Trader’s Guide to Bitcoin Cash & Bitcoin Segwit
Teaser: Bitcoin Cash can not go to zero value, but Bitcoin Segwit can.
To understand how to bet on Bitcoin Cash or Bitcoin Segwit, I will explore the extreme edge cases, why bitcoin will converge on one chain and the fundamentals of the two chains.
I consider “bitcoin” to be the most work chain with either the rules of Bitcoin Cash (BC) or Bitcoin Segwit (BS). Currently, this chain is BS. But it could change to BC.
I am not going to dive into the differences of the two movements behind each chain, what mining is, etc. I will try to shed some light on stuff many bitcoin interested people might have not seen and give them a better platform to trade the chain split in a long term perspective. This is not a bitcoin 101 course.
So I assume you know how the difficulty adjustment (DA) in bitcoin works. BC also has an emergency difficulty adjustment (EDA). EDA works like this: If there has not been mined more than 6 blocks the last 12 hours, the difficulty will be reduced by 20%. The conditions for EDA is evaluated for every block, meaning you could have several blocks in a row reducing the difficulty by 20% each time. EDA make it possible for a very fast reduction of difficulty.
The game changer
EDA is the game changer. The implications of it is far reaching. If EDA was not introduced in BC, I think most people would see BC in rigor mortis today. EDA is the difference between the possibility of chain death or not.
So what exactly is a chain death? It is the situation where there is not enough hashpower to mine enough blocks to reach the next DA. It’s just too expensive, and no point in doing it. The whole chain grinds to a halt. It is no longer possible to perform a transaction on chain. In this case, the value of the token becomes zero. Because you can’t use it. (Fun fact: Maybe it’s possible to sell Casascius coins, but they are just collectible items and not the way bitcoin is supposed to work.)
BC can not die because it has EDA. BS can die because it doesn’t have EDA. BC’s value can not go to zero. BS’s value can go to zero.
Death by Dumping is impossible
It is not possible to dump a working crypto currency to death. Some whales on the BS side in the blocksize debate have suggested that they can kill BC by dumping it over a long period of time. But it is just as impossible as it is for the IMF to buy all bitcoin in the world. The dumpers will just run out of BC to dump, followed by a new price discovery. As long as the chain is maintained by miners and working, it is not possible to buy everything or dump it to zero.
Convergence to one chain
The bitcoin split is very different from the Ethereum split. Ethereum do DA for every block and is like EDA on steroids. This makes it possible for ETH and ETC to live side by side, one big in value, one small in value. A miner makes approximately the same whether he mines ETC or ETH. If prices change, miners shift their hashpower, difficulty change immediately on both chains and everything is back in balance. It’s like if the elephant in the picture on the top of this article was standing on the ground with all four feet, while wind (price) blows on it. It just leans a little into the wind.
Bitcoin is very different. Under normal conditions, it’s 2 weeks (2016 blocks, 10 minutes per block) between each DA.
Right now, a group of miners are mining at a loss on the BC chain. They are pushing very hard against the elephant leaning against them. They do it because they want to change bitcoin and they have a long term perspective.
I call this charity mining. Not because they are not greedy (they should be greedy), but because they do long term investments that could benefit all miners, not just themselves. They believe a 1MB cap on blocks is ridiculous and preventing adoption.
Their goal is to “hold the elephant” until the next DA. They are assisted by the EDA. The heaviest work, the first 6 blocks, is already done.
Some people speculate that hostile miners are mining BC to keep the hashrate above 8% to prevent the EDA to kick in. An attack like this, however, will only postpone the DA to 2–3 months maximum. The attacker will actually do his enemies a favor. They can just relax and mine BS with profit while the attacker holds the elephant.
This elephant pushing is not sustainable. It costs a lot of money. That is why the chains will converge on one chain, unlike Ethereum. The elephant will eventually fall on it’s face or it’s ass. And it’s going to stay like that. Nobody can move it after the fall. It’s a good thing for bitcoin as a whole.
BS is very vulnerable in this asymetric game because BS doesn’t have EDA. BS is under a constant threat of a gold rush when BC becomes more profitable to mine than BS. All BC-supporting miners need to do, is to lower the difficulty by mining BS until it’s profitable to mine BC.
The fundamental differences between BC and BS
The fundamentals will win the market in the long run. When it’s allowed to run long.
I’ll keep it short, but I think the fundamental differences between the chains are the following:
More people using bitcoin: BC Yes, BS No
Cheap transactions: BC Yes, BS No
Fast transactions: BC Yes, BS No
Reliable transactions: BC Yes, BS No
Privacy: BC Yes, BS No (because of fees related to mixers)
Fungibility: BC Yes, BS No (because of fees related to mixers)
Vulnerability to dev centralization: BC No, BS Yes (BC = many teams, BS = 1)
Level 2 compatibility: BC Yes (in time), BS Yes (in time)
It’s your decision
Right now, 1 BS can buy over 10 BC.
Gentlemen, place your bets!