BTC plus BCC showing strong combined gains as market attention shifts to next controversy

The combined price of bitcoin (BTC) and bitcoin cash (BCH) has risen about 75% since the formerly single Bitcoin split into two chains on August 1.  Events thus far appear to support my suggestion that the split could well be a net positive for holders of bitcoin prior to it.

In my August 5 article, “Descendants with modifications: Bitcoin’s new and possibly beneficial evolutionary test,” I argued that a marginal shift away from talk and toward innovative action could in itself prove a net positive. To at least some degree, an actual split would enable claims that one approach or another was superior to be replaced with practical reality checks across the board.

However, I also emphasized that the split was still a poor “test” from a scientific standpoint. Not only do the chains differ in headline qualities—one is activating SegWit and the other has revised its block size limit to 8MB (already two major variables in themselves)—but also in a whole list of other confounders. For example, the two chains differ in associated development teams and testing and review practices, which leads to contrasting levels of market confidence in the different code bases as a whole. This reflects far more than just the headline contrasts. In addition, the two started out with widely differing hashing power levels and coin prices. Nevertheless the split should provide some way to proceed with implementing respective visions of how innovation should progress, and to that extent could well beat a continuation of “unmitigated talk.”

Since that article appeared, the BTC price first rallied dramatically while the BCH price languished. One megabyte block size limit enthusiasts on social media sought to out-compete each other in boasting about how decisively they would “dump their bcash" (using a popular term of insult for bitcoin cash) as soon as they could. When trading in bitcoin cash finally came up to speed on exchanges, such commenters promised, BCH would crash as dumping of the latest new "altcoin/shitcoin" began in earnest. Since then, one by one, various cryptocurrency exchanges and wallets have announced support for BCH, with more to come.

In the event, the BTC chain still has its own dramas to live through. A stark reminder of this came with a blog post by BitPay instructing users in how to move to software that implements phase 2 of the “SegWit2x” or “New York” agreement, which calls for a revision of the BTC chain’s block size limit to 2MB in November, following phase 1, its recent activation of SegWit.

Full-fledged American-style “outrage politics" ensued against BitPay, as opponents of the block-size limit revision portion of the SegWit2x framework accused BitPay of fraud for not clarifying that moving to the BTC1 software it was recommending to its customers would split them off from the portion of the BTC network running Bitcoin Core software. Bitcoin Core software has merged code that disconnects Bitcoin Core nodes from BTC1 nodes. Few to no active Bitcoin Core contributors support the BTC1 project while a significant number of miners and bitcoin companies expressed support for the SegWit2x agreement.

It is unclear how this will be resolved. Intransigence and belligerence reign on social media between the vocal on the two "sides." Another chain split is possible, once again over exactly the same issue, the specific height of the block size limit. This next split, however, might be less clean than the last, which did have critical user protections in place, notably replay protection. A scenario in which BTC1 and Bitcoin Core navigate into an unclean chain split has the potential to leave Bitcoin Cash looking like the more stable option for the time being. With a limit revision already behind it for now, it could end up sitting on the hill overlooking the next BTC chain battle with a detached attitude of: "Bitcoin Cash user unaffected."

After the BitPay post brought this next controversy facing the BTC chain back onto the front burner of the market's attention, the BCH price promptly more than tripled from $300 to briefly peak at over $1,000, while the BTC price began to soften slightly.

The BTC + BCH total price, however, has continued to rise steadily for the time being (see chart). As of this writing, the combination remains more than $2,000 higher than before the chain split.

BTCBCC speciation chart.jpg

Looking ahead, much will depend on the interplay between hashing power, mining difficulty, and price. The dynamics of differences between the mining difficulty adjustments on the two chains could have some dramatic effects as mining power shifts in pursuit of profitability, resulting in follow-on differences in block discovery times.

As I concluded my discussion on August 5, so I will conclude this one: “The complex sequence of outcomes to ensue must now be seen in practice and over time.”

[Update: The original version used BCC for Bitcoin Cash throughout, but this code was already in use by another cryptocurrency. Since that time the Bitcoin Cash community has clearly shifted to BCH, so in this text I have changed to BCH where simple to do so (not in the title and graphics).]

Descendants with modifications: Bitcoin’s new and possibly beneficial evolutionary test

 Source: Charles Darwin. 1845. "Journal of researches into the geology and natural history of the various countries visited by H.M.S. Beagle."

Source: Charles Darwin. 1845. "Journal of researches into the geology and natural history of the various countries visited by H.M.S. Beagle."

The BTC/BCH chain split of 1 August 2017 could add value for holders of the former bitcoin during any period in which the summed value of each coin exceeds the value that the former single coin would have had. Holders of BTC before the split came to hold equal amounts of BTC and BCH after the split, prior to any subsequent individual trading.

Zero “new bitcoins” have been created from a monetary-inflation standpoint. Control of any existing bitcoin unit before the split gave rise to corresponding control of one BTC and one BCH unit after the split. Since this reflected the precise and complete pre-existing constellation of unit control with no alternation for each and all former holders of the single-chain BTC, no redistributive Cantillon effects follow.

