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Won’t The Real Bitcoin Please Stand Up

By November 11, 2017 No Comments
The kerfuffle over 2x leaves bitcoin with tiny 1 Mb blocks for now, so the 8Mb-bitcoin cash fork is making its move - won't the real bitcoin please stand up?

Uhhhh.... we're gonna have a problem here. The kerfuffle over 2x leaves bitcoin with tiny 1 Mb blocks for now, so the 8Mb-bitcoin cash fork is making its move - won't the real bitcoin please stand up?

Disclaimer:  The information in this blog represents the opinions of its author and is for educational purposes only.  It is not intended as investment advice.  The bitcoin market is extremely risky so you should only invest money you are willing to lose.

Million-Dollar Prediction

It's astounding that nobody made this prediction - at least not out loud - because in hindsight it seems like almost a no-brainer, and it certainly would have made you millions overnight.

The kerfuffle over the 2x phase of Segwit2x that was ixnay'd on Nov. 8th was about block size in particular, and more generally about on-chain scaling solutions.

The nerds have been playing a $100-billion game of chicken with the future of bitcoin over the past few months.  If we ignore all the hype and just look carefully at what the price action is telling us we realize that's not a bad thing.  chart: coinigy.com, technical analysis: digitalassetuniversity.com

bitcoin price went bananas over the kerfuffle about on-chain vs. off chain scaling solutions - giving bitcoin cash the perfect opening to make its move. see the chart below to see what happened next. chart: coinigy.com, technical analysis: digitalassetuniversity.com

The SegWit phase implemented in August was an off-chain solution which separated signatures from transactions to allow for speedier transaction processing.  The advantage of such off-chain solutions is that the they speed things up by taking some of the work off the main chain.  The fork that happened at the same time created a new chain with an 8 Mb block size, an on-chain solution, called bitcoin cash. 

Not So Much

In the interim time period, it seemed like everyone just assumed that the 2x phase would be implemented as planned in the New York agreement, and bitcoin's block size would double to 2 Mb.  Well, not so much....

The problem with increasing block size in particular and on-chain solutions in general is that they can run headlong into Satoshi's original vision of a distributed ledger.  In it's purest form, true distribution means that anyone, anywhere, with any computer, can run a full node, or have a complete copy of the entire blockchain on their computer.  This level of distribution not only precludes any centralized authoritarian decree of truth but it also makes the network virtually impossible to hack, crash, shut down, or even locate in any meaningful way.

Nothing To Shut Down

As one analyst described it when talking about regulating bitcoin - it would be impossible to regulate because there's "nothing to shut down". The only way to turn off bitcoin would be to completely turn off the internet, everywhere, and even then you could still run the network using radio waves.

It's a simple fact that as blocks get bigger, fewer and fewer people have the resources to run full nodes.  When this number gets small enough, it loses its unique identity as a distributed network and it becomes just another network with redundant nodes.

It is probably a testament to Satoshi's revolutionary vision emphasizing distribution and decentralization that the community was unable to reach a consensus on the block size increase.  Since consensus was another of bitcoin's founding principles, 2x was scrapped, at least for the time being.

While the price of bitcoin plunged from a high of $7900 at noon on Nov. 8th to a low of $6200 72 hours later, the price of bitcoin cash surged - more than doubling in the same period of time.  This seems like a price move that would have been easy to predict, and there was plenty of time to jump in, as it didn't really gain momentum until about 36 hours after the news broke.  If you had nailed this prediction and started accumulating bitcoin cash after the fork was 86'd, you'd have more than doubled your money overnight. chart: coinigy.com, technical analysis: digitalassetuniversity.com

While the price of bitcoin plunged from a high of $7900 at noon on Nov. 8th to a low of $6200 72 hours later, the price of bitcoin cash surged - more than doubling in the same period of time. This seems like a price move that would have been easy to predict, and there was plenty of time to jump in, as it didn't really gain momentum until about 36 hours after the news broke. If you had nailed this prediction and started accumulating bitcoin cash after the fork was 86'd, you'd have more than doubled your money overnight. chart: coinigy.com, technical analysis: digitalassetuniversity.com

Forehead-Slapping "Aha" Moment

Enter bitcoin cash.  The nascent cryptocurrency has been operating for several months with an 8Mb block size.  An analysis of the price charts after 2x was called off should literally prompt a forehead-slapping "aha" moment.

Once the markets had absorbed the news that the kerfuffle over 2x leaves bitcoin with its tiny 1Mb block size for the foreseeable future, it seems like a lot of that big-block money started looking around for bigger blocks elsewhere.  The smart investor would have anticipated that they would naturally turn to its 8MB progeny, bitcoin cash.

Follow The Money

While the price of bitcoin plunged from a high of $7900 at noon on Nov. 8th to a low of $6200 72 hours later, the price of bitcoin cash surged - more than doubling in the same period of time.  This seems like a price move that would have been easy to predict, and there was plenty of time to jump in, as it didn't really gain momentum until about 36 hours after the news broke.  If you had nailed this prediction and started accumulating bitcoin cash after the fork was 86'd, you'd have more than doubled your money overnight.

Cash Is Making Its Move

Now that cash is making it's move - will it replace its forebear to become the next bitcoin?  Well... it depends.

It depends on the ongoing battle over the soul of bitcoin.  As bitcoin inevitably grows, it will have to process more than 7 transactions per second (VISA processes 20,000) to become the next Paypal or VISA.  The community will also have to decide whether bitcoin's ultimate future is that of the next digital gold (a store of value), a speculative investment, or a truly global, borderless, transparent, quick, cheap, secure, and universally accessible value-transfer mechanism that can provide financial services to the entire world.

As Charlie Lee, founder of the 5th biggest cryptocurrency, litecoin, put it, "Bitcoin cash is trying to scale everything on chain but this doesn't work for a decentralized system... bitcoin cash is also miner-controlled and miner-centralized.  It's pretty much all sorts of wrong."

So the question will be whether the collective intelligence of the bitcoin community can solve the scaling problem in a way that hews to Satoshi's revolutionary vision.

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