On November 9, 2017, the price of Bitcoin, the most stable of cryptocurrencies, experienced a crash of almost $1,000 per coin after reaching its all-time high of $7,899 per coin. This flash crash was a direct result of panic due to the cancellation of the controversial SegWit2x protocol upgrade.
The CEO of BitGo and lead for the SegWit2x project announced the suspension, citing a lack of clear consensus and certainty of a split following implementation. The flash crash dropped the value of Bitcoin (which represents anywhere between 50% and 60% of total cryptocurrency market capitalization) by 12% in just under an hour.
The rapid swing in the value of Bitcoin shows obvious conflicting responses to short-term and long-term impacts of the SegWit2x fork cancellation, as well as the propensity for immense volatility in both Bitcoin and the entire spectrum of cryptocurrencies.
The fork received much criticism from Bitcoin’s code developers and node operators, who argued that:
- Bitcoin is a currency, not a payment network, and SegWit2x is another step in the wrong direction
- If Bitcoin failed to deliver transactions post-SegWit2x, the entire currency could collapse, bringing smaller coins down with it
- SegWit2x would essentially allow centralized decision making on a decentralized network, negating the initial concept of Bitcoin
Had the fork gone through, it would have split Bitcoin into two competitive blockchains. Because of the cancellation, it is anticipated Bitcoin services will face intense disruptions over the following weeks and months. The resulting instability shows a high probability of some cryptocurrency traders losing funds due to exploits such as replay attacks.
As history has proven, Bitcoin’s avoidance of this hard fork is relatively bullish for long-term investments and appears to be encouraging die-hard cryptocurrency holders to increase their stakes. Nevertheless, there is a kicker.
Several informed analysts have made speculations that SegWit2x was a driving force in Bitcoin’s rapidly and unnaturally growing market share. It has been noted that this split would have led to the development of a new cryptocurrency, which would provide current holders of Bitcoin with no-cost coins in the new blockchain fork.
As the SegWit2x fork appeared to be a sure thing, cryptocurrency traders likely already included the value of these dividends, increasing their holdings of Bitcoins in anticipation. With the indefinite suspension of the hard fork, these same investors will likely transfer a chunk of this Bitcoin capital either into other alternative coins or completely out of the cryptocurrency market.
This extreme volatility in Bitcoin, the actions of which trickle down to lower market-cap alt coins, shows the true nature of the two-headed conflict. On one side of the wall are Bitcoin investors, solely concerned with the long-term growth of the currency. On the other side are casual Bitcoin traders, setting their sights instead on short-term gains.
An article on Bloomberg in late June by Dani Burger holds true today. The article, titled Bitcoin Has Become So Volatile It Looks Like an ETF on Steroids, notes that the value of Bitcoin swings more than JNUG, an exchange-traded fund utilizing borrowed funds to attempt to squeeze triple the returns compared to an index tracking small-cap mining companies.
While the cancellation of SegWit2x is causing a flood of investments away from Bitcoin into alternative coins, entry-level traders need to remember that a currency responsible for over half of total market capitalization has the power to cause massive waves in the value of all cryptocurrencies.
One thing is for certain: Bitcoin’s value over time is presenting itself in almost a perfect rise corresponding to the anatomy of a bubble.