August 25, 2017

I typically don’t write too much about Bitcoin because I believe that Ethereum is the better cryptocurrency. Ethereum can do everything that Bitcoin can do, but with the added feature of smart contracts which makes it a more versatile technology platform. Developers can build all sorts of applications on Ethereum that are not possible with Bitcoin. Despite this, I do still hold and use Bitcoin.

On August 1st, Bitcoin split into two chains which I will call Bitcoin Core, and Bitcoin Cash (or BTC and BCH). While many Bitcoin users, developers, and miners predicted that a hard fork for Bitcoin would be a disaster, in reality, the opposite effect seems to have taken place. The combined market cap of the two forks now is greater than the market cap of BTC before the fork. This demonstrates that the Bitcoin market as a whole has increased in value. The fork leaves Bitcoin in an interesting position where the two factions now can compete for users, developers, and miners to see what fork of Bitcoin will be more successful in the long run.

Transaction Speed and Cost

In the months leading up to the Bitcoin hard fork, Ethereum had surpassed Bitcoin in nearly every important metric. Transaction fees and times were significantly lower. There were more transactions, a higher trading volume, and a greater mining reward. The only two important metrics that Bitcoin still had over Ethereum were market cap, and public awareness (measured by Google Trends). Now after the fork, Bitcoin is back on top in all of those metrics except for transactions.

The hard fork was successful in lowering the transaction cost for Bitcoin core for a few weeks, but as I type this blog post, the transaction fees have skyrocketed and are now higher than they were before the fork. ETH and BCH transaction fees are significantly lower. BCH has a lower transaction volume than BTC, so it is expected that it has lower fees with less competition to get transactions processed by miners. However, ETH has the highest transaction volume, and fees that are about the same as BCH, so it is clear that it is possible to have very low fees with a high transaction volume.

BTC can alleviate some of this pain by raising the block size to 2MB according to the agreement that brought about the hard fork, but even then, I doubt that that modest increase will be able to lower the fees to a level that is competitive with BCH, ETH, or LTC in the short term. As the use cases for cryptocurrencies grow beyond the use as a speculative investment, transaction fees and confirmation times will become increasingly important. When I hear of new interesting use cases for cryptocurrencies often the developers choose to use something other than Bitcoin because of the high fees. Over time if users move to other cryptocurrencies, the value of Bitcoin will drop. For this reason, it is important that BTC implements the lightning network and other scalability improvements sooner rather than later if it is to maintain its lead as the top cryptocurrency.

Price

Despite the fee issues that BTC is facing, the price of BTC is at an all-time high. The price of BCH is less than a quarter of the price of BTC. Knowing how high transaction fees of BTC are at the moment, it is hard to imagine that the price of BTC can sustain this upward trend at the current pace. If it gets to the point where it costs $75 in fees to buy $100 of Bitcoin, then new users will start to realize that BTC is not living up to the hype. Of course, any financial market can be highly irrational in the short term, so it is hard to predict whether or not the price will crash, or if the BTC developers can fix the scaling issues in time to mitigate this risk.

Community Effects

Long before the hard fork, the Bitcoin Reddit community had split into two separate subreddits r/Bitcoin and r/BTC. In general r/Bitcoin favored Segwit, and r/BTC favored raising the block size. After the fork, r/Bitcoin seems to have aligned with Bitcoin Core and r/BTC with Bitcoin Cash (the name of the subreddit is unfortunately now very confusing). People in both camps tend to view the version of the bitcoin that they support as the true bitcoin, but most objective people would agree that the version with the highest market cap is the true Bitcoin. It will be interesting to see how widely BCH is supported by developers of wallets, exchanges, and other Bitcoin-related software, and what version of Bitcoin becomes the most popular with users.

Public Perception

Before the hard fork, it was a concern that the fork would confuse everyday people who are not deeply involved or knowledgeable about Bitcoin. I have seen this phenomenon play out a little with Ethereum and Ethereum classic. As new users enter the Ethereum ecosystem, they can be confused about which version of Ethereum they should buy (most of these users are buying it as a speculative investment). I think what happens is that newcomers buy the cryptocurrency with the higher price (and market cap). In the case of Ethereum, ETH is clearly the better of the two forks because of an overwhelming majority of users, developers, and miners using ETH over ETC. In the case of Bitcoin, however, BTC and BCH are both plausible solutions to a problem that Bitcoin was facing. I see these two forks on much more equal footing as far as which is the “legitimate” fork. If I met someone that was interested in getting into Bitcoin, I could not just recommend them to buy BTC over BCH without admitting that it is a complicated decision about which fork to support. This raises the barrier for newcomers of Bitcoin and is one of the negative outcomes of the fork.

How is Ethereum Affected?

The Bitcoin hard fork has huge implications for Ethereum and the broader cryptocurrency market as a whole. I think overall, the effect will be positive. In general Bitcoin, adoption can fuel the adoption of Ethereum as well. Bitcoin adoption had hit an artificial ceiling because of the block size limit, but now at least one of the Bitcoin forks, BCH will not be as constrained by transaction scaling. I do think that Bitcoin has already, and will continue to regain some ground as the dominant cryptocurrency now that Bitcoin has forked. However, this does not take away from any of the advantages that Ethereum has as a platform. I think the developers of Bitcoin Core have a long and hard road ahead of them to deliver on the promises that they made about Segwit. It is clear now that this change to the protocol is not an immediate scaling solution, and they have some work to do to implement the lighting network that they claim will alleviate the issues that the network is facing.

The developers of Ethereum are continuing to make progress developing Metropolis which includes important scalability and privacy enhancements. After this fork, Ethereum will be the best cryptocurrency to make inexpensive, fast, and private transactions, and will have the best developer support out of any blockchain because of the versatility and popularity of the platform.

Overall I am very excited about the future of cryptocurrencies and think that the Bitcoin fork was a positive event for the entire cryptocurrency space. I am happy to see a resolution to a conflict that has plagued Bitcoin for a long time, and can’t wait to see how each fork does in the coming months and years.