“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” -Mark Twain

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I should have known that even a relatively innocuous bitcoin cash tweet would blow up my notifications over night.

What happens when you tweet about Bitcoin Cash

If you read what I said here, it’s basically:

+ the probability is rising that BCH eclipses BTC

+ it’s still more likely that BTC fends off BCH

+ my probability assumption changed because one of my underlying assumptions about the economic majority in bitcoin changed

The reaction was (maybe predictably) that I was a fickle BCH/ETH/bankster shill who hates BTC. That I’ve changed my positions every other week with respect to my crypto holdings.

While that makes for an interesting narrative for the people who are pissed off Bitcoin Cash isn’t dead yet, it’s got the drawback of not actually being true.

I was a vocal supporter of the UASF. I was a vocal opponent of SegWit2x. I’d like to see privacy enhancements that improve bitcoin’s censorship resistance, and mining decentralization is important. I believe bitcoin thrives as a settlement ledger with layer two solutions for smaller, less important payments (coffee). And Bitcoin has never, to this day, made up less than 50% of my crypto net worth.

I’ve not walked back any earlier arguments or assumptions.

But you have to think about the universe of cryptoassets in terms of probabilities, and today, bitcoin cash seems relatively undervalued based on my personal probability estimate that it takes the mantle from bitcoin as the industry’s dominant cryptocurrency.

So I’m staying hedged.

When I first invested in bitcoin in 2013, my assumption was that bitcoin could go to $100k+ in ten years, or it would go to zero. Back then I put the probability of zero at 99%, and $100k at 1%, so expected value was $1,000.

I bought at $125. Nice. (I wish I had bought more.)

When Ethereum came out, I had 50 reasons to not invest — they were boiling the ocean, you could run the smart contract logic off chain and use bitcoin as the settlement chain, it was an unregistered securities offering, there was no defined valuation during the crowdsale, there was large anticipated annual inflation, blah blah blah.

I didn’t think in expected value terms because I was an idiot. I finally corrected the mistake and invested a little at $8. (I wish I had bought more.)

Today, with most of my net worth tied up in crypto, I take managing risk very seriously. I spend my days working on things that are important to me philosophically and that I think are critical for the long-term health of the industry. (Check out Messari.)

But I do not fuck around when it comes to managing my family’s savings.

While my core holdings don’t move much, allocations change when there are big price moves or my core assumptions change.

And since bitcoin is, has been, and probably will continue to be my largest holding, I’ve spent a lot of time thinking about bitcoin cash since SegWit2x was called off. My conclusion is that even if you hate BCH, you have to take it seriously, and understand the near-term threat it poses to BTC. However low you set your own probability assumption for that outcome.

Let me explain why I’m no longer convinced the economic majority of bitcoin holders are necessarily wed to BTC by venturing into areas that just aren’t polite to discuss in public:

Politics, religion, and bitcoin cash.

The Bitcoin Political Framework

In many ways, the BTC <> BCH dynamic reminds me of the Brexit vote or the Trump election.

The problem is that everyone’s getting sick of the bitcoin scaling / bitcoin hard fork / BTC vs. BCH debate. This comes down to “voter turn out” and who’s even actively engaged in the election at this point.

Those with any remaining energy on the BTC side of things are like the populist backers of Brexit and Trump. Vocal minorities who believe that Core developers can do no wrong because they are the champions warding off the evil miners and corporates.

Even when they talk like this:

Discourse amongst bitcoin friends.

On the other side, we watched in slow motion as the NYA signers slowly lost interest and grew tired of supporting their deeply flawed Hillary candidate — the 2x hard fork — often at great personal and professional costs.

Ultimately, they lost because they were simply worn down by the more aggressive side.

But the reality is that the vast majority of voters are sick of both sides — the Core developers and the SegWit2x crowd. They’re “exiting” and moving on to other candidates: ETH, XMR/DASH/ZEC, and yes, even BCH, which has truly galvanized the anti-Core base.

These are people who think that the way Gavin was treated was bullshit after carrying the project on his back in its formative stages.

People who silently shake their heads as they watch the industry’s pioneers get ridiculed and shamed and outright attacked.

People who do not care about 1mb vs. 8mb today because they believe that a) mining centralization already exists and b) the bigger and more immediate problem is blockchain usability and congestion, not solving decentralization.

