DAR Weekly Crypto Wrap — 11/1/19
BCH Hash Wars | Return of Jihan Wu | Bitcoin ABC Update
Market Overview
Digital asset prices were up significantly on the week, driven by news of China’s embrace of blockchain-based technologies. The total industry market cap was up 16.5% on the week to $237.8B. Large-cap winners on the week were Bitcoin Cash (BCH +32.7%), TRON (TRX +31.7%), and Bitcoin SV (BSV +24.7%). Notable laggards in the large-cap category were Stellar (XLM +4.8%), XRP (XRP +7.2%), and Cardano (ADA +9.8%). Other noteworthy positive movers across the industry were mostly Asia based projects, Ontology (ONT+54.8%), NEO (NEO +49.8%), and VeChain (VET +36.3%). Other notable laggards on the week included 0x (ZRX -8.7%), ChainLink (LINK -3.5%), and Basic Attention Token (BAT -2.1%).
DAR Research and Events
This week we published our quarterly review of crypto markets: 31 pages of charts, graphs and written analysis on everything from asset performance to regulatory updates to important technical milestones across the digital asset ecosystem. We highlighted a lot of this information in our public 3Q19 Review of Crypto Markets webinar but there’s simply too much that happens in this asset class to cover it all in 60 minutes. If you didn’t catch the webinar live, a replay is available on our webinars page here.
For those of you attending Consensus: Invest in 2 weeks, we’re inviting you to stop by our booth and meet the team. We’ll be at booth #19 with our index partner FTSE Russell handing out samples of our work and free goodies. We love to make new friends and meet old ones, so please stop by. You can also catch various members of DAR and FTSE Russell on several panels on the big stage.
Bitcoin Cash — Price Rallies, Forks, and Hash Power
We’ve received numerous questions as of late regarding Bitcoin Cash, especially given its outperformance in the past week. We think there are a couple things going on here: a broad rally in crypto assets touched off by news of China’s embracement of blockchain on October 25th, a second price bump on October 29th that coincides with the news of Jihan Wu retaking the reigns at Bitmain, and growing concerns about an unidentified miner that appears to control more than 50% of network hash rate. We’ll look at each of these and provide some insight into what’s going on.
Price Performance Analysis
Looking at the following annotated chart, the first green arrow shows both Bitcoin (orange) and Bitcoin Cash (purple) rallied significantly with the news that China had embraced blockchain technology. We see a second bump that was unique to Bitcoin Cash on the evening on the 29th (ET). This coincided with the news that Jihan Wu had ousted his co-founder, Micree Zhan, and resumed operating control of Bitmain, the industry’s largest ASIC manufacturer and one of the largest owners of BCH. This news was first reported on Tencent News at 10:06 AM Oct 30th (10:06 PM ET Oct 29th) here (Google Translate recommended). Why is the return of Jihan Wu positive for the price of Bitcoin Cash? Nothing specifically fundamental to the asset other than he’s been a large supporter of Bitcoin Cash and Bitmain has been one of the largest owners of Bitcoin Cash tokens. The information in their prospectus from last summer suggested Bitmain owned about 5% of all BCH outstanding, however, the filing has been pulled and the financials are over a year stale at this point. Given the news that they’ve secretly filed for IPO here in the US, we’re eager to see updated financials and disclosures. So our opinion is that the price driver this week was more perceptual rather than anything fundamental.
Client Update Coming in 2 Weeks
There are, however, updates to Bitcoin Cash coming shortly that are fundamental. On November 15th Bitcoin ABC, the main client for Bitcoin Cash will undergo one of its periodic updates. Bitcoin ABC also had updates on November 15th of last year (v0.18) and May 15th of this year (v0.19). The v0.20 update brings Schnorr signatures to OP_CHECKMULTISIG(VERIFY), making all signature checking operations in support of Schnorr signatures. The update also removes a transaction malleability vector. This isn’t a huge or unique update and as the following shows, Bitcoin Cash updates have had a mixed impact on price in the past. We did see some outperformance two weeks leading into the update at a year ago (v0.18) but the May update (v0.19) was totally overwhelmed by the Bitcoin price rally that started in April.
Unknown Miner in Bitcoin Cash
We’ve heard numerous concerns around the emergence of an unknown miner of Bitcoin Cash with greater than 50% of the hash rate. The share of blocks mined by an unknown entity began to ramp up in early summer but began to crest 50% towards the end of August. The following chart of the share of trailing 144 blocks (about a day) by mining pool in the month of October illustrates the concern expressed by some in the community. Although the mining share of the unknown entity has decreased as of late, it has been persistently high all month.
It’s hard to know the motives of the unknown miner but they’ve been benign thus far, with no specific issues expressed by the community. Something to consider: the Bitcoin Cash network hash rate is estimated at around 2.8 EH/s vs Bitcoin at 97.6 EH/s. That’s a 34.3x delta. At prices for Bitcoin Cash of $283 vs Bitcoin at $9,162, that’s a 32.4x delta. Even though it’s significantly harder to mine Bitcoin vs Bitcoin Cash, it’s more profitable to do so given the absolute differences in coin prices. Perhaps as prices rose in the spring, previously unprofitable miners may have come back online. In our analysis of Bitmain’s financials, we noted that at the time it had 9.0 EH/s of SHA-256 miners sitting in finished goods inventory, more than 3x the size of the entire BCH network hash power today. One more thing to keep in mind, SHA-256 miners that are not currently profitable or only marginally so today will be rendered mostly useless when Bitcoin Cash (4/8/20), Bitcoin SV (4/9/20) and Bitcoin (5/14/20) undergo reward halvings unless prices change meaningfully.
Bitmain’s Inventory Analysis
We haven’t seen any reports of reorgs or nefarious activities thus far, but we keep our eyes open. There were some reports of faster than planned block creation times but as our math shows in the following chart, they’re hovering right around 10 minutes. The average block creation time for the month of October was 00:10:00.83
And that’s all the time we have this week. Please reach out with any questions, comments, or feedback on our work. If you’d like to set up a meeting at Consensus: Invest, email us here.
Ciao for now,
The team from DAR
