Friday, August 04, 2017

Bitcoin Cash

So if you are one of the people that ensured that they had control of their private keys before August 1, then you inherited the same amount of bitcoin cash (BCH) as you held in bitcoin (BTC).  And now the question is: what should you do with it? A more important question is this: what *can* you do with it? Once you know what you *can* do with it, then you can decide what you should do with it. I won’t be answering any questions about what you should do with it. I’m simply going to give you what you *can* do with it.

And it turns out, that right now, what you can do with BCH is: almost nothing. The issue is mining difficulty. In bitcoin, the network adjusts the difficulty of finding a block so that no matter how much computing power is added to the network, it takes an average of 10 minutes to find a block.  If it’s taking a lot longer than that, the difficulty gets adjusted so that blocks can be found quicker. However difficulty is only adjusted every 2016 blocks.  And on average that is two weeks.

But here’s the problem. After the split, BCH inherited the difficulty levels of BTC. But BCH has a very small fraction of the mining power of BTC. So it is taking BCH many hours to find blocks that BTC is finding in about 10 minutes.  This also has the impact that it’s going to take a *LOT* longer to get to the 2016 blocks required before difficulty adjustment takes place.

Now the BCH folks aren’t unaware of this, and they built in some facilities to adjust the difficulty sooner than 2016 blocks.  But in the meantime, this creates a *HUGE* risk for BCH transactions. And as a result of these problems, only people who have *NOT* transacted in BCH know exactly how much BCH they have. The issue is that without confirmation, someone unscrupulous can send a transaction with 1 BCH to you, and then send another transaction with the same BCH to me.  And it’s the luck of the draw who gets confirmed first who actually receives the BCH.  On top of that, you don’t want just 1 confirmation. The general recommendation is to wait for 6 confirmations before you’re sure that things are stable. Well 6 confirmations could take 24 hours!  Additionally, when the difficulty adjusts, there’s going to be *HUGE* incentive for a mining pool to try to wipe out all of the blocks created up until the point that the difficulty adjusted. Meaning that confirmed transactions could become unconfirmed.

As a result, almost none of the exchanges are accepting BCH transfers until the confirmation time speeds up. They don’t want to have to deal with people saying, “I sent my BCH 24 hours ago! Why can’t I withdraw it or use it?” The only BCH that exchanges are willing to trade are the BCH that they issued to their users as a result of them holding the BCH for their users. Because they are tracking that BCH themselves. They don’t have to worry about the market confirmation of those transactions.

As a result there is a very very small amount of BCH that’s actually tradeable at the moment.  Which is another way to say that the price of BCH is very very FAR away from the market price. It could be that BCH is way overpriced. It could be that BCH is way underpriced. There’s just no way to know.
So it’ll be interesting to see what happens when the mining difficulty of BCH adjusts and blocks can start flowing more rapidly.  Once that happens, then there’s a number of things that you should do to protect the amount of BCH that you inherited at the split.

But here’s the thing. Given that the current prices for BCH are so wildly inaccurate, we have no idea where the bottle neck is. We don’t know if people are desperate to (a) sell their BCH to get into something else but can’t, or if people are desperate to (b) buy BCH to get more.  If (a) then the price of BCH will crash. And it will likely crash faster than you can react to do anything. If (b) then the price of BCH will increase.

In case of (a) there’s really nothing to do unless you think you can be fast enough on the trigger to do something. I personally do not think that I’m going to be fast enough. So in that case I’m not doing anything. But also since (b) is a possibility getting to eager to sell is a mistake.

The long and short: my recommendation is do nothing. Wait to see what happens. If BCH takes off, I’ll write another post describing what you need to do to secure/claim your BCH.


Selling your BCH is the right thing to do if:

  1. You believe that BCH price is going to decline, AND
  2. You can sell your BCH before the price declines

Personally, I think that BCH price is going to crash. So, I’d like to be able to get the value of BCH now if I can. The only thing is, I don’t *know* the price is going to crash. I don’t personally see the value in BCH, but I don’t get to tell the market what they value. So I might be very wrong about #1.

But even if I think #1 is true, #2 is problematic. Here’s the process required to sell your BCH:

  1. Send all of your BTC to a completely new wallet with new private keys
  1. You need to do this because to claim your BCH you need to share your BTC private key
  2. If you move your funds to a new wallet with a new private key, you can safely share your old BTC private key because it has no BTC funds attached to it.
  1. Get the private key from your old BTC wallet
  2. Import old BTC private key into a BCH compatible wallet
  3. Transfer the BCH to an exchange that accepts deposits - there aren’t many
  4. Wait until the exchange accepts your deposit - which will be very very slow given the mining difficulty level in BCH
  5. Sell your BCH

It’d be one thing if the risk to completing all of this were zero. At that point, just take the free shot. It might work, it might not. Who cares?

But the risk of doing this is *NOT* zero.  It requires you to export your private keys into a BCH compatible wallet. How many of these wallets exist? How long have they existed? How can you be sure that the wallet you chose isn’t just a Trojan to collect private keys and get your BCH?

