I can’t remember a nuttier weekend in the history of Bitcoin than this one. That’s because the action gets more exciting by the day, with deeper plots, more options, growing complexities, and financial and personal drama all around.
You know why? Because this technology matters enormously for the future of the world. It’s Day One in the birth of a new way of doing business.
It’s extremely hard to write about this for the uninitiated without seeming to speak Klingon, but here is my attempt. My own Twitter and instant messaging blew up with questions, assertions, declarations, and anathemas. I loved every minute, but that’s because I enjoy this world. Outsiders just getting into Bitcoin must be completely confused or even terrified.
I can only imagine what it must be like for someone who ventured into Bitcoin within the last 30 days. They must be wondering what kind of circus this is, especially if these people became curious and started examining the vibrant sector of Bitcoin news organizations. You can read this material all day and leave more confused than ever.
And it is true: Bitcoin is more confusing now than it ever has been. It’s the last place anyone thought we would be five years ago, but such is the nature of an emerging and massively disruptive technology. It’s going to be a long time before it is as easy and inevitable as electricity.
What exactly was going on? I could not begin to give a full account even if I did understand it all. I’ve got no real dog in the fight taking place right now but rather write as an enthusiastic observer and minor participant in the most exciting technological drama of my lifetime. It’s extremely hard to write about this for the uninitiated without seeming to speak Klingon, but here is my attempt.
BTC vs. BCH
Essentially a new currency called Bitcoin Cash (a “fork” from the main chain, meaning that all previous Bitcoin owners also own Bitcoin Cash) came into its own, after having been declared dead only a few weeks ago. I heard for weeks that this thing called BCH was “going to zero”...just before it didn’t. I did the opposite.
The shock was (and is) palpable. For years, people have been wondering if Bitcoin could forever maintain its top spot in the cryptocurrency world, given just how much competition is out there. Anyone can make a token. Surely Bitcoin could be challenged at some point.
We are dealing with such a massively disruptive technology with applications for everything from money to finance to law. Two nights ago, the least likely candidate emerged from the pack. Plain-old Bitcoin (BTC) is still #1 is market capitalization at $104 Billion. Pause to consider how large that is and yet it is only 2% of gold valuation, which suggests that it has a long way to go. The token for the Ethereum (ETH) blockchain (more of an asset than a currency) has been a far lower #2 for a long time at $29 billion.
Suddenly Bitcoin Cash (BCH) rocketed past Ethereum in market capitalization, peaking at a dollar exchange ratio of $2,400 (with a temporary market capitalization of $32.8 billion) before falling again and then ever faster, finally to land at $1,100 (with a market cap of $18.8 billion) as for this writing. It was a wild ride.
And this suddenly raised the possibility that BCH, which has only existed for a few months, could become a popular currency at some point in the future. That is saying something given that the currency has limited wallet support, super low transactions, and is far from being mainstream. But the community that is speculating on prices now lives in anticipation of whatever is the next thing.
Critics say is a sure sign of a bubble. That’s not obvious to me, given that we are dealing with such a massively disruptive technology with applications for everything from money to finance to law. Wide swings are to be expected.
What comes next is not decided upon by pundits or advocates, or even the biggest players in the markets, but market forces themselves. Markets are eminently more practical than intellectuals.
The Advent of BCH
What kicked off the price increase (and new interest) in Bitcoin Cash were several factors.
First, the transactions fees and/or processing time of Bitcoin transactions have soared, robbing the Bitcoin ecosphere of what many of used to say was the key advantage of the cryptocurrency. This has happened as the network has become more crowded and the “mining” community that is confirming transactions with processing power are choosing high-priced transactions over others, which is to say, behaving like market actors (but in ways that users do not like).
Second, a major solution to the problem called Segregated Witness, which separates signatures from transactions and frees up space (among other changes), was activated in August through a soft fork, a backward-compatible way to upgrade Bitcoin. The beauty of a decentralized development process is that we do not have to choose only one path forward.
A separate proposal called SegWit2x that added in a change to increase Bitcoin’s block size through a hard fork (a non-backward compatible upgrade) failed to gain traction. This happened because a number of major industry players chose consensus over the risky step of imposing a hard fork on the protocol itself.
These realities are pressing concerns because Bitcoin is at a point where it needs to scale for the next stage of practical use. The question is how and this is what led to Bitcoin Cash. Making the blocks bigger addresses an aspect of the current problem, but everyone knows that it still kicks the can down the road. The point is that we don’t live in the long term; we must deal with current realities.
The other longer-term solution is creating multiple layers on top of a base Blockchain, kind of like highways. Think about it: are our computers getting bigger every year? No, they get smaller, but are faster and more efficient in what they do. The future of Bitcoin could take the same direction.
