Thoughts on how to take advantage of the ongoing Bitcoin “civil war”
Disclaimer: What follows is my personal opinion only and is not investment advice in any way. Cryptocurrencies are highly risky and you are investing entirely at your own risk.
Everyone is talking about the “civil war” that Bitcoin is currently in, because of the different proposals on how to solve its scalability issues, especially through adoption of Segregated Witness (SegWit). This creates a lot of uncertainty, but where there is uncertainty there is volatility, and where there is volatility there is opportunity. The goal of this article is to give people invested in cryptocurrencies, but not familiar with the SegWit situation in detail, a (high-level) idea of what might happen in the next weeks, and how to deal with, and possibly take advantage of it. If you are not familiar with SegWit and the current adoption proposals, it makes sense to read up on these topics first, e.g. here for a general explanation, and here for an overview of what’s ahead in the coming weeks. And here you can find a guide on how to best keep your coins safe during a coin split, which could possibly happen.
I will not discuss in detail the possible outcomes from the SegWit adoption proposals, or under which circumstances they might come into play. There are people with much deeper understanding of the implications that have done that. The best article on this in my opinion is by Jimmy Song (see here).
Instead, I rather want to explore how this whole situation will affect the wider cryptocurrency market, and what are possibilities to benefit from it. Of course, this has already begun. In the last couple of weeks, Bitcoin has dropped by around $500. There can be several reasons for this (e.g. the correlation with ETH, which has percentage-wise had an even larger drop), but I think that the uncertainty around SegWit adoption is one of them.
So here’s the current situation:
- In the New York Agreement, a majority of the hashing power, as well as important Bitcoin users agreed to adopt SegWit2x — the adoption of SegWit through Bitcoin Improvement Proposal (BIP) 91, as well as a doubling in block size 3 months later.
- As of now, BIP91 is likely to be adopted, as it requires “only” 80% of the hash power to signal support. Currently, the support level is around 86% (https://coin.dance/blocks).
- In parallel, users (=nodes) are attempting to activate SegWit through a user activated soft fork (UASF 148). Starting August 1st, nodes that accepted BIP 148, will start rejecting blocks that do not signal readiness for SegWit.
In my understanding, this has the following consequences:
- A chain split on August 1st is rather unlikely. This would only happen if <50% of hash power adopt SegWit through one of the proposals. In that case, the hash power that does adopt it, would fork off together with the users that have activated the BIP148 UASF. But considering that the support rate for BIP91 is currently >80%, it currently seems this won’t happen.
- However, even if there is no forced chain split, that doesn’t mean there won’t be a new chain. If SegWit gets adopted by the majority of hash power, it could happen that the non-adopting part will create a non-SegWit version of Bitcoin anyway.
- If there is in fact a chain split, this will result in turmoil for some amount of time (anything from days to weeks), and it won’t be clear if both chains will survive, and if not, which one will. I don’t want to explore this scenario in more detail, since as I mentioned it’s extremely complex and I’m not the best person to fully assess it (see Jimmy Song’s article referenced above).
What are possible ways to deal with this situation?
In the following, I have jotted down some ideas on how one can act right now.
Short Bitcoin before July 21st: This is the day when miners actually can start signalling support for BIP91. As this whole situation will create a lot of uncertainty, and no one really knows what is going to happen, many people will get out of Bitcoin and the price will drop. As mentioned above, I believe that the downward trend we have seen over the past weeks is caused at least partly by this uncertainty. This is independent from whether there will be a chain split or not.
If there is no chain split after August 1st, and SegWit is adopted by a majority of hash power:
- Buy the now SegWit-enabled Bitcoin: There is a strong opinion that once there is a clear outcome regarding SegWit, the Bitcoin price will go up again, as part of its scalability issues will have been solved and the uncertainty will reduce. I believe that too, which would mean to buy Bitcoin as soon as it is clear that SegWit will get adopted.
- Buy new coins: If new Bitcoin versions emerge, I believe it could also be promising to buy these, depending on how many nodes and how much hash and how many nodes join these networks, that were previously in the Bitcoin network. However, I would see this more as a speculative investment.
- Short Litecoin: Since Bitcoin has now resolved some of its scalability issues, this makes it more competitive to Litecoin, which in turn could lose in value. This seems logical to me, however I haven’t done any further research if there are other arguments that would counter this.
If SegWit is not adopted by a majority of hash power on August 1st:
- First of all, there are a bunch of scenarios that can play out in this case, and it can take a while until a stable state is reach. For example, two camps (and two chains) can emerge that will attack each other and try to permanently wipe out the other chain. Therefore, it will be best to not trigger any transactions or accept any transactions until the dust has settled, or they might be permanently lost. Jimmy Song’s analysis that I quoted above explores different scenarios including a really weird one where the miners run a SegWit-enabled chain and the users a “traditional” one.
- Because there are so many possibilities of what could happen, it makes little sense to speculate which new Bitcoin version(s) there might be, and which ones one should buy. Generally speaking, I think a good approach will be to look at the distribution of hash power and nodes across the new networks to see which ones will have a chance of surviving, and what purpose they might serve in the future.
I’ve laid out briefly what can happen in the next weeks, but the only thing that is certain is uncertainty. But as I mentioned in the beginning, this inevitably creates opportunities. I have mentioned a couple of hypotheses on how one can profit from this, but they are up for discussion, and there are probably others.
Please keep in mind that everything I mentioned is pure speculation, and I’m discussing this primarily out of interest for the situation, rather than as a sustainable investment approach.
With that in mind, I will do two things:
- I have liquidated most of my Bitcoin position and will possibly get in at a lower price shortly after the outcome of this whole situation is foreseeable.
- I am going to monitor closely if alternative Bitcoin versions will emerge to possibly buy into them early at a low price. Coins that have a significant amount of nodes and hash power could survive, like Ethereum Classic.
I would be very interested in other opinions and strategies related to this topic. Happy to discuss in the comments!