Two Cryptocurrencies For The New Year

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Where Are Cryptocurrencies Headed In The Second Half of 2020?

The sharp gains and wildly volatile trading in cryptocurrencies during the first half of 2020 have raised questions over where trading in digital currencies will go during the second half of the year.

Bitcoin touched an all-time high of $3,000 on June 11 only to fall 27% in the following days. It ended the first half of the year at $2,436.7, after more than doubling its price in the previous three months.

The meteoric rise of Bitcoin was due in large part to increased demand in Asia. At the start of April, new rules went into effect in Japan that gave Bitcoin official recognition as a legal currency, with major retailers starting to accept it as a payment method.

But Bitcoin has come under pressure amid a growing rift between developers and businesses over how best to increase the digital currency’s trading capacity, since transaction speed has slowed as trading volume has grown. As a result, Bitcoin could be broken into separate, competing coins.

New proposals addressing this issue are expected to launch later this year, which could result in changes to the Bitcoin network’s processing capacity, referred to as a fork, or splitting the currency into two separate entities, hard and soft fork versions.

Fears over a potential split in the currency have curbed investor demand for Bitcoin and bolstered demand for the newer alternative, Ethereum .

Ethereum Ascendant

Ethereum hit a record high of $419.3 on June 11, before suffering a sharp flash crash. It ended the quarter at $260.52.

Ethereum, which launched in 2020, is the largest cryptocurrency by market capitalization after Bitcoin, according to Business Insider.

Bitcoin currently has a market cap of around $41 billion, while Ethereum has a total valuation of around $26 billion.

There are, however, a few key differences between Bitcoin and Ethereum. Some are technical, such as the time it takes to complete a transaction, but the most important difference has to do with the purpose of the coins.

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Bitcoin was created as an alternative to fiat money; it’s a purely digital currency. Ethereum developers on the other hand, set their sites on forging a platform that facilitates peer-to-peer contract, or as some refer to it, “smart contracts.” The simplified explanation: Ethereum transactions of any sort would level the playing field for buyers and sellers by enabling payment to be released concurrently with fulfillment of transaction conditions.

While both Bitcoin and Ethereum compete as cryptocurrencies, they aren’t in fact meant to be directly competitive.

Blockchain Technology

In recent years, interest in cryptocurrencies has shifted to their underlying technology, blockchain. Potentially, this could cause a greater revolution in the financial world than digital currencies themselves.

A blockchain is a distributed ledger of financial transactions, stored in blocks, which is maintained by a network of computers on the internet.

Once recorded, the data in a block cannot be altered without the alteration of all subsequent blocks on the network. In May of this year, global fintech consortium R3 raised around $107 million in financing to develop commercial applications for the distributed ledger technology at the heart of blockchain.

Banks are hoping the technology, which verifies and tracks transactions on its own, could eventually help them reduce the complexity and costs of activities like trading settlement and international payments.

ICOs To Drive Expansion

In the second half of 2020, the price of both Bitcoin and Ethereum is likely to be driven by initial coin offerings, or ICOs, which have emerged as a favored fundraising tool with which to launch new cryptocurrencies. An ICO is a cross between crowdfunding and an initial public offering that sells digital tokens, or “coins,” created through blockchain technology in exchange for cryptocurrencies of immediate value.

Ethereum’s development was initially funded by an ICO. With speculator appetite for blockchain rapidly expanding, the price of Bitcoin and Ethereum is likely to continue to rise as funds are being raised in those currencies.

Beyond Bitcoin and Ethereum

Litecoin and Ripple were, respectively the long-standing number-two and number-three cryptocurrencies, before the arrival of Ethereum.

In recent years, Ripple has surpassed Litecoin in market cap, making it the current number-3 after Bitcoin and Ethereum.

Much like Bitcoin and Ethereum, Ripple and Litecoin have different purposes. Ripple is a payment protocol, a secure way to represent and transfer any unit of value. It is used by banks, such as UBS (NASDAQ: UBSI ) and Santander (NYSE: SAN ), and can’t be mined, meaning creation of additional Ripple coins is centralized and can only be done by the owner or one of his representatives with knowledge and access to the appropriate technology.

Litecoin, though similar to Bitcoin, is technically more advanced since transactions can be processed more quickly, reducing the types of bottlenecks often seen with Bitcoin trades.

