and fine and that’s market competition.
What we are seeing right now, though – or rather, what we are not seeing right now, is Coingeek and BMG’s hash rate. Right? It’s completely gone. It’s not winning, mining anywhere that we can see. What that tells me is, you know, they have not thrown like 2 exahash at this, right? So they are preparing some kind of attack.
And right now we are not in a situation where people compete in an open market. We’re in a situation where we have an adversary that, you know, that is planning an attack. And so we need to consider them an attacker at this point.”
Though a few of the first blocks were indeed mined by SV after the fork, more hash power was soon directed at ABC, which then proceeded to take an overwhelming lead in blocks produced. At one point ABC enjoyed a 40+ block lead and it looked to already be the victor.
However, it was quickly ascertained that ABC’s boost was to be only temporary, as Roger Ver had redirected hash power contracts away from BTC to temporarily mine BCH ABC, and within 24 hours SV had significantly narrowed the gap. Regardless, in the minds and hearts of the community, ABC was the clear winner, as Craig Wright’s antics became too hard to stomach for many of his long-time supporters. In one of his furious and frustration-laden tweets, Craig Wright seemed to be planning to sell off some of his bitcoin stash to fund his war efforts, claiming he didn’t mind seeing the price of BTC fall to $1,000 a coin:
To all BTC miners…
If you switch to mine BCH, we may need to fund this with BTC, if we do, we sell for USD and, well… we think BTC market has no room… it tanks.
Think about it. We will sell A Lot!
And, have a nice day
(BTC to 1000 does not phase me) pic.twitter.com/oUScEahtWc
— Dr Craig S Wright (@ProfFaustus) November 14, 2018
As of early morning November 11th, the two chains, now entirely split and no longer mergeable, were nearly neck-and-neck in hash rate, and many exchanges had started delisting BCH and associated trading pairs from their markets. In their place was BCHABC and BCHSV, both entirely separate entities that were seemingly no longer in competition with one another. The idea that “there can be only one” Bitcoin Cash was cast to the wayside, and neither party seemed like they would soon relent to the other. Crypto exchanges, having to carry on with “business as usual,” for the most part have engaged in the rational option of maintaining wallets for both coins, eager it cash in (no pun intended) on the tremendous opportunity for collecting trading fees as users decided which side of the fork to back.
According to analysts at BitMex, both sides have been mining at a loss, rendering the continuation of the ongoing feud a war of attrition. Two days into the fork there seems to be no real winners. So, what does all this have to do with the falling price of bitcoin (and most other coins as a side effect)? The reasons are manifold, but here are the biggest 3:
- The fork has created an air of uncertainty of the future of the #4 biggest coin by market cap, fueling many HODLers to sell their crypto stashes in favor of the more predictable nature of stablecoins and fiat currency.
- Both sides of the fork were sitting on vast reserves of bitcoin, which they dipped into to fuel their war efforts. Bitcoin-made billionaires suddenly dumping their coins into a market with little buy support can have that kind of effect on prices.
- A significant amount of traders sold BTC for BCH, also lowering the price of BTC, hoping to catch a round of “free coins” during the fork process. This move has proved to be not so prudent as of yet, as prices of both ABC and SV coins combined still fall far short of the price of BCH going into the fork.
Others seemed completely unphased at the thought of a BCH fork, believing the whole affair would be quickly sloughed off like bad skin, and things would resume as normal upon clearing the aftermath.
Everyone is talking about tomorrow's #BitcoinCash hard fork. Seems like a lot of attention for a chain that processes around half as many payments per day as Dogecoin (data via @coinmetrics). pic.twitter.com/R9xXrkhrUR
— Kyle Torpey (@kyletorpey) November 14, 2018
Real-time prices for the two components of the fork can currently be found here:
If the “hash war” continues for much longer, with both sides operating at a loss, it is likely to assume that they will keep dipping into their BTC reserves to fuel their hash war, which would likely have a continued negative effect on the price of BTC. For the time being, the prospect of a long, drawn out battle between the two factions remains an uncertainty, with neither side likely to budge in the near future. To watch the skirmish unfold in real time, spectators can watch block counts and hash rates continually updated here and watch price changes in real-time here.
Scenario #3: Bad Technicals
Another possibility is that bitcoin charts used by technical analysis-savvy traders have just been looking bad, meaning a sell-off was imminent, in the works, and bound to happen regardless of other drama unfolding in the crypto space. Some capital fund managers have even gone so far as to say the recent downward move has been entirely technical in nature and not at all due China’s mining farm woes or the BCH split. After a month of sideways trade, it was suspected that bitcoin could soon break out for either a major upward or a major downward move, with Bloomberg speculating the result of flat movement would end up in the latter scenario over a month ago.
Coin Clarity’s own Jonathan Morgan has a more optimistic view of the unfolding technicals which poses a scenario for a recovering market, also based on technical analysis. The worst of this week’s sell-off appears to have abated, so we can only hope for the best from here on out for the crypto markets during the remainder of 2018. Regardless of why it happened, this year has been a doozy for crypto investors, who are now more than ready for a new bull run to help lift spirits during the holiday season. We’ll be sure to remain diligent with our eye on the ball, reporting back to those who are keen to see how things play out.