Jason C.


Blog

Bitcoin Cash

Date: 2017-08-05

Table of Contents

The Fork

If you haven't heard, last Tuesday Bitcoin split into two separate networks. The main chain is called Bitcoin (BTC) and the new split off chain is called Bitcoin Cash (BCC or sometimes BCH).

I find this to be pretty exciting because I think Bitcoin has been stalled for the last few years and this will allow it to move forward again. I believe in the long-run it's possible Bitcoin could end up being as impactful as the internet and that this could be a key event in its history. So far I'm a big supporter of the BCC chain, and thought I'd share my interpretation and thoughts.

First, to give a little background, this is the result of a 3 year struggle between two ideas for how to scale Bitcoin. The main group in control of Bitcoin (BTC) believes if the network has too many transactions, only really big companies will be able to participate as miners and it will become centralized and government controlled. Their solution is to change the Bitcoin protocol to make side-chains more practical (Segwit). This would allow for companies (like PayPal or Venmo) where normal people would make transactions through them, but behind the scenes PayPal would occasionally make aggregated transactions on the Bitcoin network. With on-chain activity minimized, anyone should still be able to run a bitcoin node, which will keep the network decentralized and unregulated by government.

The other side (BCC) thinks computing power is only getting cheaper, and even if one day it costs $20k to buy Bitcoin mining hardware, it still won't become centralized. They've been threatening to fork for the last few years and their scaling solution is simply to increase the number of transactions allowed. For more info about why the split happened here's a good article:

https://arstechnica.com/tech-policy/2017/08/why-the-bitcoin-network-just-split-in-half-and-why-it-matters/

Users and Miners

Forks have happened with other cryptocurrencies before, but this is an unprecedented event for Bitcoin (total value of about $50 billion). On the first day BCC was available it quickly went to about 20% the value of BTC (~$10B). Since then it has been falling, now worth about 8% (~$4B). Some people think it will bottom out in the next week or so.

There are lots of interesting economics going on, the Bitcoin network is a struggle of power between miners and users. Part of mining is the difficulty required to mine the next block of the blockchain. That difficulty only adjusts every 2016 blocks (blocks are mined on average once every 10 minutes, so an adjustment occurs usually every 2 weeks). The profitability of mining influences which cryptocurrency network the miners will decide to participate in.

Right now it is more profitable to mine BTC, so anyone mining BCC is doing it at a loss, probably because they believe it will pay off later. Part of the BCC fork was a provision to handle a significant drop in mining power, and adjust the difficulty down outside of schedule. The difficulty has already adjusted down 80% and could adjust more, potentially eventually making BCC more profitable to mine than BTC (even with a lower price). This is a site that tracks the difficulty and profitability:

https://cash.coin.dance/blocks

Scenarios

In theory things should eventually reach an equilibrium, but the normal BTC adjustment period is relatively long. If BCC becomes more profitable to mine, then selfish miners (seeking only profitability) should switch networks. If the BTC network loses miners, blocks would be mined less often, which would reduce the transaction capacity proportionately. This could create a viscous cycle where transaction capacity decreases, causing prices to drop, which makes it less profitable to mine, causing more miners to jump ship, making transaction capacity decrease even more.

This could potentially lead to a worst case scenario for BTC. Since the difficulty adjustment isn't based on time, it's based on blocks, this could push the next adjustment out months. This would require miners to mine at a significant loss for an extended period of time. Some believe this could potentially kill the BTC network altogether. Here's an article explaining this a bit more:

https://medium.com/@john.s.millibit/cashing-out-of-bitcoin-72ffe6226ab4

Conclusion

No one can predict what will happen. This could be an all out war, where either side (BTC or BCC) ends up getting crushed and becomes worthless (long live the strongest chain). Or it could end up somewhere in the middle with both finding their niche. Only time will tell.

As someone who thinks Bitcoin could be one of the most impactful inventions ever created, this is an exciting time. Based on the research I've done, I think that on-chain scaling (BCC) is the way to go. If that's the case, right now could be a great time to scoop some up. But don't take my word for it :)

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