Three years of bitter infighting in the Bitcoin community reached a head on Tuesday, when a disgruntled group splintered off to create a new coin called Bitcoin Cash that can process a greater number of transactions per second but shares the same transaction history as Bitcoin up until Tuesday at 8:20am Eastern Time.
Though many insiders were anxiously anticipating the event, the market seemed to shrug it off. The price of Bitcoin, which had been rising over the last few days, dropped only 5% from $2,875 to $2,718, according to Coinmarketcap.com.
"I think this thing will totally blow over," said Daniel Masters, director of Global Advisors, which runs the Global Advisors Bitcoin Investment Fund. "I think Bitcoin Cash will exist. I think it will be a low-priced coin compared to Bitcoin. In three months' time, I would be very surprised if it’s worth more than $50." (Its current price is $470.)
However, it is the first time in Bitcoin's history that a new coin created from it has a name that could cause it to be mistaken for the original. While it's too soon to tell, that potential for confusion could someday become an issue for what has so far, because of its 21 million-coin cap, been considered digital gold.
When a blockchain-based token is forked as Bitcoin Cash was, it gives holders of the original coin the same number of coins on the new chain. For this reason, chief executive Ryan Taylor of another cryptocurrency, Dash, disputed that Bitcoin was forked, writing in an emailed statement, "Some developers have created a new digital currency and formulated an effective means of distributing it, by giving it to everyone with an existing Bitcoin balance."
But it's unclear how many Bitcoin Cash coins are in circulation. Bitcoin holders who kept their coins on exchanges and services such as Coinbase, Xapo and Bitmex that announced they would not support Bitcoin Cash would not have received any unless they withdrew their coins from those companies before the fork occurred.
However, a significant number of people did make sure they were in a position to receive what was essentially free money being given away. Blockchain analytics firm tweeted that the number of bitcoins stored in Coinbase's cold storage plummeted almost 50% -- from 800,000 bitcoins to less than 500,000.
Prior to the Bitcoin Cash fork, this is what the Coinbase cold storage balance looks like based on our analysis. pic.twitter.com/yZrsvir9rh
— BlockSeer (@BlockSeer) August 1, 2017
But this isn't necessarily a blessing for Bitcoin Cash. Perry Woodin, CEO of Node40, wrote via email, "It's going to be a race to see who can sell it the fastest." In the days leading up to the split, a number of users unhappy about the creation of a new coin whose named also contained the word "Bitcoin" said they planned to dump it on exchanges to either drive the price down or buy more Bitcoin. That could drive Bitcoin Cash toward irrelevance.
"Everyone who supports BTC is going to be selling BCH to buy more BTC," said Vinny Lingham, the chief executive of blockchain identity startup Civic, who is also nicknamed the Bitcoin oracle. (Listen to my podcast with Lingham.) "There’s a ton of BCH in the market, and people will be dropping it left right and center using it to flip back into alt coins or buy more Bitcoin."
But if the history of cryptocurrency is any guide, a small, aggrieved minority can keep alive a coin derived from a fork. That is essentially what happened last summer after Ethereum underwent a split and those who disagreed with the decision (as well as Bitcoin "maximalists" who believe only one blockchain -- Bitcoin -- will succeed) decided to buy and push up the price for the original coins, now called Ethereum Classic.
And, if there's any obvious result of the three years of acrimonious fighting in Bitcoin, it's that it's produced a number of disaffected players. In fact, the fork that occurred Tuesday was only one of three that had previously been threatened. One, called a user-activated soft fork (UASF), was actually the one that was supposed to take place August 1. It was a way of forcing an upgrade called SegWit to the network without the consent of the miners. Its proponents adopted a militaristic, fatigues-and-camo look, making it clear their movement was a declaration of war against the Bitcoin miners.
The UASF movement came about when the core developers said they would adopt SegWit if 95% of miners signaled support. But when only about 30-40% of miners did, Lingham says some Core developers and their supporters "said, Screw you guys, we don’t need your hash power. We’ll deploy as a UASF ... and you [miners] are just dumb pipes like telcos. Go mine your bitcoins and don’t worry about the economic rules. The problem is, it’s like if I say, Laura, would you like coffee or tea? And you go, Coffee, and I say, Screw you, I'll give you tea anyway. You can’t give someone an option and take that away from them and expect them to be OK with it." That's why, Lingham says, the miners instead threw their weight behind a compromise called the New York Agreement, or SegWit2x -- basically, half coffee, half tea.
The SegWit2x compromise was forged by the largest economic players in Bitcoin, including some of the largest miners who run the network. Now that enough miners have signaled for SegWit2x, the network will adopt, first, SegWit in August, and then, in November, a hard fork to double the amount of data the network can process in any given block from 1MB to 2MB. (Listen to my podcast on why November presents a major test for Bitcoin.)
