Prior to the Bitcoin Gold fork two days ago, the market made some interesting moves.
Bitcoin price reached a new all time high on Oct. 20, 2017 - five days before the Bitcoin Gold fork -surpassing $6,000 for the first time and eventually climbing to nearly $6,200.
Those of you who have endured past chain splits are aware of what usually happens when there’s a split from the Bitcoin network. Ordinarily, the community complains, reddit.com, medium.com, and twitter.com become platforms for soapbox speeches, and a lot of trash is talked by factions within the community.
However, have you noticed the other events that are correlated with a chain split? Once a chain splits, you suddenly own a number of split tokens equivalent to the number of tokens you had on the Bitcoin network. This is because the new chain will be an exact copy of the Bitcoin Blockchain up until the point where the fork occurs.
If the wallet you use supports the forked chain’s software, you will be the owner of two digital tokens: Bitcoin and the Forked Chain Token. In our example we will use Bitcoin Cash (BCH) as the forked token. When the Bitcoin Cash chain forked off of the main chain, owners of Bitcoin became owners of an equivalent amount of Bitcoin Cash. This is because the chains were identical until the fork occurred. If you owned 10 BTC before the split, then you owned 10 BTC and 10 BCH after the split.
This is where the slope becomes slippery. People or organizations with unfathomable amounts of money can use forks as an opportunity to extort both the Bitcoin network and the forked network for enticing capital gains when a fork occurs.
Preparing for the fork
Let's say Randy owns 35,000 Bitcoins; at a value of $5,000 per Bitcoin, Randy’s digital assets are worth $175,000,000. Just like anybody with large amounts of money invested in a market, Randy pays attention to news that may affect his position (wealth) in that market. Randy learns that there will be a hardfork in the Bitcoin network and that the hardfork will create a new token, Bitcoin Cash (BCH).
On top of this, Randy learns that his Bitcoin wallet provider will support the forked software, so he knows that he will own Bitcoin Cash as well as Bitcoin once the fork occurs. Now, Randy expects to have 35,000 Bitcoin Cash tokens in addition to his 35,000 BTC after the fork. If Randy was to increase his position by millions of USD worth of Bitcoin, he would be the owner of more Bitcoin than he previously owned.
However, he would also create a buy wall that drives the Bitcoin price up since he is such a large player in the Bitcoin market. When Randy increases the amount of Bitcoin he owns, he also increases the amount of Bitcoin Cash he will own once the fork occurs.
Because Randy is an educated investor, Randy decides to increase his position in Bitcoin so that he owns 50,000 Bitcoin the day before the fork. Randy did this because he would like to own even more Bitcoin Cash than the 35,000 he would have had if he did not increase his position in Bitcoin. Now when the fork occurs, Randy expects to have 50,000 BCH in addition to his 50,000 BTC.
What happens when a chain forks
When the Bitcoin Network forks, some of the value that was in the Bitcoin network splits into the forked chain. When Bitcoin Cash forked from the Bitcoin network, the value of Bitcoin went from $2800 to $2700 (July 23,2017).
Now what does that mean for Randy?
When Bitcoin dropped from $2,800 to $2,700, Randy's digital assets (wealth in Bitcoin) dropped from $140,000,000 to $135,000,000, a $5 mln loss. However, because of the fork, Randy now has 50,000 BCH worth $555 a piece. Because Randy is an educated investor and has no plans to use the Bitcoin Cash (BCH), he immediately sells his BCH for a profit the moment the option to sell BCH becomes available to him on his preferred exchange.
Randy sells all 50,000 of his BCH for a profit of $27,750,000. A nice $28 mln gain (rounded number) to make up for the $5 mln loss that he suffered due to the decline in the price of Bitcoin. At the end of the day, Randy profits around $23,000,000 from the chain split.
Keep in mind, there are other investors like Randy who are highly educated and extremely skilled at what they do. Furthermore, they may be executing a similar or even more efficient strategy as Randy regarding the hardfork; buy a lot of Bitcoin, anticipate a chain split where you are left with a number of new altcoins equivalent to the number of Bitcoin you own, quickly sell off the altcoin for a profit and then decrease your position in Bitcoin because it is overvalued.
Individuals like Randy are referred to as whales: individuals who hold positions so large in the Bitcoin market, that their bid and ask orders are capable of shaking up the market. Since it only takes a few big players using a similar strategy to drive the value of Bitcoin up or down, when an opportunity like this presents itself (a hardfork), the price of Bitcoin may not reflect the true value of Bitcoin.
Since educated investors know that the Bitcoin price may be artificially high due to big players like themselves implementing a hardfork strategy, the big investor(s) have an incentive to lower their position in Bitcoin once they have executed their hard-fork gameplan. This is because they expect the Bitcoin price to correct to a value that is closer to its true value once all the hard-fork affiliated nonsense subsides.
Because there are multiple people like Randy who have a relatively large position in the Bitcoin market, when these people decrease their position in Bitcoin to an amount that they are comfortable owning during a bear period (and that number may be zero) their collective ask offers are capable of creating a sell-wall that drives down the price of Bitcoin.
After the big sell off of both the altcoin - because investors find it virtually worthless for them to hold for the long term - and Bitcoin - because investors know the price is artificially high for the short term due to their market strategy - investors capitalize on the low price of Bitcoin from the massive sell-wall and they buy back the Bitcoin that they previously unloaded.
On top of the profit investors make from selling-off all of their altcoin, investors will experience capital gains from selling their Bitcoin at an artificially high price and then purchasing Bitcoin back once the price is lower. During the period where investors buy back Bitcoin, we tend to see the price stabilize for a short period of time.
Boom and bust
Investors may have stockpiled Bitcoin anticipating an equal amount of altcoin and then sold off a significant amount of both Bitcoin and altcoin - in our example Bitcoin Cash - to reap the massive capital gains available to them.
I can’t rule out the possibility that several other market factors had an effect on the Bitcoin price surge and subsequent plummet, but that being said, how plausible do you think it is that the whales set off the surge and fall of Bitcoin?