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.