So, if the pro-SegWit people and the pro-2MB crowd are both getting their way, who might the remaining resentful be? Those would be the people for whom 2MB blocks aren't big enough. Previous groups had proposed block sizes of 20MB, 8MB or even a flexible limit. The 2MB proposal was a compromise made for those who did not want large blocks. Bitcoin Cash, meanwhile, has 8MB blocks (but not SegWit).
And because enough people are interested in big blocks, Lingham isn't entirely confident that BCH will wither on the vine. In the game theory of Bitcoin, the only incentive miners need to mine is the certainty that they will make a profit on their investment and electricity costs. "Here’s what people miss about Bitcoin. Miners only care about the money. They don’t really care about Bitcoin," he says, adding that a major hedge fund could find it worthwhile to spend $1 billion buying up BCH and pushing up the price. Because something called the difficulty of Bitcoin Cash -- how difficult it is for a computer to find the next block in the blockchain -- would be low compared to the difficulty on Bitcoin, miners could find it more profitable to mine on BCH within a few weeks. "It just requires someone with a lot of money saying, Fuck it, I’m going to create a market," says Lingham.
He also surmised that this could be part of a longstanding plan on the part of Bitcoin Cash supporters. "There’s too much effort to go through to do what they’ve just done with no strategy for the aftermath. Don’t underestimate your opponents. They could have been front running, buying up a bunch of Bitcoin a year ago with these plans at cheap prices," he says. "Bitcoin is the Wild, Wild West, so anyone with a ton of money can cause havoc in the market and there’s no way you can stop them. There’s no insider trading laws." It would be easy to manipulate a coin whose market cap is not even one-tenth that of Google's, Lingham says: "You just need someone with a ton of money, like a sovereign wealth fund."
He painted a scenario of how such manipulation would occur. "I would go spend my own money on branding, making sure Bitcoin Cash gets adopted in places. I’d go buy some bitcoin companies and switch them to Bitcoin Cash," he says. "You’ll confuse people who will go buy Bitcoin Cash because they think that’s the real Bitcoin."
Lingham will be watching the hash power or computing power devoted to the Bitcoin Cash network. If the hash power grows to 15-20% that of Bitcoin's, then that means it is an economically rational choice for a sizable minority. If a hedge fund or billionaire is then motivated to buy up Bitcoin Cash, "then you have the forward movement issue where, Bitcoin Cash is going up! It’s up 100% this month -- it’s going up more than Bitcoin, oh my goodness! And then everyone starts putting money in there, and then the whole thing flips. Crypto is all about herd mentality. The moment Bitcoin Cash is going up, it will keep going up."
Bitcoin's success stems, in part, from mainstream acceptance -- it is accepted by thousands of merchants, including Dell, Etsy and Virgin Galactic -- "but if you look at all the other cryptos, they all function with ridiculously high market caps and prices without any infrastructure worldwide," says Lingham.
Masters will also be eyeing the hash power, though he doubts any billionaire would be motivated to push up the price of Bitcoin Cash. Still, because the difficulty is so much lower on Bitcoin Cash, it's more efficient for miners. "The dollars you make per hash is a much bigger number than it is on the Bitcoin fork," he says. However, Bitcoin offers an extra $1.5 billion a year in mining rewards, even excluding Bitcoin transaction fees, so "can [a miner's] fixed cost base sustain the loss of $1.5 billion or 90% of the revenue just for a pickup in efficiency? The answer is, categorically, no, it can’t," says Masters. For that reason, he believes it won't gain much traction beyond people with old mining equipment that no longer mines profitably on Bitcoin. However, GABI will watch what happens with Bitcoin Cash over the next three months before it decides what to do with its investors' BCH. As long as it doesn't pose a threat to Bitcoin, the firm will liquidate it.
"I don’t know who the natural buyers of Bitcoin Cash are," says Masters. "Everybody in the world who owns Bitcoin now owns Bitcoin Cash. Who are the natural buyers? I can’t think of one."
Meanwhile, Bitcoin still faces its own test in November -- the hard fork part of Segwit2x that doubles the 1MB block size limit. While many have doubted whether the core developers and their supporters who only wanted SegWit and didn't want a hard fork to a 2MB block size would follow through on the second half of the SegWit2x compromise, Masters and Lingham believe Bitcoin Cash boosts sentiment for SegWit2x, even the hard fork portion. Bitcoin Cash has done enough to make the market nervous -- and since money talks, that may be enough even to get ideological purists to compromise.
Update, Wednesday, August 2, 2017, 2:10pm EST: The article originally reported Litecoin is, like Bitcoin Cash, a fork of Bitcoin. However, it is a different type of fork, one that does not share a transaction history with Bitcoin up to a certain point in time.