On a day-to-day basis, however, cryptocurrency price volatility will continue to be controlled by traders. One thing is certain: 20% flash crashes or equally violent jumps within mere minutes are not yet a thing of the past in this arena.

Chart courtesy TechCrunch

According to recent data, there are more than 800 different cryptocurrencies available today, including coins with such esoteric names as MarxCoin, PonziCoin, SelfieCoin, and PutinCoin, with additional currencies coming to market all the time. This is why the talk of a bubble continues to surface.

Over the past few months, many of these currencies appreciated exponentially. SelfieCoin, for instance, was worth $0.000002 in early June; it’s now trading for 0.000026. That may seem like two ridiculous numbers, but it represents a gain of 1300% in under a month. PonziCoin (a name that hints at bubble status in and of itself) went from $0.0014 in March to $0.087 at its high for the year so far, on June 6. That’s a 6250% gain, or 62.5 times its earlier value.

The possibility of such stratospheric profits greatly explains the current, swelling tide of interest in cryptocurrencies, which is pushing anything and everything in this realm higher.

ETF and Mutual Fund Adaption

With such potentially lucrative profits in play, it’s no surprise that fund management groups and companies are also looking to enter the virtual currency domain.

Grayscale’s Bitcoin Investment Trust (OTC: GBTC ) is an ETF traded over the counter, meaning off established exchanges; the company describes the fund as the first “publicly quoted security invested in deriving value from the price of Bitcoin.” The ETF doesn’t exactly mimic Bitcoin’s performance, as it trades at a premium compared to the BTCUSD pair. The fund had extraordinary returns in May, when it gained 248% to Bitcoin’s 72%. Since the beginning of 2020, the ETF is up 199% to Bitcoin’s 129%.

Others are proving eager to join the fray, not always with immediate success. In a decision released on March 10 of this year, the US Securities and Exchange Commission (SEC) rejected an application by Tyler and Cameron Winklevoss to list their Winklevoss Bitcoin ETF (COIN) on the Bats BZX exchange. At the time, the SEC said the denial of the Winklevoss bid was due to the risk of fraud and lack of regulation of world Bitcoin markets.

On March 24, Bats appealed the verdict by filing a petition for review of the rejection. A month later the SEC agreed to consider Bats’ petition. Potential Bitcoin investors await the next round of deliberations on the matter and a possible reversal of the original SEC decision. Bitcoin prices surged on the review announcement. Still, according to CNBC, there’s a high bar for approval.

Last month, Zug, Switzerland-based Crypto Fund AG, announced that they plan on launching the Cryptocurrency Fund, a European mutual fund based on the Cryptocurrency Index, which will invest in the most prominent virtual currencies including Bitcoin, Ether, Ripple and other well-established cryptocurrencies. The fund is scheduled to launch sometime in Q4 2020.

Cryptocurrency Fundamentals

Along with investment fund recognition, there are an additional number of fundamental factors that can help boost cryptocurrency prices in the second half of the year. Official recognition by governments, acknowledging at least some of these virtual currencies as legitimate will add to their uptake, and thus demand. Japan has recently deemed Bitcoin a legal form of payment, sending that coin to record highs on the announcement.

Fund recognition and official sanctioning of virtual currencies could in turn bring broader mainstream attention. Today, even as interest in cryptocurrencies grows, only a small minority of the population is aware of its existence and inner workings—while even fewer actively participate in trading. As opportunities to use cryptocurrencies in daily life grows, so too will their value.

Finally, Bitcoin, Ethereum and others can be viewed as “disaster hedges” since they’re unregulated and exist independently of federal governments and central banks which could prove invaluable during times of war or major catastrophe. Though their volatility prevents them from being true safe havens, if the situation with North Korea, for instance, were to go haywire, we fully expect Bitcoin and coins of similar ilk will skyrocket in value.

Some may argue that without broader uptake and more reliable governmental oversight of the still nascent but burgeoning virtual currency world, there’s little to recommend the highly volatile, wild-west environment that seems to currently characterize the “digital token” universe. It seems as if buzz and headlines are the major drivers. As well, catastrophic safe haven status is a pretty slim niche for a new financial product let alone for an entirely new asset class.

For all those who believe in the future of cryptocurrencies, there are many who think they’re a bubble. In early June, for instance, noted billionaire investor Mark Cuban tweeted about Bitcoin, “I think it’s in a bubble. I’m not questioning value. I’m questioning valuation.”

