No.2 cryptocurrency Ethereum faces software 'fork'; lower supply seen

LONDON (Reuters) - Ethereum, the world’s second biggest cryptocurrency, was set on Thursday for major software upgrades that traders and analysts predicted would significantly reduce its supply.

FILE PHOTO: Representation of the Ethereum virtual currency standing on the PC motherboard are seen in this illustration picture, February 3, 2018. REUTERS/Dado Ruvic/Illustration/File Photo

Ethereum is upgrading its network to cut the costs and complexity of interactions and communications on its blockchain.

It will undergo two so-called “hard forks” during the evening, in essence creating a new version of its blockchain software that will give miners fewer incentives to spend time and energy producing fresh coins.

“It is a big deal,” said Mati Greenspan, an analyst with eToro in Israel. “The supply and demand equation is going to be very altered.”

A reduction in supply of Ethereum could cause price movements across other major cryptocurrencies, Greenspan said.

Price moves across cryptocurrencies tend to be highly correlated. A recent six-day rally in bitcoin -- a rare winning streak -- was seen to be in part due to a drop in the number of new Ethereum.

During late afternoon, Ethereum was trading up 1.1 percent at around $136. It has jumped nearly 30 percent this month, compared to a 12 percent gain for bitcoin.

The upgrades to Ethereum, known as “Constantinople” and “St. Petersburg”, are due to kick in at around 1945 GMT, according to blockchain analytics website Amberdata.

Ethereum, like other cryptocurrencies, is produced when miners solve algorithmic puzzles -- usually a highly energy-intensive process and thus costly.

Miners win three coins when they solve each puzzle, or “block”. The Ethereum fork, which will be activated at the production of block number 7,280,000, will cut the number of coins received to two.

A fork in bitcoin in 2017 caused major fluctuations across cryptocurrency markets -- something analysts said was not likely to happen as a result of the Ethereum upgrades.

In the bitcoin fork, vehement disagreements among developers meant that a rival coin, Bitcoin Cash, was born after users continued to use the older code.

But consensus among Ethereum developers means the chances of the birth of a rival coin are slim, market participants said, because the pre-fork software will quickly cease to be used.

“There was some uncertainty in the community and market around which fork would win when it came to (Bitcoin Cash and bitcoin),” said Jamie Farquhar, portfolio manager at crypto firm NBK Group in London.

“There is no fight going on between different factions here.”

Ethereum has a market capitalization of $14.6 billion, compared to bitcoin’s $68 billion, according to the CoinMarketCap website.

Reporting by Tom Wilson; Editing by Catherine Evans