Bitcoin may be trading at an all-time high, but the reasons why have experts wondering.
Despite increased dialogue about the cryptocurrency's potential, and growing acknowledgment from the mainstream, there are some who believe now isn't the best time to buy the notoriously volatile asset. After all, in just weeks, bitcoin is likely to see not just a contentious split of its blockchain, but an adversarial one.
Looking for context on what could happen if bitcoin splits and one version tries to destroy the value of the other? As developers freely admit, you're unlikely to find it – it's a first.
"Bitcoin traders are some of the most irrational investors you'll come across," OpenBazaar developer Chris Pacia said in a Facebook post addressing the issue.
The brutal sentiment points to what has been the uptick in buying that appears to be taking place not just despite – but because of – the coming fork, now slated for November. In contrast to zealous investors, developers like Pacia are finding it hard to believe anyone would put big money into a protocol about to undergo a process even they're just beginning to understand.
Yet it seems, investors believe the momentum is warranted given the results of the last hard fork in August, which split the network in two, but did so in a way that fairly safely created a new asset called bitcoin cash.
Distributed to all bitcoin owners at the time of the fork, investors were suddenly given an equal amount of valuable cryptocurrency (bitcoin cash has held relatively steady around $300 per coin, but has traded for as much as $1,000). Far from a risky proposition, investors see that extra value as just created out of thin air and delivered to existing investors for free.
But while developers are aware the mechanisms and politics of the coming fork are different, investors seem to be planning for the same results.
Harry Yeh, managing partner at cryptocurrency investment firm Binary Financial, told CoinDesk:
"Investors are just looking at it like, 'I'm going to get more tokens right now.' It's just that simple."
And these investors aren't new to cryptocurrency (or to trading in general), they're well-established investors.
Ronnie Moas, the founder of Wall Street firm Standpoint Research, for example, echoed Yeh's belief, saying, "I don't see [investing in bitcoin as Segwit2x closes in] as risky – especially if you hold onto the spin-off [coins]."
Not the same
Is this merely a case of aggressive trading, or is it wishful thinking? Some would argue, that on this issue, the traditional finance guys are getting in over their heads.
For one, the bitcoin cash hard fork and the Segwit2x hard fork will be different in that the former's supporters were defined by their interest in creating a competing (and now seemingly complementary) cryptocurrency. With Segwit2x, the motivations aren't exactly that.
Still, traders counter, cryptocurrency just doesn't function like more established markets, meaning that in the high-risk world of experimental assets, more risk is still just risk.
"Historically, one would assume that if you have one token and it splits into two, your mindset would be that both tokens would be worthless," Yeh said. "But, traditional rules of economics and finance don't really apply in the cryptocurrency world."
Yeh points to last summer's ethereum hard fork, which led to a split and the creation of two competing assets as yet another sign forks have historically resulted in value creation.
While the price of ethereum and ethereum classic (the new coin) dropped initially after the split, ethereum's market value recovered quite nicely, currently hovering around $32 billion, while ethereum classic continues to hold value at just over $1 billion.
"History has shown that, any time there's been a hard fork, that people get more tokens – and those tokens become tradeable somewhere," Yeh said.
As a consequence, retail investors are betting that if they buy more bitcoin, another fork will drive prices higher, and that this will result in them holding a more diversified portfolio.
More about bitcoin
However, some investors say the rally could be less about diversification and more about going all in on bitcoin with the expectation of even more long-term gain.
According to Arthur Hayes, a former Citigroup trader who now heads a cryptocurrency derivatives exchange, confidence is high that the existence of additional versions of the bitcoin protocol won't affect this long-term future. Further, with bitcoin holding steady, even though three of the world's largest exchanges in China closed down, there's confidence that nothing can quite derail its current trajectory.
As a result, investors aren't really worried about Segwit2x.
Yeh agreed with the bullish outlook on bitcoin broadly, saying he expects a run-up both before and after the hard fork.
He argued that ideological belief in bitcoin – even at its most uncertain, even at its lowest – is what will continue to push the price higher and new investors into the market.
Summing up that investor optimism, James Altucher, a former hedge fund manager, popular business blogger and bitcoin bull, told CoinDesk:
"When people say that bitcoin is like a penny stock, it's like a scam internet stock, no. Bitcoin actually has huge amounts of software and science behind it to make it the best store of value in the world."
Ash Bennington contributed reporting.
Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which helped organize the Segwit2x proposal and has an ownership stake in OB1, the company that develops OpenBazaar.
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