Is he correct about Bitcoin and its sister assets? Or are crytpocurrency early adapters onto something new, smart and potentially highly lucrative?

What top 10 crypto currencies will explode in 2020?

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Traditional assets have well-developed valuation rules. Crypto does not have that.

But, there are general market psychology rules plus knowledge that canprovide some insights.

Most traders trade large cryptos – Bitcoin, ETH, LTC and other top 25 pretty much. Large institutions and individual investors with significant resources are most likely to invest larger chunk in established coins, plus smaller portion of their portfolio into smaller alt-coins.

Well, top 25 coins are most likely to be the first to receive money.

With small coins it really depends on how big money will be playing each indi.

Why Blockchains Fork: A Tale of Two Cryptocurrencies

Bitcoin and Ethereum have both seen high-profile forks in the past year, spawning separate coins with different rules. The splits come down to diverging ideologies and the laws of network consensus.

On August 1 st , a new cryptocurrency called Bitcoin Cash appeared online. For the first time in Bitcoin’s eight-year history, the original blockchain network underwent what’s called a “hard fork.” A small faction of Bitcoin (BTC) miners split off onto their own blockchain network, spawning Bitcoin Cash (BCH).

Why the split? The technical answer lies in the long-standing Bitcoin community debate over block capacity, the nuances of which we’ll get into shortly. More broadly, the Bitcoin fork speaks to a fundamental ideological rift over what’s more important: preserving the decentralized nature and independent control of the Bitcoin network, or accelerating transaction speeds to make the cryptocurrency more viable for mainstream e-commerce and payments.

Bitcoin’s split is the second high-profile cryptocurrency fork in the past year, after a smart contract vulnerability and subsequent hack led to a split on the Ethereum blockchain in 2020. The result: Ether (ETH) and Ethereum Classic (ETC). Bitcoin and Ethereum’s forks came about for entirely different reasons, yet the parallels between the splits can explain a lot about the complicated nature of reaching a consensus on major decisions within a blockchain network. When an impasse is reached, a fork may follow.

Collectively, all four Bitcoin and Ethereum coins still sit near or at the top of the constantly fluctuating cryptocurrency market capitalization index . But you shouldn’t necessarily take a coin’s market cap at face value, according to Peter Van Valkenburgh, Director of Research for Coin Center, a nonprofit organization focused on the policy issues facing cryptocurrencies.

“The headlines are focusing on ‘Wow, Bitcoin just gave birth to a $10 billion baby,'” said Valkenburgh. ” But the reality is, until there’s liquidity on these markets—enough people trading their Bitcoin Cash coins on exchanges and making transactions on the Bitcoin blockchain—the market capitalization is really based on artificial scarcity. That’s bad economics.”

The concepts and technologies at play can be confusing even for software experts to wrap their heads around. PCMag spoke to Valkenburgh to sort through how a blockchain fork works, how the Bitcoin and Ethereum splits parallel one another, and what the future may hold for the newly minted Bitcoin Cash.

Blockchain Networks: A Quick Explainer

If you don’t understand what a blockchain network is and how it works, then the rest of this article will be even more confusing. To help, Valkenburgh gave a succinct explanation of the mechanics underlying the Bitcoin blockchain.

“The reality is, there are no Bitcoins, they don’t exist. They’re a construct of software and people’s imaginations. The only thing that describes the existence of Bitcoins is the blockchain, a ledger of all transactions,” said Valkenburgh.

A blockchain is made up of two primary components. First is the peer-to-peer (P2P) network of computers around the world, often called nodes, collectively validating and bundling batches of encrypted transactions together into code blocks. Each block is then added to the end of the chronological chain, stored not in one central location but, rather, synchronized on each node across the network.

Since the blockchain is decentralized, no one single party (such as a bank, financial institution, or government) can control what happens on the network. At the same time, the blockchain gives you consensus agreement and timestamped, tamper-proof data. This eliminates the need for online third parties to facilitate that transaction.

“The Bitcoin blockchain records every event throughout Bitcoin’s history—new coins and evidence of transfers—back to 2009 when the network started,” said Valkenburgh. “Every computer on the network also has to be running compatible software so that the nodes can see and validate transactions. So, if your software is not compatible or if you fail to meet or invalidate any of the consensus rules baked into the Bitcoin code base, then the network would ignore your transaction. That’s all it is to have a Bitcoin: the ability to broadcast a valid transaction and transfer that balance.”

