Bitcoin Forks and Crypto Carnage

If you think it’s been a tough week for equity markets and commodity bulls, spare a thought for those with their money in cryptocurrencies.

On Wednesday night Australian time, the price of Bitcoin, and the majority of the world’s largest cryptocurrencies, plunged, with BTC falling below the all important USD $6,000 per coin level.

The USD $6,000 mark was seen by many as a line in the sand, and one that had provided important support up until now.

As per the image below, which was taken on Thursday morning Australian time, of the 8 largest cryptocurrencies in the world, all of them, except for Ripple (XRP) were down more than 10% in 24 hours.

After this latest fall the market capitilisation of the entire industry is now back below USD $200 billion, according to this article from Reuters.

That is a level not seen since last September when the crypto bubble was in full swing.

As with most crypto market moves, it’s not always easy to determine what drove this fall, though many are attributing it to a pending ‘hard-fork’ in Bitcoin cash, which is due to take place this week.

The issue of forking, and why it made cryptocurrencies thoroughly unsuitable as monetary items is something we discussed in detail in “Bitcoin, Dollars and Gold – What is the Future of Money?” report from November 2017.

We’ve included that section of the report (which you can access here in full);

The Issue with Bitcoin Forks

If I could pick just one issue that, more than any other, makes me question the long term potential for BTC to become the world’s premiere monetary asset, it is the issue with forking.

BTC has already forked twice this year, with investors now having the freedom to invest in BTC, Bitcoin Cash (BCH), and Bitcoin Gold (BTG). A third fork (Segwit 2x) was recently cancelled – which has seen a huge uptick in volatility in the prices of the three strands of Bitcoin.

BCH seems to have been the main beneficiary, with its price rising some 35% in a matter of days, whilst BTC, which surged originally when the fork was cancelled, dropped 7% in a day, according to a November 11 article on Business Insider.

There are four points worth making when it comes to the forking of BTC.

The first is that the decisions made regarding how the BTC network develops are concentrated in the hands of very few people.

I saw first hand evidence of this on November 9th and 10th this year, when I attended the Precious Metals Investment Symposium in Melbourne, and participated in a panel discussion on gold and cryptocurrency colliding.

During that session I asked the crowd to put up their hands if they own BTC, and roughly 50% of the room put their hands up.

I then asked them to keep their hands up if they had had any say about the BCH and BTG forks, or the recently cancelled Segwit 2x fork.
Not one hand stayed up.

Far from being democratic, the governance around BTC development is in some ways analogous to our current fiat system, where a small group of people make decisions about monetary policy, which we all have to live with.

Furthermore, it would be naive to think that the developers who are making the decisions about which BTC forks to support/not support are not doing so with their own financial interests front of mind, rather than the broader concerns of the BTC owning community.

Satoshi may well have intended to leave a gift to the world, but that doesn’t mean it’s incorruptible.

The second point to make regarding forking is that it highlights just how very different BTC and cryptocurrencies are when compared with physical gold.

Gold miners (indeed the whole gold industry) can come up with as many different ways of finding gold, mining gold, transporting gold, refining gold, trading gold and storing gold, but that makes no difference to the physical gold itself.

Physical gold will never fork. It will forever be chemical symbol Au, and number 79 on the periodic table, no matter what those who work in the gold industry do.

The third point about forks is that it raises a question about the “consistency” of Bitcoin. Yes, each and every new forked version of Bitcoin is consistent within the confines of that particular version of the Blockchain (each BTG is the same as every other BTG, etc.), but unless each fork really does create wealth out of nothing, you have to wonder if some of the value within Bitcoin is not being distributed to each and every new fork.

After all, a financial services business could split its wealth management and banking divisions into two separate companies, and the performance of those two companies could, and indeed would differ going forward.

Be that as it may, there is no question that at the time of forking, the value that was contained within one entity was distributed across two entities.

If BTC, BCH and BTG aren’t related to each other, then how on earth did ownership of one entitle existing owners of BTC to free coins in BCH and BTG?

If they are related, then there are now three versions of Bitcoin, with the potential for more forks in the future.

Given the differing performance profile of the three Bitcoins, one should at the very least wonder about about the consistency of Bitcoin as a whole.

The final point is the most important when it comes to BTC forks. According to many BTC enthusiasts, forking, and the creation and continued development of hundreds of other cryptocurrencies is an unquestionable positive, as it gives choice and freedom to consumers.

“Let the market decide” is what they will typically say in reference to these forks. If we were talkingabout software, then “forking” would be a positive, and we would wholeheartedly agree with those who see the benefit in multiple forks developing.

But we are talking about money here – so let us take a theoretical walk down the path of a market economy with multiple cryptocurrency choices. To keep it relatively simple, we will just use BTC, BCH and BTG.

For money to serve all of its functions, it needs to be a unit of account. So in this theoretical world, every business in Australia will now need to price all the goods and services it offers in BTC, as well as BCH and BTG.

As a consumer, next time you go buy your cup of coffee, you won’t just see price in AUD, but in the three cryptocurrencies that your local café now needs to monitor and essentially offer their product in.
 
These prices will of course be fluctuating at different rates through the day (indeed in real time), as the performance of each currency is not uniform.
 
Every single Australian with a job will also no longer have a salary that they negotiate in AUD either, but will have the freedom to choose whether they get paid in BTC, BCH or BTG, assuming of course your employer has the necessary infrastructure in place to handle all three currencies.
 
Assuming you are an accountant, not only will you now need to ensure you stay abreast of all the accounting trends (which just got a lot more difficult as you now need to reconcile and report in three currencies), but for you personally, you’ll have to choose which of those three currencies best suits your saving and consumption needs.
 
This of course could change over time, so you may need to sit down with HR and negotiate a “multiple crypto payment plan”, with regular salary negotiation that is no longer just about asking for a pay rise, but also a potential change in which crypto, or batch of cryptos you want to be paid in.
 
The scenario described in this theoretical example is clearly absurd, and most definitely not progress.
 
Indeed, rather than help a market economy function (which is the whole point of having a widely accepted monetary medium), it would prove a major spoke in the wheels of commerce.
 
Taken to its logical extreme, a world of multiple competing cryptocurrencies, if they are to be used as a unit of account and as media of exchange, is no more sophisticated than a barter system.
 
Ultimately, for money to serve its three primary functions over the long run, then, within the confines of any given nation state at least, there can only be one form of it.

Jordan Eliseo
Chief Economist
ABC Bullion

Disclaimer
This publication is for educational purposes only and should not be considered either general or personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, and past performance is not necessarily indicative of future performance. Any prices, quotes, or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.