Is the contentious fork debate impacting Bitcoin’s price?

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Watching current events with negative interest rates, gold rising, and world economies on the brink, one can’t help but wonder, where is Bitcoin?

It would seem that 2016 is offering the perfect confluence of events for Bitcoin to take its place on the world stage of global assets.

The Bitcoin network has been in continuous operation for 7 years, a Bitcoin mined in 2009 can be perfectly traded in 2016.  Bitcoin’s issuance rate, its block reward of 25 coins to miners, will be cut in half some time during the year.  Gemini a Licensed Bitcoin exchange has come online with expectation of offering institutional investors access to Bitcoins. China’s collapsing economy and collapsing currency would seem to provide a ready audience desperate to secure part of their wealth with an alternative asset like bitcoin.  It seemed that Bitcoin was showing signs of exiting its long bear market briefly touching $500 last year in the early days of November. Yet since that brief rally bitcoins performance has been ambivalent to say the least.  Despite the fact that worldwide trends are conducive to a rising bitcoin price.

There have been a series of events however that could be viewed as diminishing Bitcoin’s claims of being a immutable and secure store of value safe from the prying hands of desperate governments.  Primarily Bitcoin’s current debate which has flared into a civil war.  A war over which direction it should take, the current development process offered by Bitcoin Core developers or an alternative process offered by Bitcoin Classic that is based on a hard fork of the protocol.

Below is our subjective assessment of key events in the Bitcoin Forking process with the closing price of Bitcoin on Bitfinex

  1. December 7th Bitcoin Scalability Road Map Posted
    Bitcoin Price $422.00
  2. December 19th Bitcoin Road Map support is posted 
    Bitcoin Price $437.52
  3. January 7th Bitcoin Core Segrated Witness testnet live
    Bitcoin Price $454.00
  4. January 9th Bitcoin Classic announced
    Bitcoin Price  $449.59
  5. January 13th Gavin Andresen posts support for Bitcoin Classic
    Bitcoin Price $429.25
  6. January 14th Mike Hearn infamous quit post
    Bitcoin  Price $359.16
  7. January 22nd Bitcoin article is published showing that some miners are concerned about a PoW fork of Bitcoin and may not support Bitcoin Classic.
    Bitcoin Price $385.57
  8. February 5th Bitcoin Classic Beta 2 Binaries released   and Gavin Adresen posts on why classic will use a fork of 75%
    Bitcoin Price  $373.75

Now it is a dangerous path to select events and try a determine some causation to the price of an asset.  However it appears that the fork debate because it introduces uncertainty to bitcoin’s future is having a suppressing effect on the price.  Particularly when one considers that almost 3 years ago a far smaller Bitcoin economy had a market cap that was double the current market cap.

Proponents of a hard fork now approach will contend that Bitcoin’s price is representative of a market that does not believe Bitcoin can scale. They believe that continuous delay in increasing the blocksize is preventing Bitcoin from growing and attracting new users that will drive an increase in price.

However if that was the case the price should be responding to each future development that supports a fork bitcoin and in fact the opposite is happening. It appears that Bitcoin price was in a more positive trend just after the Bitcoin core road map was presented.

Additionally Ethereum which is considered to be the only true credible alternative to bitcoin has risen from a price of just 90 cents at the start of the year to almost $3.20, while Bitcoin debates a hard fork.


As discussed in Hard Fork Risks as Bitcoin gets closer to a contentious fork the price of bitcoin will continue to decline as investors flee all the potential risks both short term and long term that will be introduced to Bitcoin. So far the continued poor performance of the price of Bitcoin continues to reinforce this thesis.  Like a corporation fending of a hostile takeover the Bitcoin economy will be fractured and damaged by a contentious hard fork.  With the real possibility of triggering a full fork into two competing protocols.





Morning Reading 2016-03-02

EU proposes end of anonymity for Bitcoin and prepaid card users [thestack]

JP Morgan Chase Blockchain Trial: Bitcoin Server Could Streamline Loans And Settlements, Executives Say [ibtimes]

Cheap Energy Draws Bitcoin Miners To Northwest, Bringing Discriminatory Rate Hike Controversy [cryptocoin news]

The Bank Of Japan Has Betrayed Its People [zerohedge]

China Unleashes New Steps to Control Financial Risks, Outflows [bloomberg]

Bitcoin Developer Eric Lombrozo on Five Benefits of Segregated Witness | Bitcoin Magazine

Segregated Witness has become the most talked-about breakthrough in Bitcoin development since the concept was presented in early December to the Scaling Bitcoin Workshop in Hong Kong by Bitcoin Core Developer Pieter Wuille. One of the men that Wuille thanked in the last slide of that presentation was Bitcoin Developer and Ciphrex CEO Eric Lombrozo.

