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Bitcoin Forks are So 2017

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“Let a Hundred Flowers Bloom” Mao Tse Tung 百花齐放

Well there are 20 flowers in the Bitcoin ecosystem. And over 1400 in the cryptocurrency ecosystem at present.

Salad forks, dinner forks, shrimp forks, dessert forks, tuning forks, pitchforks… so many kinds of forks..

Image credit: Ellen Levy Finch, CC BY-SA 4.0

Why fork a new cryptocoin? One can fork for technological improvements, one can fork to make money, and one can fork for ego, for the pride of “ownership”.

There were several software forks that occurred mainly in the 2015-2016 timeframe and known as XT, Classic, and Unlimited. Including Unlimited, they have had limited impact to say the least.

But let us look at hard forks, or coin splits, that have been so prevalent since August of last year.

Technology enhancements promoted in these forks are across several main categories:

  • Bigger blocks for scaling, shorter block times
  • Off chain or side chain transactions (Segwit for signature, more generally Lightning, etc.) for scaling
  • Different hashing algorithms for easier mining
  • More anonymity, security
  • Enhanced programmability, smart contracts
  • Increased money supply

How many hard forks and coin splits has Bitcoin had so far? In total there have been 20 such forks to date.

  • August 2017 – 2
  • October – 1
  • November – 1 and Segwit2x proposed, withdrawn
  • December – 14
  • January 2018 – 2 so far

This Cambrian Explosion of bitcoin forks is in large part a result of the increased transaction costs and delayed confirmation times with original BTC, Bitcoin Core. But it is also a sign of a healthy and growing blockchain universe. If cryptocurrencies were not seeing increased success, the rate of innovation, and the number of forks, would be smaller.

Here is a list of the most significant ones, all in the second half of 2017, and with current pricing, key features, and URL:

August – Bitcoin Cash, BCH, $2413, 8 MB blocks, bitcoincash.org

October – Bitcoin Gold, BTG, $323, equihash, bitcoingold.org

November – Bitcoin Diamond, BTCD, $22, 10 times number coins , X13 hash, btcd.io

December – Super Bitcoin, SBTP, $108, lightning and zero knowledge proofs and smart contracts, supersmartbitcoin.com

If you owned bitcoin prior to block 478558, you in principle own all 20 of the forked coins, including the most valuable one Bitcoin Cash, and mostly in a one-one ratio. Putting your hands on them is trickier.

That is a question as to what support particular private wallets or public exchanges provide. There are guides on the internet and YouTube as to how to retrieve although it seems more trouble and risk than justified in most cases. (This writer has managed to get some BCH and BTG separated out, but it is a somewhat nerve-wracking experience.)

For now it seems we have reached a point of exhaustion for the principal good ideas and the newest forks are more likely to be dodgy, or frauds, or duplicating others, or of limited potential.

Here is an important consideration: while increasing the transaction rate and lowering fees will bring greater utility to users, this does not contribute to the store of value or digital gold aspect. Bitcoin, the original Bitcoin core, is most valuable today for its store of value attribute, much more so than for its medium of exchange attribute.

Now it will be a race between development teams and marketing teams to see which of these forks/coins other than BCH and maybe BTG will have relevance and value going forward, and what value any of them can sustain.

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Bitcoin: Like Gold or Like a Currency?

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Valuing the various bitcoin forks

Recent News: Segwit2x fork has been postponed indefinitely

Some say bitcoin acts more as digital gold then as a currency, more as a store of value than as a medium of exchange. It is very interesting to look at the various bitcoin forks with this question in mind.

Everything in life and in finance is a tradeoff. Gold works well as a long term store of value, but not so well as a medium of exchange. The US dollar works very well as a medium of exchange, but not well as a store of value in the long term. Even the Federal Reserve and other central banks hold gold as a reserve asset. It represents the bottom of the inverted money pyramid.

Now bitcoin is from its beginning more like gold in the sense that it is an asset with limited, predetermined supply. Dollars and other fiat currencies are debt-based since they come into existence when new loans are made, and their continual supply growth is rather assured; usually inflation occurs to varying degrees. See the Money 3.0 article for a longer discussion of this point.

Image: Silver ice cream fork, De Young Museum

There are 4 versions of bitcoin, 3 currently, and one possible fork. That was scheduled for mid-November as Bitcoin 2x (or B2X) a possible fork due to partial adoption of Segwit 2x, but it has now been indefinitely postponed due to lack of support.

As of today, approximate values for the 3 existing forks are:

Bitcoin BTC $11,530

Bitcoin Cash BCH $1560

Bitcoin Gold BTG $330

And Bitcoin 2x B2X had future values around $1600 before plunging on the announcement that it is now postponed. That value seems to have migrated to BCH.

All these cryptocurrencies have a supply of around 16.7 million accounting units, and all are limited to 21 million as the ultimate supply. And yet their prices are very different. Bitcoin has a first mover advantage but is that the whole story? How does one value BCH and BTG relative to BTC? In principle the various versions have both asset and currency characteristics.

