BITCOIN: $15 Billion Losses and Pointless Fork Wars

Bitcoin went down 15%, losing $15 billion of market cap in a flash last week. We're not focused on every gyration of the markets, but this case deserves analysis. The first quick point is that there are four major components of BTC value we see: (1) secular, permanent adoption of blockchain technology across every use-case, (2) the proliferation of new crypto assets that reduce the use-cases that BTC satisfies, (3) a team's operating ability to grow and maintain the network, and (4) the financialization of the sector. Putting aside (4), we can say that the more stablecoins succeed at payments, the less BTC will be the medium of exchange; the more smart contracts platforms grow DApps, the less BTC will be programmable; the more XPR banks use, the less BTC they are likely to adopt. But there are massive tailwinds in the secular shift for the sector overall, which should counterbalance increased specialization. Smaller pie slice, bigger pie.

Which brings us to operating execution. On November 15th, Bitcoin Cash, a fork of Bitcoin that was about 10-20% worth of the parent, underwent another fork, while making the headlines for major personality conflict between several crypto billionaires. The split is by now a familiar story --  trying to solve for scale using (1) new concepts that are additions to the "original" protocol (Scalia would be proud!), or (2) just increasing the blocksize again. Depending on what asset you own (a mining pool, a manufacturer of chips, merchant processor), software decisions drive economics in your other assets. And there is also the opportunity to be Internet_King, ruling over an open source protocol and being written in the history books as a progenitor of digital money.

Forking is an interesting experiment. Believers in the homo-econonomicus - that mythical creature of marginal utility maximization, see forks as a reasonable voting mechanism for deciding human policy. We agree that it's neat to see hash power from collective mining pools be directed as votes for software versions. But this is a naive view of human collective decision making. Imagine a constitutional democracy where any petty disagreement -- between oligarchs controlling private oligopolies mind you -- lead to a secession of states, currencies, systems and assets. No requirement or need for forced compromise. If you want to build a network that flows across nation states to lift people into techno-utopia, endless fractal splintering facilitated by no meaningful governance is not the way. Using either the logic of Metcalfe's law to say that network value falls exponentially with each node removed, or the logic of corporate spin-outs to say that some minimum entity size is important (you shouldn't spin out all your employees into LLCs, looking at you Uber), suggests that BCH's fork was a bad idea. 

This had a $15 billion effect on Bitcoin proper. Perhaps some of the aspirants needed to liquidate assets to wage a hash war, mining 51% of empty blocks on their opponent's chain to break their asset. Or perhaps there was simple confusion, or a desire to sit out the volatility, on the part of investors. Regardless, Bitcoin Cash ABC is trading at 5% of BTC, and Bitcoin Cash SV is at about 3% of BTC. Hard to see the future of money in there.


Source: Bloomberg (BCH Fork), Coin Dance (charts), Binance (ABCSV), Coinmarketcap (BTC)