These “Trustless Consensus” rules include concepts such as Proof of Work , public and private key encryption, and most importantly in this instance, a cap of one megabyte (MB) on Bitcoin block size. This particular rule has been a point of contention between Bitcoin core developers and the miners who are coding new blocks since the dawn of the network—and it’s the ongoing debate that ultimately led to the Bitcoin Cash fork.

Breaking Down the Bitcoin Fork

Like every other cryptocurrency or public blockchain, Bitcoin is open-source software. Changes and modifications to how that software works need to be approved by consensus and every CPU gets a vote. As Valkenburgh explained, if a group of nodes modify their software without consensus, those nodes then invalidate a rule held by the rest of the network and create their own fork of the blockchain.

“If you break any of the consensus rules, then the network will ignore you. If you and a bunch of people choose to break it in a certain way, you’ll all then be compatible on a parallel network,” said Valkenburgh. “What happened with Bitcoin Cash is, a small minority of miners and enthusiasts frustrated with their perception of the scaling debate made those modifications and forked Bitcoin.”

Bitcoin Cash increases the block size to 8 MB. The reason miners want to increase block size in the first place is pretty simple: As Bitcoin has grown in popularity, the network has come under heavier strain to process and validate the transaction load. As a result, transactions have started backlogging. Completion times have ballooned from an average time of 10 minutes to a high of more than 40 hours during a slowdown this past June.

Bitcoin Network Transaction Speeds, 2020

Credit: Blockchain.info

Increasing the block size has been the subject of heated debate in the Bitcoin community for more than two years. Bitcoin Cash simply forked it into reality and increased the block size to 8 MB. Though, in point of fact, Bitcoin Cash actually stole another fork’s thunder.

At the Consensus 2020 blockchain conference in New York this past May, a prominent group of international Bitcoin companies announced the New York Agreement , which resolved to introduce a hard fork within six months called Segwit2X . This fork also planned to change the block size but compromised on the contentious issue by only raising the capacity to 2 MB. Some factions of the community felt that block size shouldn’t be modified at all, while others (such as the nodes now running Bitcoin Cash) believed simply doubling the size wasn’t enough.

Segwit2X currently still has the support of the vast majority of the Bitcoin network which, in essence, makes it a software update as long as the consensus of nodes upgrades to it. Jeff Garzik, CEO of enterprise blockchain company Bloq and a former Bitcoin core developer, is leading Segwit2X development. In spite of the release of Bitcoin Cash, Garzik said that Segwit2X is pushing forward with its own fork to upgrade Bitcoin.

#SegWit2x and NYA have successfully met all goals so far, and continue as planned. #bitcoin https://t.co/cq6UZWOeMw

What We Can Learn From Ethereum

The impetus for the Ethereum fork was a much more dramatic hack and Ether heist rather than good ‘ol fashioned network stress. Nevertheless, the value and relative stability of both the ETH and ETC cryptocurrencies in the time since the fork shows the possibility for a successful path forward.

Some background on Ethereum and its fork: The Ethereum blockchain network is different from Bitcoin in that, beyond the cryptocurrency it powers (Ether), it’s also a blockchain application platform for building smart contracts and decentralized apps. Ethereum also has more support from major tech companies and enterprise organizations, including the more than 150 members of the Enterprise Ethereum Alliance .

Ethereum is also governed a bit differently. While the Ethereum blockchain is a decentralized network with consensus voting, the platform was designed and is still overseen by the core developers who make up the Ethereum Foundation, including Ethereum co-creator Vitalik Buterin. When a vulnerability in a smart contract called the Decentralized Autonomous Organization (DAO) resulted in a heist of $50 million worth of Ether, Buterin and the developers fought fire with fire: they hacked the hackers and reclaimed the cryptocurrency.

The debate came when deciding how to proceed from there. Buterin and the core developers were faced with a decision: If they intervened and create a new version of the network, it would fix the vulnerability and reimburse the DAO investors. At the same time, Ethereum’s official documentation stated that decentralized apps should exist “without any possibility of. censorship, fraud, or third-party interference.” Essentially, violating a core principle of the blockchain in order to save it.

“When the fork happened, there was a major ideological discrepancy for Ethereum,” explained Valkenburgh. “One side believed all the miners should get together and reverse this transaction, fix the flaws in the smart contract code corrupted by the hacking attempt, and give everyone who put their money into the DAO their money back. Immutability is less important than keeping an equitable system that functions. The other side said [the DAO] is an uncensorable smart contract that should continue running and not be reversed. So, by rolling back the DAO hack, you’re breaking a [core tenet], and we’re going to maintain the faith.”

