All you need to know about the upcoming Ethereum upgrade (hard fork) and how to trade it
This post assumes that the reader has prior knowledge of Ethereum and will be covering the following key questions.
1. What is happening?
2. What is a Hard Fork?
3. What is the set of upgrades for this update?
4. What should you do as an Ether (ETH) holder?
5. How should you trade this fork?
What is happening?
Referred to as Constantinople, Ethereum’s hard fork will consist of several codebase modifications specified by five different Ethereum improvement proposals (EIPs). The Ethereum (ETH) hard fork upgrade will be activated at block number 7,080,000, which is expected to be mined between 16th and 17th January. We are currently at block number 7,068,700 and we can expect the Hardfork to happen around 47 hours from now as it takes approximately 15 seconds for one block to be mined approximately. That would be 12pm in Singapore (GMT+8) on Thursday, 17th January 2019.
What is a Hard Fork?
While they are essentially software upgrades, upgrades to crypto projects are specifically known as “forks” because of the underlying blockchain technology. Since blockchain operates via the consensus of the majority, if an upgrade is contentious (i.e. there are power users that do not want certain changes to be made to the existing chain), the blockchain network might split into two separate chains. Therefore, a hard fork is a backwards incompatible upgrade that is somewhat similar to upgrades performed to applications, such as Microsoft Word. For instance, an older version of the Word processing program may not be able to accurately read and display all the characters and fonts in a file that was created using the latest version of MS Word (example from source: cryptoglobe).
What is the set of upgrades for this update?
The set of upgrades planned for Ethereum, with Constantinople, are non-contentious as all network participants have reportedly agreed to activate the five EIPs listed below:
EIP 145 — More cost-effective and overall efficient approach to processing information, by adding bitwise shifting operators to the Ethereum Virtual Machine (EVM);
EIP 1014 — Better approach to accommodating network-scaling solutions such as off-chain transactions;
EIP 1052 — an improvement to how contracts are processed;
EIP1234–12-month delay of difficulty bomb; reduces mining rewards from 3 ETH to 2 ETH per block;
EIP 1283 — a better way to monetize data storage changes, made by smart contract programmers)
What should you do as an Ether (ETH) holder?
Many exchanges have announced their support of the fork so if your ETH is held on these exchanges, you need not do anything to prepare for this upgrade. Here’s a list of exchanges that have announced their support: OkEX, Huobi Global, Bittrex, Binance, OKCoin, IDAX, Koinex, BitMart, Cryptopia, BiBox, HotBit, EtherFlyer, BitForex, WazirX, Exodus Wallet, Catex, Indodax, TOK, and ABCC.
The software changes to be activated with Constantinople will not, for the most part, be noticeable to users. However, to avoid any unexpected events, you should transfer your ETH to these exchanges before the fork, assuming that you plan to hold on to your ETH.
How should you trade this Fork?
The Constantinople hard fork is important as it aims to smoothen the shift from the current proof-of-work (PoW) protocol to the proof-of-stake (PoS) protocol. PoS is deemed as a better consensus algorithm as it aims to solve the issue of the large computing power needed for PoW, while also improving how smart contracts are processed to better prepare the protocol for future scaling solutions. However, before getting excited about these updates, there are two factors to consider in determining whether one should long or short the fork:
1. Risks related to the Constantinople hard fork
2. How forks impacted the price of cryptocurrency in the past
Risks related to the Constantinople Hard Fork
· Delay risk. While this risk is certainly being reduced as we move towards block 7,080,000, there is still a chance of delay or postponement of the update. This will raise serious questions about Ethereum’s ability to keep up with its development plan and could, in turn, significantly damage sentiment and trigger a fresh sell-off.
· Acceptance risk. While the hard fork is seen as ‘non-contentious’ (i.e. most developers are expected to shift to the new protocol), there is still a chance of the chain splitting if miners oppose to the shift from PoW to PoS. The reason for this is that PoS would move the balance of power from miners to stakeholders and existing miners would be left with worthless mining rigs.
· Operational risk. Although the Constantinople hard fork has undergone testing for almost 4 months, there are no promises that it will run smoothly upon a system-wide update. This might create post-fork uncertainty and undoubtedly trigger a sell-off, in the event that vulnerability is spotted after the upgrade.
How did forks impact the price of cryptocurrency in the past?
Hard forks can have a profound impact on cryptocurrency, not just because of the uncertainty caused. The Bitcoin Cash hard fork is a good example of a quirk that can occur. Holders of the “parent” cryptocurrency end up with an equal number of forked-off coins and in Bitcoin Cash’s case, these were translated into a fresh sell-off as investors dumped the forked-off coins. While Constantinople bears a small chance of a new forked-off being created, a hard fork marks an unstable time for a cryptocurrency as the community will often be divided. This, in turn, creates a huge amount of volatility, even by cryptocurrency standards.
Price action of Ethereum leading up till today
While the value of ETH came 94% off its all-time peak of $1,389 on 15th January 2018, it has quickly rebounded by 84% against the US dollar since its December bottom. ETH/USDT advanced as high as $155 from $84, before settling at $128 today.
My short-term recommendation would be to offload ETH from now till the hard fork, in order to avoid the uncertainty and volatility surrounding the upgrade. Research has shown that from the cases of past hard forks, the average correction ranges from around 20–40%. Again, while the chance of a new forked-off coin in this update is relatively slim, one might be better advised to not take their chances and instead, sell off the coin prior to the fork.
All in all, based on past price actions, we tend to see a rally fueled by the announcement of a software upgrade or a hard fork, before the occurrence of a violent sell-off. More importantly, we think that the said rally has already been priced in, as seen from how ETH made an incredible comeback from $84 to $130 just last week. Therefore, we recommend selling your ether before the fork and look to re-enter only when the Ethereum network resumes smooth operations again.