The scaling upgrade for Bitcoin’s blockchain, Segregated Witness (SegWit) went live in the early hours of August 24. Market commentators have mixed feelings about where the price of bitcoin will head next. Further progress in development is expected with the activation of SegWit and the event has spilled over into altcoin markets, with SegWit-ready altcoins showing large gains.
SegWit Paves the Way for Lightning
SegWit was first proposed over two years ago. Bitcoin Core developer Peter Wuille outlined the scalability solution at Scaling Bitcoin in Hong Kong, which can be viewed here.
One change SegWit introduces is a change in the data structure for upgraded nodes. Prior to SegWit, signatures that unlocks an input so it can be spent. Then the transaction ID (TXID) is created from the entire transaction data, which is hashed together. However, with SegWit, the unlocking code part is moved to the end of transaction data. TXID can be changed by altering the unlocking code in a transaction, meaning a node can change the TXID before passing it on. However, with SegWit, the unlocking code is no longer part of TXID, meaning no node will have the ability to change it.
Since the upgrade is a soft fork, it is backwards compatible, meaning that old nodes will still function as normal. The downside is that these nodes will not enjoy the benefits that the upgrade eventually brings.
Another notable change, which might be familiar to litecoin holders, is that SegWit (P2SH) addresses begin with a “3,” like multisig addresses. You must move your coins to a SegWit-ready address to capitalize on the (eventual) lower fees.
SegWit’s main advantage comes from eliminating transaction malleability. This bug has slowed progress in bitcoin, such as layer-two solutions like the Lightning Network. With SegWit enabled, developers can now focus on important upgrades such as the Lightning Network, MAST, Schnorr signatures and TumbleBit, which all improve scaling and privacy.
‘SegWit Coins’ Rally, Atomic Swaps Imminent
Certain altcoins have been partying too on Bitcoin’s SegWit activation, namely the coins that are SegWit-ready. For instance, Vertcoin (VERT) reached fresh highs on August 24, as it was recently confirmed that VERT will be the first coin be atomically swap with litecoin. The latter had already activated SegWit in May, and has now moved onto implementing MAST. Viacoin also showed a significant increase in volume and price once SegWit activated, shown below.
With the Lightning Network, eventually atomic swaps between coins like bitcoin, litecoin, vertcoin, viacoin, and syscoin will become available. Atomic swaps eliminate the need for exchanges such as ShapeShift, allowing you to instantaneously swap across blockchains. As with the Lightning Network, hash time-locked contracts are used. By opening a channel on two blockchains could perform the same function as an altcoin exchange, as well as more.
While boosting capacity, it only does so marginally and starts to take effect once the new SegWit addresses are used by the ecosystem. In our simulation, we asked computer scientist and Bitcoin expert Jochen Hoenicke to review the formula and he made a minor correction. Capacity can be expected to increase by a scope of 40 to 80 percent in six months. For the best case scenario, we may see 90 percent adoption rate, at which the maximum block size will be around 1.8MB.
The Outlook for BTC-USD
Now we know what the changes are, how will the price of bitcoin be affected? With no knee jerk reactions from the market, the SegWit activation has gone smoothly if we are consider BTC-USD in isolation. On activation, BTC-USD has so far moved slightly higher from $4100 to $4224 at the time of writing.
Financial pundit Max Keiser raised his prediction up from $5,000 to $10,000 on SegWit activation, with many others feeling more bullish on the cryptocurrency. Arthur Hayes, CEO of BitMex, says while he expects some retreat downward, after the activation of SegWit sets in, we could see BTC-USD go as high as $5,000.
— Max Keiser (@maxkeiser) August 24, 2017
However, other market analysts think that we may be in for a reversal or at least locked in the current trading range until November. For example, developer and trader Jacob Eliosoff reckons uncertainty is a key theme with the market looking to price in the upcoming SegWit2x hard fork. Also, SegWit may have been priced in already, with anticipation of the upgrade perhaps a major factor for pushing bitcoin to fresh all-time highs. Now that the event has passed, we might see a lot of profit taking, hence, a declining price over the next week or so.
The weekly chart below shows that short-term equilibrium lies at $3155, as signaled by the conversion line (blue). For a move toward the Fibonacci extension at $6359.47 is expected if we get a weekly close above $4270.80. Notice, in the run up to the SegWit activation, BTC-USD posted an all-time high at $4480.00 but failed to close above the Fibonacci level at $4270.80. Moreover, last week’s candlestick is a bullish variant of a Doji, suggesting indecision amongst market participants. Therefore, the weekly close on August 27 will be key to determining the path of bitcoin going forward.
So far this week, the price action has remained below the important resistance at $4270.80. A break above this level would most likely see a fresh surge of bullish momentum.
It could be that euphoria has yet to kick in and as SegWit’s improvements filter their way through the Bitcoin ecosystem, traders will become more optimistic and buying interest will begin to increase. In this scenario, we should see BTC-USD close above $4270.80 and aim for a long-term target at $6359.47.
On the other hand, it could be the case that euphoria already peaked in the week beginning August 14 and bullish momentum was not strong enough to break $4270.80. In this case, we look for a return to $3155.00 and the Fibonacci support at $2980.00. Notice that the flat conversion line suggests we should look to buy near $3155, as the market will generally test such a support before moving higher.
In summary, we look for a break of the Fibonacci resistance at $4270.80 and a weekly close above this level to keep the bullish charge strong. Alternatively, we look to buy around $3155-$2980 as bears become exhausted.