The community ultimately decided to go ahead with the fork, with the new Foundation-led network maintaining the Ethereum name (ETH) and the latter group choosing not to move to the new blockchain and instead becoming Ethereum Classic. Despite questions of whether Ether would survive the split or if Ethereum Classic could be a viable currency, the networks navigated the fork and both remain active and viable cryptocurrencies today (although ETH has skyrocketed in value as compared to ETC). Valkenburgh said this comes down to the strength of Ethereum’s community and could serve as an example for Bitcoin’s fork.

“I was on the side of Ether but, to my surprise, the vibrant developer community working on Ethereum Classic has helped the price rise slowly from $2 when it emerged to around $14 today. Ethereum at the time was about $10 and recently has averaged around $225,” said Valkenburgh. “Maybe we’ll see that with Bitcoin Cash. There are definitely strong ideological differences in both examples. But the difference in this case is, Ethereum’s fork had less to do with technology and design than what to do about equity and this one ‘bad apple’ transaction. With Bitcoin, you have this impasse with varying technical solutions.”

What’s the Future of Bitcoin?

The saga of Bitcoin, Bitcoin Cash, and the Segwit2X fork is ongoing. Thus far, support for Bitcoin Cash has been divisive among the Bitcoin exchanges, but the tide seems to be turning. Bitfinex and Kraken, two of the top five exchanges (platforms for buying, selling, trading, and exchanging cryptocurrencies) announced support in advance of the split. The big holdout had been Coinbase, the most popular online exchange, which had stated it would not support BCH—until announcing it will add support by 2020. For those worried about how the fork would affect Bitcoin’s market value, after a brief dip following the split, Bitcoin rebounded to set a new record. After breaking the $3,000-per-Bitcoin threshold, the original cryptocurrency has hovered around $3,300-$3,400 this week.

Beyond the short-term controversy over what exchanges support Bitcoin Cash, the larger debate that will shape Bitcoin’s future comes down to centralization versus decentralization. The power of a blockchain network lies in its ability to facilitate trusted online transactions without a third party in the middle. Bitcoin was originally conceived as a P2P electronic cash system for global transactions. The debate over block size and transaction speeds all comes back to Bitcoin’s viability as an alternative to banks and credit card companies for mainstream online transactions.

The goal in this case would be to accelerate transaction speeds and reduce latency to the point where a consumer could walk up to a checkout counter and buy groceries with Bitcoin, without waiting an hour or more for the transaction to be validated. To do this, however, Valkenburgh explained that the network itself might be forced into centralizing a decentralized system.

“When data goes through the internet, it has latency. Sending a Bitcoin transaction from the US to China takes longer than sending packets from me to you in New York. And the latency gets worse the more data being sent,” said Valkenburgh. “Bitcoin blocks need to propagate through the network to validate and start building the next block on the chain. And if the blocks are big, they propagate slowly and unevenly.”

Miners always want to hear about a new block first. If blocks get larger and larger, leading to substantially more latency, then Valkenburgh said there’s a strong incentive for miners to geographically co-locate within the same region. That’s a slippery slope, one that colors in the other side of the debate over block size. What’s more important: maintaining the decentralized autonomy of the Bitcoin network or furthering Bitcoin’s charge to revolutionize global payments?

“What would be likely is, all the miners decide to geographically co-locate in Western China where there’s cheap hydroelectric power or in Iceland or possibility the Pacific Northwest. The fundamental role miners play could then be more easily controlled, either by a cartel of miners who get together privately to block or censor transactions or, more likely, from a government,” said Valkenburgh. “It’s sacrificing censorship resistance for the ability to use your smartphone to buy a Coca-Cola with a Bitcoin.”

Valkenburgh is a staunch supporter of maintaining decentralization but said the debate over block size is mostly because we haven’t figured out a better solution. The inability to execute cross-border payments and trustless, online transactions were considered a fundamental flaw of electronic cash systems—until Bitcoin creator Satoshi Nakamoto found a way to build one that didn’t. With the pace at which cryptocurrencies and decentralized blockchain technology is evolving, the Bitcoin and Ethereum forks may ultimately be remembered as nothing but footnotes for what came next.

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