The BTC “win” last week was far from permanent, and may have simply reinvigorated the BCH base, which could now be in a position to attack BTC through a combination of hashing wars, price manipulation and potentially even a large-scale 51% attack.

We saw a teaser of this last weekend, and even seasoned execs in the industry were alarmed at the BCH volumes.

I know this because several told me as much.

The question is whether the BCH tactics will be successful, and whether the economic majority cares more about their savings or their philosophical interests.

I am not convinced the BTC crowd can survive the simultaneous price and hashing war.

To see why, and at the risk of confusing political analogies (ignore the presidential election example above for a second), I want to revisit a framework that I laid out back in June when I wrote about the UASF:

“Satoshi developed a framework (constitution) that set the rules for the initial system design and the mechanisms by which that system should scale. New popular open-source protocol upgrades would get passed once majorities of two primary groups invested in bitcoin’s development, the Core Developers (Senate) and the Application Developers (House) agreed to them. But those upgrades would still need to be recognized and enforced by the nodes in the network itself (Executive) who represented the economic majority. To keep everyone honest, miners were introduced to keep the system humming and select the correct interpretation of the consensus rules whenever there were disagreements (Judiciary).

It was never anticipated that those checks and balances would be perfect by themselves. So there was even a process for soft forking the protocol (a constitutional amendment), or hard forking it (a secession from the old state). Bitcoin has had several “constitutional amendments” in the past, including the original 1mb per block limit and the allowance for multi-sig transactions. The amendment process works.”

My assumption then was that the “House Reps” in bitcoin were simply being impatient, and setting bad precedent by allowing miners to “legislate from the bench” and hold up upgrades the vast majority of developers, businesses, and HODLers wanted in the core protocol.

I believed that the solution was to band together, and force the issue with the miners. Essentially tell them: “You guys are utilities. You don’t get to block upgrades you don’t like that everyone else agrees upon.”

My mistake was underestimating how exasperated the business community had become in dealing with the Core developers.

Where I previously believed there was general alignment around SegWit from business interests, developers, and holders, I now think the business interests and a large percentage of the holders have gotten so disgusted with Core obstinance that they will follow whichever chain takes economic control — even if it’s one that is ultimately propelled forward by a small handful of Chinese miners in the short-term.

In particular, I’ve been reading between the lines from official statements, social media interactions, and conspicuous silence alike from the major bitcoin infrastructure providers.

Here’s what I see:

The miners: Team Jihan. If the BCH price rallies and there’s a clear path to profitability, the miners will swarm to BCH and maybe even attack BTC. Read Jihan’s tweets and ask yourself this question: “Does Jihan sound as if he is anything other than in complete control?”

The exchanges: None of them give a shit which asset wins. The rise of BCH is phenomenal for business. Volumes last weekend were absolutely staggering. If you assume the exchanges made an average of 50bps in fees on the BCH pump, the exchanges made $50mm+ of revenue in a 24 hours period last Saturday night. As far as they are concerned, bring on the chaos.

Bitfinex’s Phil Potter, last weekend, probably.

BitPay: The team here has contributed a great deal to bitcoin’s open-source development — maybe more than any other venture-backed company not named Blockstream, yet they have has also caught the most flak for being outspoken about following the bitcoin blockchain that the miners adopt.

Blockchain: They are prioritizing BCH support over SegWit. They have been making a push into Ethereum. They were outspoken supporters of SegWit2x until the bitter end.

Coinbase: Coinbase is an interesting one. I hope Brian Armstrong reads this and publicly corrects me if I’m wrong. But if I were to speculate on the decisions Coinbase has made to wait until January to release users’ bitcoin cash, it’s not out of corporate greed or a lack of urgency, or anything like that.

It’s because Brian knows that he under-estimated Ethereum for a long-time, then underestimated Ethereum Classic’s ability to survive. And it’s because he also knows there is a *small* chance BCH eclipses BTC. To interpret this, you need to check out some of his social media activity, and conspicuous silence on the SegWit2x debate from the get go.

One problem is that Coinbase is onboarding a reported 100k users per day. Unfortunately, those new users aren’t getting both coins. Coinbase is between a rock and a hard place there.

