Crypto-majors offered on ETH fork delay, legal investigations

2019 started on the back of a failed recovery attempt across the cryptocurrency markets.

The delay in Ethereums Constantinople hard fork has perhaps been a major catalyzer for another wave of sell-off across the cryptocurrency majors. Though the downside momentum remains contained, the short-lived price recovery has certainly stuck in investors craw during the first trading weeks of the new year.

Meanwhile, regulatory uncertainties keep the bulls on the sidelines, as authorities explore and investigate cryptocurrency-related business models in an attempt to define a legal framework to protect investors in the $120-billion worth crypto-industry*.

Constantinople hard fork delayed to late February

Ethereums Constantinople hard fork has been delayed yet again, due to a bug found in the EIP 1283, which would provide attackers with a gap in its program allowing them to steal users funds. With the activation of the EIP 1283, some smart contracts would have become vulnerable to reentrancy attacks, meaning that hackers would be able to reenter the same function several times without updating the user and withdraw funds infinitely. The issue is serious, and developers need time to fix it properly.

As a result, the hard fork is postponed to late February.

Good news is, the delay has not triggered a significant price unwind. The ETH/USDT is certainly under a decent pressure, yet the price decline has rather been limited. After all, the delay has surely prevented the network from facing serious security problems in the future.

Bad news is, the consecutive delays in Constantinople update raises the question regarding Ethereums ability to keep up with its development schedule and could damage the investor confidence in the medium term.

Traders do not expect a rebound in Ethers value on the back of the pending event risk. The $100-support will be closely monitored for the weeks ahead.

Heading toward the next hard fork, traders should carefully distinguish between the sector-wide price fluctuations and the impact of the delay in Constantinople hard fork on Ethers valuation.

Regulation is another major barrier to the recovery

The regulation of cryptocurrencies will certainly remain among the major themes of 2019.

According to the latest news, the UKs Financial Conduct Authority (FCA) has placed 18 companies related to cryptocurrency transactions under watch and the government is willing to empower the FCA to supervise all cryptocurrency assets.

Across the Channel, the European Banking Authority (EBA) is also looking for ways to homogenize the regulation concerning the cryptocurrencies within the European Union, in an attempt to define rules and to protect investors from getting hurt in a high-risk environment.

In the US, the OCIE, the US Securities and Exchange Commission (SEC)s Office of Compliance, Investigations and Examinations, will take steps to identify market participants offering, selling, trading, and managing these products or considering or actively seeking to offer these products and then assess the extent of their activities. The SEC states that the examination of cryptocurrencies will be one of the top priorities in 2019, and adds that for firms actively engaged in the digital asset market, OCIE will conduct examinations focused on, among other things, portfolio management of digital assets, trading, safety of client funds and assets, pricing of client portfolios, compliance, and internal controls.

These developments could go both ways. If all goes smoothly, giving a legal structure to crypto-assets will likely tame the volatility, encourage a significant recovery across the sector, help the technology to develop in a healthier setup and lead to a more stable trading environment.

Moreover, regulating cryptocurrencies would also boost the market for derivative instruments, such as the very-much expected ETFs (Exchange Traded Funds) on Bitcoin and other cryptocurrencies, allowing institutional players to fund and to rejuvenate the market.

This is what investors hold on to. Yet, there is still a risk that some regulators would ban the cryptocurrencies, as it is the case in many countries including China, Russia and Taiwan. Though in practice, it is difficult to take down a decentralized operating structure, the possibility of a ban on cryptocurrencies from the major financial centers is a risk that is being broadly priced in by traders.

Cryptocurrency majors under pressure

As mentioned earlier, the regulatory uncertainties and the delay in Constantinople hard fork didnt help boosting the sentiment across the cryptocurrency majors, though the impact of the latter has not been as dramatic as the Bitcoin Cashs November fork.

Bitcoin, which remains the major sentiment gauge in the cryptocurrency market, met support near the $3500 level, which is approximately $300 above the December dip. Yet, the BTC/USDT remains offered at $3700/4000 area, including the 50-day moving average and a psychological resistance. From a technical standpoint, Bitcoin should recover above the $4500-resistance, the major 38.2% Fibonacci retracement on November December decline, to step in the mid-term bullish consolidation zone. Below this level, the market will likely remain in the hands of the bears.

Ethereum, which had recovered to 0.0500 versus Bitcoin on January 1st eased back to 0.0320BTC. Ethereum has again slid to third position in the ranking of top cryptocurrencies; Ripple became the second biggest cryptocurrency by market cap ($13 billion) despite falling to the $0.30 mark last seen on 18th December.

Bitcoin Cash and Bitcoin SV continue suffering from the shaky November hard fork, as Litecoin finds support near its 50-day moving average ($30), highly influenced by negative sector dynamics rather than idiosyncratic factors.

Traders are unsure about whether the actual market distress is temporary or the low trading volumes are an early sign of a further debasement. A positive or a negative breakout is needed to give a clearer direction to the market. Given the high cross-asset correlation across cryptocurrencies, the best hedging strategies involve the effective use of stop loss / take profit strategies.

* source: as of 23 January 2019