Don't Blame the BCH Fork for Bitcoin's Price CrashBy Yerui Zhang
Last week Bitcoin Cash (BCH) split into two competing blockchains, Roger Ver’s Bitcoin ABC and Craig Wright’s Bitcoin Satoshi’s Vision (SV), and some crypto watchers believe that this disruptive event triggered Bitcoin's recent price crash. However, after analyzing Bitcoin price trends and computing power, the LongHash team concludes that the impact of BCH's fork on Bitcoin's price is much smaller than expected. Below we discuss what drove the recent price crash -- and where we think Bitcoin's price will go.
Stage one: It's all because of OKex
The above chart from tradingview.com suggests that the trouble started November 13. At 9 a.m., BTC’s price fell below $6300, causing a wave of sell-offs. At 11 a.m., the price went down to $6239, and continued to decline after a short-term rally. Then, on November 14, the Hong Kong-based futures exchange OKex suddenly forced a settlement on its futures contracts, enraging some traders in the process. The next day, an OKex bug made it temporarily impossible for traders to execute orders. Contracts continued to fluctuate between $4,900 and $6,300 and were not available for purchase at the lowest price limit. $189 million USD disappeared for BTC futures, and $108.7 million USD disappeared for ETH futures. This affected a significant amount of quantitative trading software, whose programs chose to sell bitcoins regardless of losses. BTC plunged to $6000 in heavy trading volume in just one hour, and continued to fluctuate around $5,600 the next day. We believe that the plunge has little to do with BCH’s fork, which was scheduled for November 15. Rather it was a chain reaction caused by the short-selling of funds and a malfunction at OKex.
Stage two: Where does the fork come in?
Although the BCH fork was scheduled for 12 p.m. on the 15th, the transaction volume of the first fifteen hours of the 15th was low. At 3 a.m., due to Craig Wright's increasingly firm position, analysts continued to warn that both parties might try to use 51% of hash power to launch double-spend attacks. In order to avoid potential risks, some investors chose to sell their cryptocurrency assets, causing a drop in heavy volume, which caused the BTC price to fall below $5,400. In the next three hours, as the bottom-fishing funds entered the market and BTC computing power did not decrease significantly, the price once again rallied back to around $5,700, and everything seemed to be back on the right track. At this point, the block generation of SV led by Wright was slower than that of ABC. According to the longest chain principle of Bitcoin (nodes will always identify the longest chain as the valid blockchain, and only miners who mine on the longest chain can get rewards), many believed that the ABC team had already won the race.
Stage Three: The computing power race is the culprit
When it started to look like the fork drama had settled down, Wright launched a counterattack. Starting from the 18th, CSW mobilized a large amount of BTC computing power to mine the BSV blocks, meaning that there was less computing power to mine Bitcoin. At 2 a.m. on the 19th, the height of the BSV block successfully surpassed that of ABC. From the chart of BlockChain.info, we can see that the BTC's total computing power fell between November 18 and 20, triggering a panic selling. The price fell to a new low of $5,271 early on November 19, and it’s not over yet. As Bitmain and related ABC supporters operated a large number of mines, they quickly responded by calling a large amount of BTC computing power to speed up ABC's block generation rate. The price of BTC dropped to $4,405 early on November 20.
It can be seen from mining difficulty statistics on BlockChain.info that since October 18, the mining difficulty of BTC has been reduced by more than 10%. This may be the reason why a large number of mines are overwhelmed by the decline in the price of BTC, but we believe that the bigger reason is the computing power race of the two parties.
So when will there be a rally?
You may be curious about how much this kind of computing power race would cost. According to the Bitmex team, Nov. 19, ABC lost $3.15 million and BSV lost $2.938 million as of noon on the 19th, which happened in less than one day from the beginning of the computing power race. Becuase of these huge costs, we believe that there will not be a winner in this race. The ABC chain and the BSV chains will develop in parallel. The computing power summoned by both parties will soon return to where it should be. In other words, the fork-related commotion is a short-term problem, not a long-term one. Resolving it will not cause Bitcoin's price to rebound. Capital has fled, investors have been shaken, and there's no guarantee that OKex or another exchange won't cause similar chaos in the future.
So what's next? There may be a rally of BTC, which we believe will possibly go back up to $5300 to $5600. It will be difficult, however, to break $6000. The chain of events reaction triggered by Okex futures caused the price of Bitcoin to drop from $6,200 to $5,600. Over the short-term, it will be difficult to restore investor confidence. We further believe that as the balance point in the first round of decline, $5,600 is a strong resistance level and can be seen as the second target of the rally. $5,300 is a short-term balance point before the computing power war, and will be the first target for this rally. Please stay tuned for LongHash's follow-up analysis.