This split looks like a better-case scenario, at least “less bad,” than several of the other fork types proposed and discussed over the past months.

At this early phase, bitcoin cash (BCH) trading remains nascent, as exchanges and wallet services work to serve customers in a post-split environment. Potential traders remain limited because many exchanges do not yet offer BCH account crediting or have temporarily disabled relevant withdrawal and deposit options.

Various partisans have already claimed that as soon as normalized trading is achieved the BCH price will either collapse or rally, or some sequence of both. Pre-split futures and post-split exchange data (such as it is) have thus far shown an approximately $250–500 range for BCH. The bitcoin (BTC) price hardly reacted from its recent pre-split range of approximately $2,600–2,800. Either way, relatively wide changes to the BCH price are likely to be the rule until at least some time after normalized trading options come on line and hashrates and difficulty levels settle out to a greater degree.

The summed prices of BTC and BCH have mostly exceeded the former BTC all-time high, hinting at possible net value added from the split. This could be illusory due to the poor trading environment, but this sum could also have been lower instead, particularly if viewed as a network, mining, and trading disruption: the BCH price range could have started lower than it did, the BTC price could have fallen unmistakably, which it did not—or both.

Looking ahead, hash rates and difficulty adjustments are other key points to watch. Although the BCH chain protocol revisions did add certain more flexible mining difficulty adjustment methods, it remains to be seen if this will be sufficient to prevent very long block times over the coming weeks, which, amid price declines, could further reduce mining profitability on the BCH chain for some time. The future allocation of hash power, pace of difficulty adjustment, and price all remain to be seen.

Separate from these temporary and news-oriented issues, in the balance of this article, I will interpret the chain split in more fundamental terms.

Potential net value added from innovation and experience effects

If a net value gain from the split is actually present and does persist, such an outcome would not be entirely mysterious. Innovation proceeds through action far more than talk. SegWit activation (BTC chain) and a substantial block size limit increase (BCH chain), respectively, both promise to partially replace months and years of talk with action and experience, which is, in general, bullish for innovation.

In contrast to action, speculation and modeling are far more subject to partiality, bias, and social and financial pressures in the selection, construction, and interpretation of models. Action can supplement or partly displace hot air. What will happen with SegWit? Watch and learn. What will happen on a live network with a higher protocol block size limit? Watch and learn. This opportunity for the addition of progressive sequences of reality checks on the respective chains might be positive in itself. The “test” this represents is highly imperfect, as discussed below, but is still probably better than unmitigated talk.

The misleading conventional understanding of innovation is that practice follows theory; that “basic science” comes first and then begets technological innovation. The historically far more common process of innovation has very often followed the opposite pattern. Some fundamental innovation attempts occasionally succeed (mostly they fail). After the rare successes, new theory and research come along to try to explain and formalize what entrepreneurs and tinkerers had already done (after the best pontifical efforts of old theory to prove that what had been done could not have been).

Descendants with modifications

The minimum requirement for a process to be called evolutionary is descent with modification. Thus far, Bitcoin has gradually evolved as a single chain with modifications to its software. This split, in contrast, is Bitcoin’s first speciation event. Both BTC and BCH build on and carry forward the Bitcoin chain in a valid unbroken lineage of blocks tracing back to the genesis block.

The best chain in Bitcoin is defined as a chain of valid blocks with the greatest accumulated proof-of-work difficulty. In this model, the validity test comes first, followed by the total difficulty assessment. The software variants behind each chain have recently implemented certain substantial rule changes that are not now recognized as valid on the other chain. The BTC chain, for example, does not recognize the BCH chain’s modified block size limit, and the BCH chain omits SegWit, which recently activated on the BTC chain. Bitcoin block history diverged after block #478558, which is the last “common ancestor” that the two chains share.

The term “altcoins” has been used to denote cryptocurrencies that are not Bitcoin. Both of these chains, however, are valid Bitcoin chains as defined above. From this standpoint, the commonly expressed opinion that BCH is a new altcoin may be viewed as a use of language for rhetorical and emotional, rather than cognitive and elucidative, functions. Sharing almost all specifications and over eight years of transaction history, each is far more Bitcoin than either is altcoin. Some new term may be required. For example, in a public draft article, Daniel Krawisz, a long-time altcoin critic, has quite recently suggested the term "bitcoin child" to specify any chain that traces its history back all the way to the Bitcoin genesis block, a category that now includes BTC and BCH, but no others.

Proponents of each chain will naturally want to claim the banner of “true” succession, much as most religious sub-sects story themselves alone as the one truest representative of the ancient founder’s original teachings (rarely acknowledging the odd coincidence that all of the other sub-sects likewise tell just such a story about themselves). Regarding coin names, it is sufficient if the tradable units of the two chains are named in such a way that those using them now or in the future do not encounter any practical confusion. Bitcoin (BTC) and Bitcoin Cash (BCH) appear sufficient for this. For continuity, Bitcoin dominance indices might choose to sum the valuation estimates for the two post-split Bitcoin chains, perhaps after trading normalizes and if it appears that both will persist for some time.