In my opinion, trying to claim your BCH is not worth it. If you give your BCH private to the wrong software, you lose all of your BCH. And then what happens if you’re wrong and BCH ends up being worth something?

BCH is a brand new coin that has almost no community around it yet to provide confidence that it’s secure.

My plan is simple: I’ve been given a sum of BCH for free. I’m going to sit on it for a while - probably about a year.  If by that time, it still has value, I’ll be in a better position to know if I can safely claim that value.


Apparently the bitcoin cash difficulty algorithm has adjusted and blocks are being generated quicker now.  Rather than 5-13 hour block times, they're down to 1 hour block times.

I presume future adjustments will be forthcoming to make the blocks generate every 10mins.

Tuesday, July 25, 2017

Aaand... #facepalm

UPDATE: This post is meant for poker players who hold "large" amounts of bitcoin. E.g. an amount that would be devastating to lose. If you hold a small amount of bitcoin you shouldn't worry about it. If you're the type of player who just uses bitcoin to buyin and out of poker sites and immediately converts it to dollars or euro or something else, and you don't hold any bitcoin for the long term the advise for you is simple: don't buyin or cashout using bitcoin for at least a couple of days after August 1.

BUT if you do hold a lot of bitcoin, then the below post explains what you should do to protect it. (End of Update)

The purpose of this post is to attempt to inform poker players on how to handle the upcoming changes to bitcoin. We poker players are amongst the few in the bitcoin community who are actually directly using bitcoin on a daily basis for transacting. So my goal here is to give a set of options that I see for how to prepare for these events, and to try and explain a little bit about what’s actually happening.

Last Friday (July 21, 2017) nearly all of the people who maintain the bitcoin blockchain (aka “the miners”), made a commitment called BIP 91. This opened up the pathway to finally enabling a feature called segregated witness (segwit for short). And, as a consequence, there was renewed hope that a split of the bitcoin chain would be averted. A chain split is bad because it screws around with the bitcoin supply limits. It effectively doubles the supply. After a chain split, instead of there being one bitcoin blockchain with a maximum of 21 million bitcoins. Now there’s two chains: each with 21 million bitcoins totaling 42 million.

So despite BIP91 being committed to by the vast majority of the miners, one group that really hates segwit has decided that they’re going to split bitcoin anyway. They’re going to do this on August 1, 2017 at 12:20 PM UTC. They’re going to call their new coin “Bitcoin Cash” in order to distinguish it from bitcoin. They’ll use the “BCC” symbol instead of “BTC”. Because they’re messing with the supply of bitcoin, it may very well impact the price of bitcoin…. or it might not.

As of the time I’m writing the futures price for BCC is about $430 per coin, and the current price for BTC is about $2600 per coin. Does the current price of BTC account for the upcoming split? I don’t know. I suspect it might but there’s no way that I can think of to test this.

So, this brings us how to deal with this. Here are the options that I see for what you can do. And whichever one you do, you should probably do it at least a couple of days before August 1, 2017. My recommendation: if you haven’t chosen one of these by July 29, 2017, then by default you’ve chosen option 2.

  1. You could cash out of bitcoin immediately. You have lots of options here.
  1. You can just put all of your money into a poker site and have them hold it for you
  2. You can buy some other crypto currency (like litecoin, dash, ethereum)
  3. You can cash out into a government currency (like USD, EUR, etc)
And then after all of this kerfuffle has settled down buy back in.

  1. Or you can hold your bitcoin. Doing this has an interesting benefit. However much bitcoin you hold prior to the chain split, you will hold the exact same amount in both bitcoin (BTC) and bitcoin cash (BCC).  This is because at the time of split, both sides will have the same blockchain history, they'll just be building different split chains going forward. And in that history you held coins that are now valid on both sides of the split.

    But this is *ONLY* true if you hold your bitcoin in a wallet where you control the private keys. As a general rule you shouldn’t leave your bitcoin on an exchange like coinbase, kraken, etc. You should hold your bitcoin in a wallet that you control. I personally recommend trezor or keepkey. But other good ones can be found here. Make sure that you choose one that says, "Control over your money". 

    • Go look up the wallet that you use RIGHT NOW and determine if they're going to support both BTC and BCC. Here are the two posts from the wallets that I use describing their support:
    • Avoid sending any transactions 12-48 hours before the split. The issue here is that there's a risk that they may not get confirmed in time before the split and cause confusion if this confirmation is happening at the split.
    • After the coin is split, sit on your coins for a little bit while the dust settles
    • After the dust settles, it will likely be a good idea to send a transaction to yourself on each side of the chain. Search for instructions from the wallet that you use on how to do this.

It is likely that most poker sites are going to continue to accept BTC and ignore BCC. There's also a chance that BCC essentially amounts to almost nothing and carries very little value compared to BTC. This is what happened when Ethereum's chain split creating Ethereum and Ethereum Classic. But I have no idea what's really going to happen valuation wise. Predictions are hard, especially about the future.