But I’ll bet you a beer that Brian has not touched his personal BCH. He may be doing users a favor by not facilitating their sale of BCH, and by instead forcing them to have taken the extra step in August to remove balances from Coinbase if they wanted to trade on early information.

If you’re Coinbase, facilitating BCH liquidations amidst so much uncertainty could end up seriously reducing your AUM in 2018. Why risk it when you don’t have to? Especially when you’re already worried about the risk to your new users.

Grayscale: One of the largest single holders of bitcoin and bitcoin cash, the Bitcoin Investment Trust, is in the process of unwinding 170k+ units of BCH in the next 90 days. Auctions for 20k BCH increments are happening daily via their authorized participant, Genesis. This is in motion, and there’s no going back. Once the largest centralized seller of BCH is finished unwinding their position, who is making the next largest BCH sales to depress price?

Xapo: To me, this is the most fascinating company to watch. Xapo is still the Fort Knox of bitcoin, and we will learn a TON about how the BTC <> BCH drama unfolds based on Xapo’s positions related to their proposed “forced conversion” of BCH to BTC in mid-December.

I’d put Xapo in the Coinbase bucket, but Wences is a bitcoin maximalist, and has ignored the Sirens’ song of alternatives like Ethereum to date. He’s been unwavering regarding bitcoin as the one true global currency.

Anyone who has met Wences for five minutes knows he is the most intense dude in the industry. He’s patient zero for many of the larger institutional investors, his back story about growing up amidst hyperinflation in Argentina borders on folk lore, and if there is anyone that wants bitcoin to succeed for philosophical reasons, it’s him.

But as a vocal early proponent for SegWit2x and the NYA, the Xapo team is clearly frustrated with the lack of block scaling. Wences’ gracious tweet about being “impatient” on scaling was far from a tacit endorsement of Core’s approach. Given the alternative between a BCH chain that wins price and hashing power dominance, and a BTC chain that has developer mindshare, I’m not sure which direction Wences and Xapo goes.

I don’t even know if they know yet.

Xapo could, for liability reasons, rethink its position on the forced December conversion of BCH if the asset keeps rallying.

More FUD.

All of the above companies, save Xapo, are actively embracing alternatives to BTC, in most cases including Bitcoin Cash. That means that BTC’s moats are eroding like never before as support for other substitutes takes shape, and switching costs plummet.

The default option for the vast majority of holders is to sit on both assets and see what happens. And I simply don’t see many large BCH sellers right now.

The vocal #no2x sellers liquidated months ago.

On the other hand, there may be over one million BTC that get sold into the next BCH attack / bull run (depending on your perspective) — as much as 10% of the total BTC money supply.

The religious BTC congregation sold BCH at $300+. The religious BCH congregation is selling BTC at $7,000+.

Will BTC proponents truly have enough faith to withstand the savage swing a coordinated BCH pump and BTC attack would entail? Will they double down with their savings?

Religious Conversions & the End of BTC Faith

To me and many others, bitcoin is not a technical revolution as much as it is a triumph of political and economic incentives. And that’s where the shared illusion of money comes in.

The bitcoin faith. The religion of our savior, Satoshi Nakamoto.

The key question then has to be whether BTC is on the right side of the political and religious equation and truly has a hard-core economic majority that will buy the dips in the face of an attack on the BTC blockchain.

When looking at which way the economic majority may swing, I’ve considered:

1) The muted “whale” support for BTC, and the fact that most of the vocal #no2x community members have already sold their “free” BCH many months ago. Current potential selling pressure is limited.

2) The silent majority of HODLers who just want the whole digital gold and peer-to-peer cash system to not break, and whose only concern is that things get resolved one way or the other so we can move forward. I submit that they will follow the chain with the highest price and hashing power without fuss.

3) So we’re left with the question: what of the religious BCH base? Do they have the juice to brute force BCH into prominence?

And this is where you have to look at Bitcoin’s religious roots and clarify what the bona fide BCH sympathizers and zealots are thinking today…

For literally years now we talk about raising the bitcoin block size. We talk about rising fees threatening existing bitcoin business models and pricing out the unbanked that were supposed to benefit from Satoshi’s peer-to-peer electronic cash system.

SegWit gets widely accepted as a novel approach to scale bitcoin, but many contended that it won’t be enough (by itself) to solve block congestion issues in an exploding bitcoin economy.

Bitcoin Jesus wants people to be able to use bitcoin as currency. Then Bitcoin Jesus becomes Bitcoin Judas in the eyes of many for a stark philosophical difference that he won’t back down from.

A crusade ensues.

Theymos vs. Roger. Bitmain vs. Blockstream. SegWit vs. Big Blocks.

The Eastern miners take exception to what they feel are moving goalposts by arrogant Western Core developers, and get sick of being vilified as the evil trusted third parties in bitcoin transaction processing. “No SegWit until we raise block sizes,” they say.

A vocal contingent of the bitcoin community starts banging the drum for the UASF. Blockstream’s Chief Strategy Officer goes full Trump campaign and uses hats and trolling to go on the offensive.

It kinda works.

So “the adults” head to NYC and compromise. The miners say “we’ll give you SegWit, if you give us our 2mb blocks.” The NYA gets struck by the oligopoly and it (rightly) raises alarm bells for those who weren’t in the room.

Wtf is this? OPEC?

Only some of the signers have a religious conviction in bitcoin.

Most simply want a united front and for bitcoin to evolve organically in the same direction.

But a schism proves unavoidable because one contingent asserts that they need to protect against the UASF, especially since many of the current core developers that support it had previously dismissed bitcoin for years before “hijacking” the project. They create BCH.

Months later, that decision proves prescient. The #no2x contingent wins the SegWit2x debate, and 2x gets called off.

The 1mb block size and bitcoin as a settlement layer with layer two scaling solutions is seemingly codified as the BTC roadmap. But an 8mb blockchain now exists that has been laying in fallow. It now has the support from the scorned Eastern miners and a not-to-be-ignored contingent of uber-wealthy BTC whales who have been quietly doubling down on their back-up plan.

That back-up plan starts picking up steam in Asia. The BCH price ticks up in the days following the SegWit2x cancellation. Then the first pump comes in the middle of the night on a Saturday. $10 billion of volume isn’t something that can be easily faked. The test run raises eyebrows.

Many start to viscerally hate the BCH crowd. “Now they are truly attacking us.”

The Eastern zealots think: “We were patient. We compromised. We tried the united front thing. But some people can’t be reasoned with. We’ll do a hostile upgrade of the network if needed. Because we can, and it’s right. Let’s see if the BTC crowd has the conviction to withstand a fork of bitcoin’s proof-of-work. Because we can withstand some short-term price hits.”

This doesn’t end well for anyone, perhaps, but the scenario I can’t get out of my head is this:

Last Saturday was a trial run. Most BTC zealots have sold their BCH. The vast majority of bitcoiners will default to the most secure chain with the highest price and accumulated difficulty. And the BTC defectors haven’t even showed their true economic clout, which is in the many billions of dollars. The next play could be the all-out BCH pump and BTC dump. It could be paired with a massive and sustained shift in hashing power to the BCH chain, and potentially a series of 51% attacks on BTC. As people who don’t have the pre-fork BCH exposure panic to buy BCH as a hedge, others panic sell, a flippening occurs, and BCH has a multi-week sustained premium while BTC remains cripplingly slow crawling into a difficulty adjustment.

I hope it doesn’t happen. But we aren’t in economic territory anymore.

This is the last battle in the great crusade for bitcoin’s future as settlement chain or peer-to-peer cash. And the only assumption that matters is how big a BTC stake you think the BCH purists have. I think it could be north of 5% of total supply and as high as 10%.

And I’m not going to be underweight BCH during that sort of all-out war. Because it’s stupid from an expected value perspective.

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Some or all of what I wrote above could be wrong. Much of it is informed conjecture based on multi-year relationships in the industry, intuition, and of course, my personal probability estimates, which are that BCH has a ~20% chance of eclipsing BTC.

I welcome clarifications from the companies referenced above. And I’ve never shied away from being wrong. Cunningham’s Law is how I’ve developed most of my relationships in this industry, anyway. I just haven’t seen much informed and measured discussion about the BCH threat to date.

Either way, I’m HODLing.

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If you’ve been in this industry for any length of time — despite the peaks and valleys and chaos — you know we’ve got a lot to be thankful for this year especially.

Stay safe out there, and Happy Thanksgiving!