Lombrozo gave a presentation on the future of Bitcoin scalability at the recentBlockchain Agenda Conference in San Diego, where he outlined some of the key benefits of Segregated Witness (SegWit). Although much of the Bitcoin community thinks of SegWit in terms of getting more transactions into each block, the reality is that this innovation offers more than that


Source: Bitcoin Developer Eric Lombrozo on Five Benefits of Segregated Witness | Bitcoin Magazine

Shift Card: A Glimpse Under the Hood


Coinbase has released some data on the performance of its new Bitcoin Debit card Shift which launched two months ago.

Shift has quickly emerged as one of the most successful apps to launch with Coinbase. Here’s a few insights on Shift Card usage:

User Signup and Spending Growth

Since launch in November, over 10,000 people have signed up for the card and spent over $1,000,000 worth of bitcoin.

It will be interesting to see if these products drive users to store more wealth in Bitcoins as they have the ability to spend now almost anywhere that a debit card is accepted and  without the need to sell Bitcoins in advance.

PwC and Blockstream Announce Strategic Partnership

Blockstream a Bitcoin company who counts among its founders Bitcoin Core Developers Gregory Maxwell,  Dr. Pieter Wuille  and Adam Back, has announced a partnership  with PwC a Global Consulting firm.

Blockstream is pleased to announce today a strategic partnership with PwC to bring blockchain technology and services to companies around the world. The rapid pace of innovation in cryptocurrencies, distributed ledgers, and smart contract technology is driving organizations to transform their operations. PwC exemplifies the type of partner that will help us deliver the promise of this cutting edge technology.

Blockstream provides companies access to the most mature, well tested, and secure blockchain technology in production – the Bitcoin protocol extended via interoperable sidechains to support new applications – along with one of the most experienced teams in the industry. PwC brings deep industry experience, a broad range of business services and cutting-edge client insights. Together, PwC and Blockstream will help companies evaluate cryptocurrencies and blockchain technologies and launch new uses for the Bitcoin protocol.

Source: PwC and Blockstream Announce Strategic Partnership

Blockstream will be working with PwC to bring it’s side chain implementations to PwC clients and expand the use cases for the Bitcoin protocol.  Blockstream states they will be using their Liquid platform to underpin these new initiatives.

This news coincides with PwC’s announcement earlier in the week that they are putting together a specialized Blockchain team to bring these new technologies to clients.

PwC has recruited 15 leading technology specialists to exploit and commercialise blockchain, the technology that powers the crypto-currency, Bitcoin.

The new Blockchain team will be based in PwC’s Belfast office and is expected to grow to over 40 digital and technology specialists during 2016.


Hard Fork Risks and Why 95% Should be the Standard.


There has never been a hard fork of Bitcoin, as most would define it, where the entire network needs to coordinate a protocol update at the same time.  The closest Bitcoin came was in 2013, due to an unexpected software error and it caused significant disruption, and in 2012 where the protocol made a backwards incompatible change but it only affected clients over 2 years old which as far as developers could tell were not in use.

However a contentious hard fork has never been attempted, which is any fork where less than 95% of the network supports the rule change. A fork of this type could provide major instability to Bitcoin and undermine its unique value proposition.

Whether the fork, is Bitcoin XT, Bitcoin Classic, or even just BIP 102 which calls for a increase to 2MB. Bitcoin must set a high bar for consensus rule changes, for one simple reason. Bitcoin’s existence is based on the belief that it is an immutable store of value. If you do not have confidence that a Bitcoin today will be a Bitcoin tomorrow that economic decisions you make today will hold over years even decades. Then why hold Bitcoin, what is it going to offer except the same empty promises made by other political-financial systems.

Miners securing of the network, the Bitcoin cap fixed at 21 million, and its current large network effect represented by its daily transaction volume and global acceptance all contribute to Bitcoin’s value but these things are only possible because of the decentralized consensus Bitcoin imposes on participants.   Strip away Bitcoin’s decentralized nature and Bitcoin offers no unique value proposition as a payment network, a store of value, or even its person 2 person nature.  Without decentralization all of Bitcoin’s features are open to change.  That is the reality that a Hard Fork brings, it is difficult to argue that a hard fork for one change, does not imply there will ever be a hard fork for another.  The fact is a change of the rules even minor, implies a new system where all participants must rethink their economic position within, and with some winners and some losers.

If 51% of the hashing power was used to conduct a double spend  it would be viewed clearly as an attack on the network.  And so should a 51% fork to change the rules.  If a group can coordinate a rule change to their benefit which the network in unison does not support even if it is a small minority, that is an attack.  It is assumed that while 51% of the mining power can change the rules, they will probably not get the support of the economic majority, and they would invalidate the value of their Bitcoin investments and future rewards.  This risk of self harm is what is believed to keep all participants honest. However raising the threshold to 75% as many keep proposing is still dangerously low, and now blurs the picture of whether it is an economic attack or consensus. Couple this with the fact that voting in bitcoin via miner signaling means nothing in terms of actual implementation since votes are not binding.