Of most practical relevance now is the quality and prospects of the existing chains, as they have actually come to exist, moving from the present into the future. Practical measures of their prospects center on hash rate and unit price trends.

Rather than relying primarily on such ever-shifting market criteria, however, I prefer to begin by examining what defines the respective chains themselves. If we are talking about mining, mining what? If we are talking about price, the price of what? Identification properly precedes evaluation. In this case, a comparative identification is natural given the context of descent with modification, in which common features far outnumber differentiators.

Which chain is the “truer” successor is, in principle, not especially important in direct analytical terms. It might be useful as sociological research into the study of the development and spread of beliefs, or somewhat more useful than that as a source of hints for investors as to likely relative popularity based on belief frequencies in relevant user populations (meme frequency).

Nevertheless, BCH’s critics have taken to consistently labeling it an altcoin (which it is not), and moreover asserting that it is impossibly distant from being any true and proper successor of the one real bitcoin, which they believe the BTC chain unquestionably is. In this context, it should at least be noted in counterpoint that from a strictly content standpoint—rather than a popularity standpoint—BCH is arguably a nearer successor to 2009–2015-6 BTC than a post-SegWit BTC.

First, the BCH chain block size limit functions for the time being as a high upper-end traffic-burst defense, which matches the originally stated role and years-long practical function of this limit. This is more consistent in economic terms with the former BTC throughout the majority of its historical development until relatively recent times. In contrast, it was a significant new development when the particular height of the block size limit began to function for extended periods as an economic output ceiling on the industrywide production of Bitcoin transaction-inclusion services. Regardless of one’s opinion on whether this new economic effect is desirable, it remains that it was a significant departure from most of Bitcoin’s past viewed in functional economic terms.

Second, BCH does not implement SegWit. Again, regardless of one’s particular opinion on the net desirability of SegWit, it will in fact arrive on the BTC chain—but not on the BCH chain—as a significant data-structural departure from the organization of the former Bitcoin’s blocks.

Both BTC (with the new SegWit and some other recent changes) and BCH (with its revised block size limit and some other recent changes) are direct successors of the Bitcoin that came before them and each differs in some substantive way from that former Bitcoin. Against a backdrop of continuous Bitcoin software modification and innovation over the years, this stands out as the first time protocol choice options have elicited sufficient sustained disagreement among participants that a chain split has in fact resulted. For the lower block-size limit camp, the key factor was the limit change being unacceptable to them; for the higher block-size limit camp, it was the failure to revise the limit, and for some SegWit activation as well, being unacceptable to them.

Some observers have expressed concern that this first Bitcoin chain split could set a precedent for additional splits in the future. This seems possible, but somewhat doubtful to me. First, it is unclear the extent to which this first split will prosper, and if it does quite poorly, this might discourage future attempts rather than encourage them. Second, months and years of debate, effort, proposals, and campaigns, all primarily centering around the block size limit issue, preceded this first chain split. This suggests this step has by no means come about lightly. Most importantly, I view the block size limit as quite unique and distinctive among Bitcoin protocol issues and think it unlikely that other issues are likely to rise to the level of sustained disagreement that would be required for another similar split. [That said, the 2MB hard fork already planned for November could lead to another split, but that plan predated the current split and some believe this split might even reduce the probability of the other one rather than enhance it.]

A poorly designed experiment, but all we get

The emergence of these two daughter variants of the former Bitcoin, which diverged from a common ancestor block on 1 August 2017, enables a certain evolutionary test in that both represent descent with modification following a speciation event. However, it is by no means a “clean” experiment, able to test the effect of changing a single variable. Alas, real-life evolutionary tests are usually “dirty,” reflecting the net effects of a complex interplay of context and interdependence. Even a single genetic change in an organism that does have some practical effect seldom has a simple, singular effect, but instead results in a certain cascade of effects, interactions, and adjustments.

As an experiment in the scientific sense, then, this chain split is badly confounded due to the many major variables differentiating the two chains. This includes, at least: the block size limit height difference, the presence/absence of SegWit, the respective quality levels and reputations of software development teams and software testing processes, differences in user traffic, and the extent and stability of relative hashing power. Most of these variables can impact both general user confidence (subjective) and bug probabilities (more objective). A good experiment, in contrast, would seek to change one variable at a time. This development does not do this—not even close.

A reasonable case can be made that the BTC/BCH split, such as it is, may be a net positive for holders of the previous “single bitcoin.” Bitcoin’s evolution continues for the time being along paths that have diverged into two chains differing across a set of multiple variables. This may well bring a certain marginal shift toward more practical experience opportunities and away from talk and modeling, which could in itself represent net value added from the event. Relative hashing power, unit prices, development efforts, and software quality levels are all likely to shift over time to various extents and directions not easy to predict (though always easy to “predict” afterwards). The complex sequence of outcomes to ensue must now be seen in practice and over time.

[Update: The original version used BCC for Bitcoin Cash, but this code was already in use by another cryptocurrency. Since that time the Bitcoin Cash community has clearly shifted to BCH.]