Segwit2X, and Your Money

You’ve likely read a lot of articles that have spammed the internet on what this is all about. And by virtue of the fact that you’ve clicked on the link to open this article, you are either still looking for more information, or are interested in measuring your own assessment against another. I want to present a view from an investment perspective, because this is going to be far more complicated than “I’ll leave my bitcoin on an exchange because I like to get free money from forks.”

To start, Segwit2x and its antecessor, Segwit, are upgrades to the existing Bitcoin protocol. Originally, as the incumbent Bitcoin chain gained popularity, there was a scalability issue. As a result, many proposals were introduced over time to tackle the problem (BIPs). And though a number did the rounds (BIP 141, 148), there wasn’t a real catalyst for adoption, mainly because the minimum threshold for inertia was quite high (super majorities were required). As congestion issues came to the limelight and Bitcoin price started suffering, ingenuity sparked, and through BIP 91, and some gimmickery, Segwit was ultimately activated, as part of the NYA part 1. The situation before us now relates to NYA part 2, or Segwit2x. There are many for it, and many against it, but there is an unalienable fact that part 2 was previously agreed to be implemented as part of the entire NYA agreement; many parties have canned their patronage, citing various reasons (mostly to do with 2x not being “necessary”), but that has drawn analogies to reneging on a gentleman’s deal. In essence, Segwit2x will allow for larger blocks (still limited by weight)up to 8mb to be processed with signatures stripped into a sidechain. This has a distinct advantage as it enables the incumbent Bitcoin chain to approach the capacity that of of Bitcoin Cash, while still preventing transaction malleability (via segregated witness) and thus setting the stage for deploying the Lightning Network (to make things even faster). Of course, the economics aren’t aligned for everyone, and there are initial hurdles (lack of replay protection), but there is an emerging consensus that it is still the “best way forward.”

Where the issue is cracking the foundation is on adoption. And because there is no consensus for this upgrade, this will have to be attempted via a contested hard fork. Though indications are suggesting that there will be significant hashing power going to the Segwit2x chain, many exchanges are either not going to acknowledge the new token (BitMex), or use nomenclature to subvert its initial presence (i.e. Coinbase and Bitfinex will designate the incumbent chain as BTC and will refer to the Segwit2x token as B2X). Thus, the average investor looking for “Bitcoin” may have to choose between the original BTC, and the upgraded B2X, being none the wiser of which reflects his/her intention.

There is a disturbingly common misconception that the August fork led to Segregated Witness activation, simultaneously causing the creation of Bitcoin Cash, which paid out like a dividend if you had parked Bitcoin on a compliant exchange. That is utter nonsense. Segregated Witness was NOT the direct cause of the Bitcoin Cash token (an altcoin, and an incidentally different project). In fact, SegWit was activated to upgrade the incumbent chain. This time around, the lack of consensus, and thus lack of willful widespread adoption of SegWit2x, will lead to a hard fork in which hashing power is likely to initially seesaw. This has significant implications for pricing, as market cap may not be simply created out of thin air and be granted as a dividend. In fact, it’s almost reasonable to assume that the price of B2X and BTC will start behaving inversely. With B2X trading synthetically as BT2 on Bitfinex currently at 15% of the value of BTC (looks cheap), it would not be unreasonable to see BTC discount itself by that much when B2X materialises. Of course there are many other factors at play that will impact pricing, but the point is that the chance of “free money” is highly restricted. Further, because the SegWit2x token does NOT have replay protection, there will be tremendous risk in transferring tokens between exchanges. During August, it was common to see some Chinese exchanges release Bitcoin Cash, while transactions queued up to move them to other exchanges in hopes of arb. It will be prudent this time to stay put until uncertainty has settled. This in particular is explaining the pricing on Bitfinex; an exchange typically marred by the Tether issue and used to trading at a premium to reflect the credit risk, is pricing Bitcoin at a discount (it is difficult to fund yourself on there). This is because Bitfinex has announced to allow for the trading of CSTs reflecting the BTC/B2X tokens via BT1/BT2 in a continuous manner over the chain-split event; a liquidity that traders will have to pay for.

There are various complexities to be considered over the next 20 days, and it would be naive to assume there is a free lunch coming. There are opportunities present in the lead up to the storm, via distorted derivatives-pricing, but they are simply not in the eye of the many. What can be said for sure however is that SegWit2x will play a significant role in the future landscape of the Bitcoin ecosystem; it will not simply produce an altcoin, and it will not disappear (I personally believe that in due time it will be as potent as the incumbent). And therefore, Caveat Emptor is now most apropos when it comes to investing in Bitcoin (whether you believe it to be BTC or B2X). Trade mindfully.

If you require any assistance on the implications of market pricing, or want to discuss a particular portfolio structure, contact me for a consultation via Linkedin.