This low threshold implies at a minimum 25%  of miners must accept a change that they may view as economically harmful this does not even consider what the economic participants may want since Bitcoin has no way to determine this. Even if just 25% of the Bitcoin population is against the change this would be a significant percentage when discussing a $7 billion network.

Consider that the African American population of the U.S. is only 13%, and no one would question their position as a minority with a significant economic and social stake in the United States.  While they live in a democracy where majority rules there is no doubt that their interests must always be taken into account.  This makes it all the more concerning in Bitcoin’s case because Bitcoin is not a democracy but a consensus system. The rules are set and it is expected that to change them you need the entire system to agree.  To dismiss 25% of Bitcoin as some obstinate hold outs that just want to impose their will for no reason is irresponsible, short sighted and brings into question Bitcoin’s claim of decentralization.


As we discussed in Why a Hard Fork Should Be Fought.

Regardless of how altruistic B claims their intent is, regardless of whether B believes that their solution will bring peace on earth, and caviar dreams and limousines to all, one has to assume in a decentralized system that all participants act out of self interest first, and if one party sees no reason for a consensus rule change and the other party does then more than likely the majority party is looking to increase its benefit at the expense of the minority.

As a result, it is a very real possibility that a contentious hard fork (<95%) will be viewed by many economic participants as a bad sign for the future safety of their investments.  We have seen no positive response from markets to recent proposals to hard fork bitcoin contentiously .

As we approach the likely hood of a contentious hard fork there is a real possibility of instability arising in various forms.

  1. Drop in Exchange Volume: The closer we get to a contentious hard fork, transaction volume and exchange volume could fall as coins are withdrawn to user controlled wallets.   Without clear certainty what the results of a fork will be, users will have an incentive to hold their own coins until the uncertainty is resolved.   Similar behavior is exhibited by  financial markets in anticipation of a major Central Bank decisions.
  2. Drop in Bitcoin Value:  With the uncertainty of a hard fork looming, investors may move to fiat or alternate currencies during this period of high risk.
  3. Rethinking of what Bitcoin is: Long term there will be a revaluation of Bitcoin’s claims of stability and immutability. With a new standard of 75% for forks and centralization of mining in bitcoin, 3 pools contribute to 65% of the hashing power, can one still claim Bitcoin is insulated from the flaws of fiat currency where a majority can be swayed to make changes to the system.
  4. Bitcoin 2.0:  Assuming a low threshold hard fork there is a real risk that a percentage of Bitcoin is actually being kicked off the Bitcoin Island. If we assume every participant acts in their self interest, participants who reject a hard fork do so because it against their economic interest. They maybe motivated to fork to an alternate protocol.  At 6-7 Billion dollars there is significant incentive to create an alternative protocol that may provide a better long term return on investment if it can claim greater decentralization.  Exchanges will have every incentive to run a second Bitcoin and in the end what would happen is the economic interests of the “majority” could be permanently damaged.  A “winning” Bitcoin fork would be left competing with a smaller coin which would position itself as the more decentralized “true” Bitcoin.  This would put the “majority” coin in the position of defending its tactic of kicking out a minority by using a low threshold fork that only needs the support of a handful of mining pools. Mining pools that may directly benefit from ever increasing block sizes.
  5. Fork Day could be a disaster.  As mentioned Bitcoin has never performed a contentious hard fork in its history. If one looks at Bitnodes which is not a 100% view of active nodes many nodes still run versions of the Bitcoin Core software which is several releases back. Only 45% of the nodes run current versions.   BIP66 was a soft fork that used the 95% threshold trigger and resulted in some serious unforeseen circumstances over what was supposed to be a modest change.   A 75% triggered fork, with only a 30 day window to upgrade a global network, poses a real threat of encountering unforeseen problems that once again will bring into question Bitcoin’s stability.


Humans beings have very short-term memories and so the thefts of the past are quickly forgotten. It is why Bitcoin is really a minority attempting to fork from the current economic system.   Many “Bitcoiners” have a vivid understanding of economic history, of men voting for their hamburgers today and pushing the bill off for tomorrow.    This is why Bitcoin’s protocol was to be different because history has shown that getting a majority to vote against their long term self-interest is no difficult task and sadly it may appear that we are witnessing the same in Bitcoin.

If we truly believe a 2 mb block increase is good for Bitcoin then achieving a 95% threshold should not be difficult. It would signal that Bitcoin network is making protocol changes in unison and that no participants are favored over others.   If it cannot be achieved then maybe we should listen to the network.