It has been a couple weeks since the Bitcoin Cash fork, the difficulty rate is starting to adjust to a more long term level. Segwit is locked in and implementing soon and it now looks like THIS stage of the scaling debate has come to a conclusion. A couple things have become clear:
- Bitcoin Cash isn’t going anywhere anytime soon.
- Bitcoin didn’t miss a beat and has reached new All Time Highs.
I won’t go into the details but there were a few factors that I would like to touch on to explain some of the initial volatility of Bitcoin Cash. With Bitcoin, and really any decentralized system, you are beholden to the desires of the crowd and if 2016 taught us anything it’s that the crowd is impossible to predict. There were and are diehards on both sides of the scaling debate but in the end none of them (despite what they may have said) knew exactly how this was going to play out. Bitcoin was too entrenched to be seriously injured in the short term and the only thing that could have made Bitcoin Cash dead on arrival would have been a major flaw being exposed in the software. That didn’t happen so what we were left with was wild speculation, some overreaction, and eventually some price discovery.
Bitcoin Cash is a fork of Bitcoin. They share a common transaction history, but their histories will be completely different going forward, like a two-tine fork. A copy of the bitcoin code without forking and bringing over the history would be like chopsticks and would make it more akin to an altcoin like Litecoin.
Fork – same history, Chopsticks – different history
The importance behind BCH being a fork is that there are a number of throttles and controls built into the Bitcoin protocol that govern how it runs and maintains appropriate incentive structures. These are dynamic structures that adjust based on activity on the network and mining resources being directed its way. Bitcoin Cash has all of the same structures and inherited the settings from Bitcoin as of the split. Say you have a car that has a 4 cylinder engine and then you decide you want to put a V8 in. You can drop it in there, hook up the gas line, oil, etc. but you won’t really be getting the most out of the V8 and it may even run less efficiently than 4 cylinder. Over time you can retool those inputs to get better performance and the full value of the V8. If you don’t know how engines work you may get frustrated and think the engine is bad, when all it needed was some tweaking. Well the tinkering is apparently working and it is going to be very interesting to see how it plays out through the end of the year.
Just needs a bit more tinkering
Some items i think are worth paying attention to over the next couple months:
- Is BCH just being held up by some whales and miners? What level of diversity of transactions will we see?
- Will any major projects be built on or moved to BCH? (Yours.org is apparently considering moving to BCH from Litecoin)
- Exactly what level of increase in transaction volume will we see with Segwit on BTC? (increase in BTC capacity = less added value for BCH)
The politics and motivations behind Bitcoin Cash aside, there is something I really love about it. When one has been fully immersed in the cryptocurrency world for a while it is easy to get caught up in the high idealism of it all where all you see are brighter decentralized futures. The Bitcoin Cash fork to me was a reminder that this is all still funny internet money. The community just spent months, nay years! debating how to scale Bitcoin with screams for “Bitcoin one million”, calls for its demise, and everything in between. To be honest, no one outside of the community really cared but that really changed when the cryptocurrency market crossed $100 billion or so. Yes, Bitcoin market cap matters, but as long as most tokens are traded against Bitcoin, the overall market cap will always say something about the health of Bitcoin. Instead of one side “winning”, a new token was created and billions of dollars of market cap was divined out of thin air.
A few things I take away from all this:
Time matters until it doesn’t.
Bitcoin was here first, it’s at least twice as old and twice as valuable as any other major coin. It has been tested on a larger scale and there is nothing anyone can do about that. Right now bitcoin is an adolescent and every other coin is still in elementary school. Another 5 years though they are all in high school and the playing field becomes a lot more level. That doesn’t mean Bitcoin will lose its dominance, but there will be new and more legitimate challengers in the future.
It’s still funny internet money.
At roughly 2:15 pm EDT on August 1st, the first Bitcoin Cash block was mined. The total market cap of the crypto-economy was at $91 billion before with $41 billion of that attributed to Bitcoin. Here we sit a week later at $145 billion overall and $68 billion in Bitcoin (8/20/17 8:30 am PDT). Bitcoin Cash itself is now the #3 coin in market cap at a bit over $12 billion. What have we gained?
Crypto is here to stay.
In my last post I said that if you are not a fan of volatility to sit on the sidelines till the dust settles. I can’t say that the dust has fully settled, but I can say that not many people were scared enough to take their money out. There was about a 30% swing in the overall crypto economy from a max of $120b in June to $75b in late July which sounds like a lot but pales in comparison with the 10x jump we experienced in the spring. It turns out that money was just taking a breather and was ready to hop back in once the fork happened. The worst thing that could happen to the cryptocurrency economy is Bitcoin being undermined. I won’t speculate on what that would look like, but this is the closest we have been to that happening that I have seen. What do we have to show for it? An all-time high and a doubling down of investors coming into the space. A month ago I might have said that if Bitcoin somehow is compromised or dramatically loses value, then the space as a whole would go down with it. From my perspective it is now clear nothing can stop the crypto-revolution.
Get your crypto-glasses ready
With the benefit of time and perspective I have some advice on how best to get into the space. Bitcoin is still king. It may be on its way to a more honorific title, but start there. After that – find what interests you and learn everything you can about projects in that space. Join their communities on Slack, Telegram, Reddit, etc., and if you feel excited for the prospects, find a way to contribute whether its with your time, skills, or money. There are projects in different stages of development in almost every industry so you should be able to find something that speaks to you. This is not stock picking. It’s closer to being your own venture fund. Some of these projects are very small and by investing your money, time, or knowledge you can actually have an impact on their success. That also means you are dealing with venture fund value propositions – assume the majority of your investments will fail, but hope the ones that succeed provide out-sized gains. I couldn’t be happier about finding this graphic to explain.
This was supposed to be something that shook the industry to its core, but instead everyone just seems happy to move forward. There is, and always will be, plenty of butthurt to go around, but in one of the great first tests of the resiliency of this industry it passed with flying colors………but mostly green.