Each of the alternatives to the original bitcoin is designed to facilitate faster, less expensive transactions. And this makes it more like a currency than a reserve asset.

BTC can be looked at like a large denomination bill, not as easily spent, although it is much easier to break into change than large bills are. Bitcoin Cash differs from BTC because it has a much larger blocksize, 8 MB. Bitcoin Gold differs in adopting a GPU-friendly mining algorithm, Equihash, rather than SHA-256 used by the others, which requires custom ASICs.

Bitcoin 2x adopts Segwit2x with a larger 2 MB block size.

Each of these three alternative coins is designed so that the system can process transactions more quickly and at lower cost, and so, along the spectrum of digital gold to currency, each is closer to a currency than the original BTC.

And that, somewhat counter-intuitively, is why original BTC retains a higher value.

In particular, the Bitcoin Gold is actually least like gold of all of these, since it will have the most accessible and thus fastest mining algorithm, and presumably could end up with the lowest transaction fees.

Image credit: bitcoingold.org

The respective values of the 3 or 4 types of bitcoin reflect this view. Bitcoin is the “slowest” and has the lowest velocity (slowest turnover) and highest value. Bitcoin Gold appears to be the most rapid and with lowest transaction fees, and thus has the lowest value.

Bitcoin Cash and a possible future Bitcoin 2x are between the two extremes. Since Bitcoin Cash has much larger blocks it has substantial miner support. Bitcoin 2x is favored by the user community that wants to facilitate more efficient transactions.

If you have a gold coin and some fiat currency, which do you spend first? You bought the gold coin in expectation that it would preserve its value and increase in terms of the number of currency units per coin.

So HODL (hold on for dear life) BTC, and spend or convert BTG and BCH seems the way to go for now. As always one should monitor how the different cryptocurrencies are developing in comparison to each other, in this very dynamic and volatile marketplace.

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Why Buffet Doesn’t “Get” Bitcoin

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Warren Buffett is the most famous name in stock investing, the second richest person in the world, and a leading expert in valuing companies and securities. He also is a big investor in banks, including Wells Fargo, Goldman Sachs, and Bank of America. So he has a lot of vested interest in the current monetary and financial system.

He recently said that bitcoin is in a bubble, which may well be true. He also said “You can’t value bitcoin because it’s not a value-producing asset”.

 

And yet, as of today, bitcoin has a market cap which is over $120 billion, substantially more than Buffet’s net worth. Bitcoin can be valued, but not like a security or a company, which is what Buffet does so well.

As we have written elsewhere, bitcoin is a currency, money, a cryptocurrency. Some will say it is a digital asset, like a digital gold. We say it is Money 3.0 (fiat is Money 2.0, gold and silver coins were Money 1.0).

Do these have value? Although none has intrinsic value and each costs a nominal amount to make the one on the right is worth quite a bit more than the one in the center, and the one on the left, more still.

Yes, money is designed as a store of value, a medium of exchange, a unit of account. Cryptocurrencies have the same design goals.

Bitcoin is a unit of account in a secure, distributed ledger. It has been a much better store of value than fiat currency in recent years.

In fact in 2014, Buffet said “It’s a mirage”. And yet, the value of a single bitcoin has increased 20 times since late October, 2014 to about $5800 today.

Money is valued by what you can exchange it for in the economy, by its utility. It is valued against other currencies. Bitcoin can be valued the same way, and thus by the vitality of the bitcoin economy.

Within the cryptocurrency world, bitcoin is the reference benchmark, just as the US dollar is globally. Bitcoin gets valued every single day, every minute of the day, against all major fiat currencies and against hundreds of cryptocurrencies. Like those currencies it has an economy and a turnover (or velocity) of the currency.

One thing we don’t normally think of with respect to cryptocurrencies is interest, or dividends. It is possible to lend out bitcoin for interest, as one can do with dollars, euros, or even gold. But bitcoin has effectively thrown off two special dividends this year, in the form of forks of the bitcoin blockchain. These are known as Bitcoin Cash (forked in August) and Bitcoin Gold (forked in October). Collectively, those two are worth close to $700, representing over 9% dividend rate to date during 2017, based on the current bitcoin price.

And for someone who bought at the beginning of the year, when bitcoin was under $1000, the dividend is around 70%. Not shabby, and a very reasonable reward for accepting the volatility.

Bitcoin is a technology for internet money, network money that is independent of any government, and it can be hard to fathom for the newcomer. Buffett has always said he does not understand technology. He was late getting into Apple, for example. He has not examined the technology and potential of bitcoin and other cryptocurrencies sufficiently to have an informed opinion.

Bitcoin’s future value? It all depends on how the economy around bitcoin develops, but it will be quite an adventure. And bitcoin to bagels it will increase in value over the next several years.