Ether under pressure ahead of the Constantinople hard fork

Ether has been displaying a poor performance since the beginning of May. Even the significant recovery in Bitcoin's price couldn't rejuvenate a positive market action in Ethereum. While a part of the price stagnation was explained by the $31 million Ether hack in the third week of July, the market's persistent inability to recover raised some fundamental questions among traders ahead of the next Ethereum hard fork.

How could the next fork affect the price of Ethereum?

Ethereum's four stage growth plan

The launch of Ethereum has been planned in four stages: Frontier (the beta stage to develop and to test the decentralized applications (dapps)), Homestead (to stabilize the platform), Metropolis (ongoing) and Serenity (upcoming).

The first Metropolis hard fork, known as Byzantium hard fork, has been launched in October 2017 aiming to minimize the actions of bad actors within the Ethereum ecosystem, to increase speed, scalability and smart contract efficiency and to secure a more effective and safe infrastructure for the decentralized applications that run on Ethereum's blockchain.

The second update of Metropolis hard fork, called the Constantinople hard fork, will be finalized on August 13, tested for two months and released by the second week of October. The Constantinople hard fork will allow smoother transactions and further improve speed and scalability of the Ethereum's network.

From a fundamental standpoint, the technology updates are good news for any cryptocurrency and in theory, the improvements on the network should be welcomed by the community of users.

However, both soft and hard forks carry a high event risk. Some users may not adhere to changes and some could be too cautious or too slow to adopt new protocols. Therefore, the short-term market reaction to code updates could sometimes be a bit unexpected.

Market reaction to Byzantium hard fork

Let's have a quick look at the market reaction following the Byzantium fork.

The Byzantium hard fork was successfully launched on October 16. Ether gained past $340, a historical high at that day, immediately following the launch yet failed to maintain gains and shred more than 20% of its value during the following week.

Apparently, some negative press dented the appetite that week. First, Parity CTO and founder Gavin Wood warned that the risks following a hard fork could extend several days, adding that it could be a bit early to call the fork a success immediately after the launch. "There needs to be a more conservative approach to the specification, development, testing and deployment for major protocol alterations like Byzantium' Wood said in a statement shorty following the hard fork, ‘it should be ascertained to as great a degree as possible that all major implementations are in consensus before any determination of a hard fork block.'

Meanwhile, rumours that two groups would protest the reduced mining reward following the Byzantium fork spread among traders and may have further weighed on Ether's price.

In reality, the downside price correction was certainly nothing, but a buy-the-rumour-sell-the-fact move. Moreover, the cryptomarkets were under a global downside pressure that particular week, while an unprecedented rally was just around the corner. As a result, Ether surged more than 250% following the post-fork dip.

What to expect for Constantinople hard fork?

Ether is under a decent selling pressure since the beginning of May, despite a period of improved sentiment in its major rival Bitcoin.

The failure to clear the critical $500 resistance has certainly added an extra downside pressure from technical traders, as short-term speculative trades pointed at a deeper price correction. Combined with a renewed deterioration in Bitcoin prices, Ether retreated to its lowest levels since April and the short-term trend hints at the possibility of a further price dip.

The key question is whether Ether is currently priced at a fair value?

It is important to note that the individual cryptocurrency fundamentals are often not well understood by a clear majority of market traders. Hence, the short-term price valuation could diverge from the medium-to-long term fair price. Therefore, the Constantinople hard fork may not have a significant impact on the short-term market trend. In contrary, the launch of the new hard fork could add an extra downside volatility on the back of uncertainties and caution from fundamental traders. Ether could test dip below the critical $350 support.

In the long-term however, the network upgrades are an essential and unnegotiable phase in the development process, provided that the blockchain technology is new and there is certainly a lot to be improved before any platform reaches a form of maturity. In this respect, investors who believe that Ethereum and Ether have a lot more to offer in the future could benefit from the actual low prices to strengthen their long-term bullish positions.

To us, Ethereum is a valuable platform and is on a stable and a promising development path. Therefore, the second largest cryptocurrency should benefit from steady capital inflows over the long-term. Readers should remember that today, a clear majority of tokens use Ethereum's network and there is no sign of a trend reversal in Ethereum's popularity among token issuers in the foreseeable future.