Why I’m Not Selling My BitcoinCash

Spoiler: It is the perfect BTC hedge.

My thesis around bitcoin has centered around two hypothesis:

1 — There will be significant future demand for a digital and borderless store of value.

2 — No coins come close to competing with Bitcoin as digital gold and it’s unlikely that any will in the future.

Well folks, now we have a competitor.

Although the competitor doesn’t currently compete all that well on the vectors that seemingly matter:

• Hashing Power
• Length of Chain
• Community Support
• Business Support
• Strength of Core Devs

But things change. It’s very early for them; could BCH get their act together? What’s the likelihood of that? Who knows.

One thing has definitely changed: hypothesis #2 proved to be false.

Now there is a competitor — they might not be pretty and they could certainly be overvalued at .17% of BTC (at the time of this writing); but they are a competitor nonetheless.

What to do?

I still believe hypothesis #1 to be true— so why not just own both chains?

With my previous work with family offices I learned a lot about portfolio theory and risk reduction. The best way to reduce risk is to create portfolios with uncorrelated assets. That’s why family offices do things like buy disaster bonds which aren’t correlated with anything but random extreme weather events.

Taking it one step further you can bundle portfolios with assets that have a ‘negative relationship’ where the correlation is negative. Hedge funds do this all the time — for example, when the buy oil companies they will often short crude oil to reduce risk related to movement in the price of oil.

BCH is a great (likely the best possible) bitcoin hedge.

Most of the scenarios that would cause the price of BTC to fall will send BCH soaring:

• Not upgrading to 2mb
• Critical technical failure of some kind
• BCH actually becoming a secure & utility providing chain with a strong community

It looks to me like BTC and BCH will have a negative relationship when it comes to all the downside events that I’m worried about.

However, it’s still likely that they can rise together if they both find a niche and create value in the ‘digital gold’ or other markets.

The negatives of supporting BCH:

• BCH erodes the network effects of the ‘one and only bitcoin’ — this is the argument that most give that have been emotionally invested in BTC for a very long time. BTC is there baby and anything that is a threat to it must be squashed. I’m focused on function over form and care more about a global, borderless, digital store of value and less about who provides it.

• BCH surviving incentivizes others to use this playbook for a funding vehicle. The problem is network security and hashing power. BCH was quite vulnerable for a while there — it still is to some degree. But smaller coins with less attention put on them would be even more exposed. There are ways to change the hashing algorithms but just something to consider (since BCH didn’t).
• The amount of forks could be endless — this would really hurt the network effects and increase competition. This is something I’m going to keep my eye on. If it gets out of hand I could just get out of my btc position all together. It’s possible I might just hold all of the chains… or bath in the glory of all the new free money. We’ll see.

The positives of supporting BCH

• We have two players solving the same ‘high fee’ problem from two perspectives — BTC using off chain transactions with lightning networks (which will take a bit longer to roll out) and BCH using on chain transactions with 8mb (which is ready out of the gate)
• Competition is healthy! BCH will push BTC and keep BTC honest. For example, now that BCH exists I feel much more confident we’re getting 2mb blocks on BTC.
• Long term competition will lead to better technical improvements, lower transaction fees, and greater network adoption — for both networks.

Today (8/2/17) the market cap of BTC + BCH is > the market cap of BTC yesterday. The market appears to be telling us that two chains are better than one. My opinion is that this has a lot to do with a reduction in risk in the digital gold market. I’m going to make sure my portfolio benefits from that as well by holding BCH.

Thanks to Jake Brukhman and @eekstheunwise for their comments on the Coinfund Slack that shaped my opinion on this (and many other) matters.

Disclaimer: This is just my opinion; not advice or ‘investment’ advice of any kind (assuming this is even legally considered an ‘investment’). Do your own research, listen to varied opinions from informed people, then form your own opinions and don’t put any more into crypto than you can afford to lose.