Sell and Short: Bitcoin Traders Are Preparing for a Possible Fork

Traders are reducing their exposure to bitcoin ahead of what they say is the increasing likelihood that its network could split into two competing blockchains with two separate assets.

In conversation with CoinDesk, a wide range of traders are reporting they are preparing for a potential split by pulling capital from the market or otherwise placing bets that the digital currency's price will decline in the short term.

The development is the latest that stems from the increasing discussion about whether bitcoin could see a "hard fork", a process by which new software could be introduced that alters the existing rules of the network.

Harry Yeh, managing partner at Binary Financial, a firm that helps high net-worth individuals purchase bitcoin and other cryptocurrencies, said the company has exited the market in anticipation of volatility ahead.

Yeh told CoinDesk:

"We liquidated our position in bitcoin. We still have some, but the majority of our holdings are just sitting on the sidelines."

Tim Enneking, chairman of hedge fund Crypto Asset Management, an industry veteran who formerly served as a partner for a firm that had nearly 100,000 BTC under its management, indicated a similar strategy.

"We've moved almost entirely out of bitcoin. We don't think much is going to [happen] until the fork," he said.

The comments come amid new attention to alternative software implementations such as Bitcoin Unlimited, the software currently favored by a notable contingent of the industry's largest mining hardware manufacturers and mining software providers.

Recent weeks have seen a recasting of the scaling debate, with miners and developers largely backing separate paths forward for the network.

As this initiative has gained steam, a group of almost 20 exchanges has issued a contingency plan, which details how they would handle a split in an attempt to allow a free market decision on a dominant software.

Big shorts

Other smaller trading firms and individual investors noted a similar sentiment in the wake of recent news.

For example, Vinny Lingham, an investor and entrepreneur, emphasized how important the scaling issue has become to investors.

He told CoinDesk:

"I have sold the majority of my bitcoin holdings, about 90%, earlier this month, and I do not intend to repurchase any bitcoins for long-term holdings until there is clarity on a path forward."

This sentiment seemed to cross geographical lines as well, with major over-the-counter (OTC) firms and traders in China reporting that they, too, are taking steps to position ahead of what could be a period of volatility.

OTC trader Zhao Dong and Zhou Shouji, operator of OTC trading firm FinTech Blockchain Group, both reported that they intend to short the cryptocurrency ahead of any decision.

FinTech Blockchain Group boasts $20m in assets under management, while Zhao trades about $250,000 in the digital currency daily.

Money to be made

However, market stakeholders mostly believe a bitcoin network split would be a boon for traders – who can make money "up or down" in the market.

Cryptocurrency fund manager Jacob Eliosoff offered a more optimistic point of view, noting how ethereum's network split offered investors both another asset and new trading capital.

In the event of a network split, users would possess an equal amount of cryptocurrency on both networks. This is because their bitcoin private key – a string of code that grants ownership of the coin and allows them to be used – would be compatible with both the original chain as well as the new one.

In Eliosoff's view, traders should adopt a wait-and-see approach.

"Most holders don't need to make any rash decisions after a split. By default, you now just own coins on both chains," he argued, adding:

"The simple thing to do is hang onto both and let the market sort it out."

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