Tuesday, June 20, 2017

The Bitcoin Scaling Debate in Brief

This is intended to be an overly short description of the bitcoin scaling debate and where we stand as of June 20, 2017. My hope is that this will serve mostly online poker players who are using bitcoin on a daily basis. As such, it glosses over a lot of details, but hopefully is sufficient to outline the problem for that group of people.

The problem
Bitcoin blocks are what are used to keep track of all bitcoin transactions and ensure that the same bitcoin can’t be given to more than one person. A bitcoin transaction isn’t real until it’s been added to a block. Currently the maximum size of a block is 1MB. Consequently there are a maximum number of transactions that can fit into a 1MB block. The current demand for transactions is greater than the amount that can fit into a block. This results in two things: longer wait times for transactions to be confirmed, and higher transaction fees in order to create an incentive for miners to include transactions in a block.

The Sides
On one side we have the group that would like to see bigger blocks. This would increase the capacity of the transactions but would also make it harder for smaller miners to compete as the hardware requirements to compute and transmit these blocks would also increase. Causing a fear that mining would be more centralized. Additionally this can only be implemented as something called a “hard fork”.

On the other side we have those who would like to see something called “segwit” activated. Segwit = segregated witness. It’s a way of changing the location in the block where signatures live. And the new location doesn't count as heavily in the blocksize.

This does two things. The first is it effectively doubles the number of transactions that can be stored within the existing 1MB block. And second it fixes a problem called transaction malleability. That problem prevents an offchain scaling solution called “lightning network” from working. The good news is that segwit activation is done through  a “soft fork”. The concern is that it requires 95% of minors to activate. That is a very difficult standard to achieve, and may never activate.

The consequence of segwit is that enabling offchain transactions removes transactions from the system and handles them off the system. Which means that the miners won't see any fees from those transactions. AND the demand for transactions on the system goes down so the fees associated with onchain transactions get reduced. Consequently, people who mine bitcoin really hate this. They are primarily the ones who are blocking segwit activation. They want bigger blocks so that they can collect more transaction fees.

Splitting the blockchain
Both of these sides create a risk of a split in bitcoin. The reason to set the bar at 95% for segwit is to avoid a contentious fork where those that don’t agree continue to maintain a separate blockchain after the fork. If this happens, people who held coins before the fork would be able to spend them on each side of the fork, effectively doubling the number of bitcoin in the world. An increase in the monetary supply is not supposed to happen in bitcoin and would have very large economic impacts for those who hold bitcoin.

As a consequence any resolution to this has to involve a high degree of confidence that there will be only one bitcoin blockchain.

A compromise
A compromise has been proposed called “segwit2x”. This compromise is two things: 1) Activate Segwit by end of August 2017 and 2) double the blocksize by December 2017.  These two things are tied together such that if the first happens, the second must also happen. Remembering that segwit effectively doubles the number of transactions that can fit into a block and a doubling of the blocksize, this is effectively quadrupling the number of transactions that can be in a block. In addition offchain scaling solutions like lightning network become possible.  Segwit2x will be activated if 80% of miners signal support for it.

This is a compromise. The segwit crowd does not like the increase in the blocksize and the bigger block crowd thinks the blocksize increase is too small. But the good news is that more than 80% of miners have signaled support. So it looks like this will happen by the end of the summer of 2017. Which means that offchain scaling experiments can begin in earnest. And, hopefully, the transaction fees will start to reduce making bitcoin much more useful. There is still a risk that the minorities will maintain a separate blockchain. I do not know how to assess how big that risk is.

My opinion
I’m glad to see that some resolution to the scaling debate appears to be within reach. And I’m hopeful that it will not result in splitting bitcoin. Ultimately each side gets a little bit of what they want, and they’re going to be better off staying with the 80% (or more) majority than splitting.

But here's the thing. It may not happen. And it may turn out that bitcoin only becomes useful for large transactions. Transactions where the fee to send the transaction is rational. So say you're sending $10,000 worth of bitcoin. At that point a $2.50 fee doesn't seem that bad.  Whereas that fee for a $2 transaction seems exhorbitant. Who decides? No one person or group. This may happen because this is the bubbled up result of all of incentives in bitcoin determining that this is the most efficient use of bitcoin.  In which case, bitcoin will likely have a lot less value for poker players.

But for right now. No one knows, and bitcoin continues to be pretty valuable tool for poker players. Although I personally have modified my behavior. I used to immediately withdraw everytime I got over about $100 on each poker site.  Now I wait a little longer. Now I'm waiting for a withdrawal that's at least $200. And the reason is that I don't want to pay the high fees.  As the fees get higher, the amount of money that I'll transact must get bigger and bigger. At some point, if the fees get too high, I simply won't transact on bitcoin, and I'll convert to something else - maybe litecoin, maybe iota, maybe zcash. Who knows.

For now it remains bitcoin.

6/26/17 Update:
For those curious, Andreas Antonopolous just published a *FANTASTIC* video describing the different types of forks within bitcoin. Highly recommended.

 Here's another one describing the fee situation in bitcoin: