Skip to content

Bitcoin loses $2 Billion in Market Cap due to forking; Ethereum capitalizes on Bitcoin’s Loss

In the past three days, Bitcoin prices have plummeted from over $1,200 to $1,100 with clear signs of onset of bearish behavior owing to a strong fundamental factor. The market cap of the cryptocurrency dropped from over $20 Billion to $18 Billion in the past three days owing to the drastic fall in prices. While the market is in a strong uptrend on a long term time frame, this might very well be a major blow to the trend and might shadow the Bitcoin markets with bearishness. The influencing fundamental is the Bitcoin forking problem that has had negative impact on the prices in the past. Let’s dive deep into what exactly the problem and will forking really solve it:

The issue at hand:

During the processing of Bitcoin transactions, the processed transactions are stored in ‘blocks’ which is turned into a complex math problem. Bitcoin miners, owing to their high hashing power (processing power), calculate the solutions of these problems to determine if the transaction is possible. The solutions are then validated by the other minors and are added to the ledger as complete blocks. This would result in reward generation for miners. However, it has been observed recently that the number of outstanding transactions to be processed has been piling up and is defeating the purpose of the cryptocurrency which promises quick transactions.

The solution and attaining consensus:


Due to the piled up transactions, Bitcoin unlimited has emerged which suggested that to tackle this problem, we can increase the block size. Major Bitcoin industry players like Roger Ver have backed the idea but many in the community are of the opinion that the method might not be totally safe and might lead to disruption in the blockchain ecosystem. Currently about 11% of the nodes run Bitcoin Unlimited and the rest of them run Bitcoin Core(The original block size). The idea is that the nodes can run Blockchain Unlimited software which would indicate their support for increasing the block size. If 50 percent of bitcoin miners adopted Bitcoin Unlimited, there would then be two major blockchains. This would result in a “fork” between Bitcoin Core and Bitcoin Unlimited.

Both blockchains would be operational with their respective nodes but there would then be essentially two different coins – Bitcoin and Bitcoin Unlimited.

The impact on the price and the boost to Ethereum:


The Bitcoin community is yet to hit consensus on what would be the next move – a plausible scaling or a forked blockchain. Both the events are expected to have adverse effects on the prices and would take some time to settle down from the impending volatility. Hence Bitcoin traders and investors are offsetting their exposure to altcoins like Ethereum. Hence there was a sudden rise in the prices of Ethereum that has made the cryptocurrency reach all-time highs for the year. How the forking would impact prices further is to be seen.

Charlie Lee evens the ground for cryptocurrency comparison, proposes volume weighted market cap

When it comes to cryptocurrency comparison, people immediately look up to market capitalization as the most reliable metric as it represents currency’s core market value. However, as the cryptocurrency ecosystem is still developing and is a nascent one, their unique characteristic pave way to practices which intentionally or accidentally influence market cap to a great extent. This is exactly what Charlie Lee explained in his series of tweets on 8th February. The creator of Litecoin and Director of Engineering at Coinbase explained through these tweets how market capitalization is not a fair ground for cryptocurrency comparison. The tweets explain how few cryptocurrencies are purposefully locking up coins or destroying them to increase market cap and hence the need for a new grounds for comparison. Let’s dive deep into what Lee is suggesting as alternate:

The problem with Market Capitalization:

Lee explains that with low volumes, the volatility will remain strong and only push prices higher. This would lead to increased market cap but in reality doesn’t reflect the true value of the cryptocurrency. A good example for this would be the launch of Z-cash.

During the first few days of the launch, Z-Cash was illiquid and had a dearth of volumes which increased the volatility. The prices touched an instant high taking Z-Cash’s market cap higher than few of the already existing cryptocurrencies. While in reality this wouldn’t be a measure of the actual value as the currency is new and low on volumes. This will lead to a possibility where a coin with $ 1 Million market cap, may really be worth only $1000 as the daily volume is only $10.

The proposed solution:

To lay down the alternate for the said problem, Lee bases his idea on the fact that Bitcoin and Litecoin volumes are a bit over 1% of their market cap. Using this 1% as the benchmark, Lee has suggested Volume weighted market cap. The volume weighted market cap would reduce the market cap by how much the trading volume is less than 1% of the market cap. Hence the Volume Weighted Market cap would be Market cap times minimum of 1 or percentage volume per market cap. Basing on this method Lee posted the comparison of VWMC in descending order of various cryptocurrencies and that provided a new perspective.

VWMC = MC * Min(1,VOL*100/MC)

Hence Bitcoin and Litecoin’s VWMC would be the same as their market cap because their daily volumes are more than 1% of their market cap. Similarly a coin with $10 Million market cap but only $50K in daily trade volume will have its VMWC reduced to $5 Million. Hence this indeed becomes a very accurate and better way of comparing cryptocurrencies.