Further, defenders of the status quo point out that it was never intended to scale on chain. Early adopters understood that Bitcoin’s ledger would eventually come to operate as a system for final settlement of transactions, while encouraging further innovations to address more specialized financial needs.
Other currencies and services would step in and serve as more efficient systems for small transactions and for credit services. For example, developers have built second layer systems that sit on top of bitcoin, such as Lightning Network, that enable instant, high volume transactions that settle to the blockchain. Some such systems date back to the middle of 2013, though with limited adoption rates, but have low impact on how Bitcoin is used today.
The Near Term
It turns out that aspects of the long-term have arrived sooner than was anticipated. That creates a problem and an opportunity. People are currently using Bitcoin not only as “store of value” but also as a real money: a means of facilitating real transactions right now. Frustration with high transaction fees inspired a team to fork the original chain to create Bitcoin Cash (BCH), which multiplied the pre-Segwit Bitcoin block size by eight times, and hence will presumably work well for small transactions for some time to come.
Critics say that this approach takes us in the wrong direction toward disincentivizing miners and bringing about more centralization. On the other hand, and this is the beauty of a decentralized development process, we do not have to choose only one path forward. BTC, BCH, and a thousand other cryptocurrencies, can operate at the same time. This grants what F.A. Hayek called “choice in currency,” an idea that was a dream in the 1970s but is quickly becoming our current reality.
BCH is not the only contender to address the desire for cheap cryptocurrency transactions. Many services are working to upgrade their code to integrate SegWit transactions (some already have) and are preparing to utilize the second layer systems built over the past few years on Bitcoin. Meanwhile, many other currencies are competing to provide the services that Bitcoin cannot, including better privacy and faster confirmation times such as Litecoin, Dash, and Monero.
Aside from them, there are the asset-class cryptocurrencies such as Ethereum and Ripple which themselves could function as mediums of exchange under the right conditions.
But look out for the new kid in town: Bitcoin Gold (BTG). It has nothing to do with gold as a commodity. As incredible as it seems, this is yet another fork with a different ambition: to decentralize mining by providing a new and easier method.
It has already received support from the industry because it includes several seeming improvements that would have been difficult to gain traction given the Bitcoin mining ecosystem. It began trade today, as of this writing, and it is already enjoying a higher price than most anyone in 2012 believed any cryptocurrency could obtain.
Does This Chaos Doom Bitcoin?
Presumptions of good faith seem to be in short supply. The debate over the matter of scalability has been going on three full years and even longer. But as the price and user base have massively expanded (here are more charts on this and you will ever need), the imperative for a scalable way to use Bitcoin has intensified. The pressure built and built until the amazing explosion of change that has hit us in November 2017, a month that will surely go down as historic in the annals of cryptocurrency.
So intensely divided has the once-united community become that it’s impossible even to Tweet about the subject without being called ghastly names. Let’s just say that presumptions of good faith seem to be in short supply. For my own part, someone speculated that I’m personally behind the scenes manipulating the price of all these coins for my own benefit, a fact which would very much surprise my friends.
On top of all of this, you have the old world financial community that regards this entire sector as one big Ponzi scheme. People like Jamie Dimon would tell you that you are a fool for putting so much as one dime on this technology, whether BTC, BCH, BTG, ETH, or any other.
What Doesn’t Kill It
The current chaos is a symptom of Bitcoin’s successes, not its failures. What’s the meaning of all this chaos? For my own part, I’m delighted by it all. Why? Because the more this sector is pounded on, denounced, broken, and forked, the stronger it grows. This is because it is the product of a dynamic and competitive marketplace rather than some kind of central committee. That makes it adaptable, robust, and intimately connected to human choice.
In other words, all the current chaos is a symptom of Bitcoin’s successes, not its failures. There is no greater contemporary example of order emerging from seeming chaos than you find in this sector.
I’m also delighted because I’m convinced that no one guru in this space, to say nothing of the planners and intellectuals outside of this space, can know for sure what the future holds. As for average investors, the slogan is probably right: "Keep calm and HODL." (The misspelling is correct.)
This much we can say: whatever emerges will be better than the systems that have monopolized world finance for the last one-hundred years. Moreover, this time, the sector will not be frozen in time but instead will never stop emerging.
Enjoy the ride!
Note: I would like to thank many the many specialists in the space who made suggestions and fixed errors on earlier drafts of this article. For more articles from FEE on the topic, see the above tags Bitcoin and Cryptocurrency. My favorite data and news sources are: Bitcoin.com, CoinMarketCap, Coin Telegraph, and Brave New Coin.