Hard forks: opportunity or danger ?

Hard forks have been growing in number lately, creating a lot of uncertainty for investors who are hesitant about how to manage this event.

Below, we will analyze in detail the most important forks that took place to understand what strategy to implement in the approach of a fork and give all the keys to investors to approach serenely the next forks.

What is a fork?

First of all, you have to differentiate between soft forks and hard forks.

The first ones are generally simple updates of the network that do not alter the fundamentals and the cryptocurrencies emission on which the fork acts.

Regarding hard forks, those deeply modified the functioning of the cryptocurrencies on which they take place, most of the time creating a break between two blocks with a duplication of the main blockchain. Therefore, there is a before and an after during which altcoins are distributed to the holders of the initial cryptocurrency.

The price of cryptocurrencies undergoing a hard fork is generally subject to significant variations and increased in volatility as we will see below.

Why a hard fork?

There are several reasons for hard forks:

1. Correct or improve a blockchain

2. There may be a divergence of point of view between developers and different goals related to using the coin (generally understand: a personal conflict within the community that uses crypto-currency).

Behavior in previous hard forks

1. Concerning Bitcoin/Bitcoin Cash:

The fork took place on August, 1 2017 and the price of the Bitcoin did not fluctuate significantly. It quickly decrease before the fork, from $2890 to $2650, a variation of 8% before rising again. The share price of the Bitcoin Cash also appreciated afterwards, in connection with the share price of the Bitcoin and all other crytocurrencies. This was therefore a relatively good fork for investors.

It should be noted that the holders of Bitcoin were likely to receive Bitcoin Cash but some never received them, due to lack of clear informations or lack of professionalism on the part of some exchanges. However, the Segwit fork, which was due to occur on 17 November 2017 and was eventually cancelled, caused the Bitcoin price to fluctuate sharply from $7000 to $6000 in a few days.

2. Spreadcoin: The fork took place on 1 February 2018 and was preceded by a sharp fall in the price. The Spreadcoin then increased sharply before to fall again, like most cryptocurrencies in this difficult period of early 2018.

3. Siacoin: Approaching the fork (January 21), there was a noticeable rise in the price before it also fell. It is difficult to analyse the exact causes of the decline, as all cryptocurrencies were dragged into a downward trend at the end of January.

4. Ethereum: On July 28, 2017, the fork between Ethereum and Ethereum Classic occurred. This fork did not bring about any major change in the course of the Ethereum and both values appreciated strongly until January 2018.

5. Litecoin: The Litecoin had dropped sharply to its low point in early February before the fork occurred (February 18,2018), dropping from $350 to $115 before bouncing back to $230 (which corresponds to a 38% Fibonacci retracement). The Holders were granted of 10 LCC for each LTC, and the price of LCC was around $5 the first days. This means that the fork was globally a lost for most of the short term investors.

However, the general context of the crypto market was subject to strong tensions during this period and it is therefore difficult to draw any real conclusions from this fork.

In conclusion

As we have seen, one fork is not another. There are many reasons for the creation of a fork, and the consequences can vary greatly depending on the cryptocurrency involved.

Only one fact remains certain: in the vast majority of cases, there is a wave of uncertainty on the part of investors and an increased volatility before the creation of the fork.

As a result, although cryptocurrency investors operate in a much more risky market than traditional financial markets and the creation of a fork only adds additional risk in an already risky market.

Similarly, the technical analysis cannot predict the future direction in which cryptocurrencies targeted by a fork will take. This is a too important event, both in terms of the fundamentals and viability for the cryptocurrency and in terms of investor's behaviour.

It seems much more opportune to wait until the hard fork is completed before making a decision and repositioning itself once the market has validated or not the hard fork :

If, the value of the initial crypto and of the new crypto rise together significantly after the fork, it will be a strong buy signal from the market that approves the fork and sees potential in it.

It is also possible that a new coin created thanks to the fork will be given to investors and logically, the price of the initial cryptocurrency will decrease, offset by the price of the new coins.

However, it is also possible that the price of the new coin may not be sufficient to recover the difference between the two.

In addition, as already mentioned, in the case of a new coin distribution, although exchanges are more professional, the holder of the original coin may not recover the new coins issued.

If, on the other hand, the price of the if the price of both cryptos falls (the initial and the new), the fork can simply be perceived negatively by investors.

In any case, the approach of a fork is synonymous with increased uncertainty in the market and investor's psychology is put to the test.

In conclusion, investors will be able to adopt two different positions depending on their risk profile:

Either, they are risk avoiders and they will anticipate the fork by selling their position about ten days before it takes place. They will then be able to reposition themselves once the fork is finished following the new trend.

Either, the investors have a risky profile and will position themselves a few days before the fork to hope to take the potential price increase. They will sell 50% of their position on the day before the fork, hoping that the issuance of new coins will offset the price decrease of the original cryptocurrency. They will therefore retain 50% of their portfolio and will consider an increase in both coins following the trend.

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