What to consider when investing in Bitcoin and Bitcoin Cash in 2017

Disclaimer: This article is not intended as investment advice, but only my (author's) personal opinion. Cryptocurrency is a risky industry. Never invest beyond your ability to bear. It is best to consult professional advice before making any investment.

Investing in Bitcoin or Bitcoin Cash presents both huge risks and huge opportunities.

In this article, I will explain what makes Bitcoin valuable and describe the historical issues surrounding Bitcoin and Bitcoin scaling. We will focus on analyzing Bitcoin and Bitcoin Cash, as well as the upcoming SegWit2x, and analyze their impact and dynamics.

These are confusing times for investors

Some quick technical analysis:

Bitcoin’s price has more than quadrupled since January, a parabolic rise that has become a tricky thing for investors and traders.

The moves last much longer than anyone expected, which makes the market very risky. At the same time, such markets tend to have big corrections, which makes traders chase the market.

If you believe Bitcoin is not a historic opportunity, the best approach is to wait for the market to become clearer and larger.

Now let’s look at the fundamentals. You might be wondering:

“Why has the value of Bitcoin surged?”
“Will Bitcoin continue to appreciate?”
“What is Bitcoin Cash?”
“What is this ‘SegWit’ and ‘SegWit-2x’ I keep hearing about?”

The original Bitcoin

Bitcoin has many properties that make it one of the most ideal forms of money imaginable.

In general, Bitcoin is more scarce, durable, portable, divisible, and exchangeable than fiat money (issued by governments), and it is like a precious metal like gold. Bitcoin is easier to verify its authenticity and more difficult to counterfeit than other forms of currency.

Bitcoin is a payment system that is faster, cheaper, and more reliable than any traditional payment system. You can send Bitcoins anywhere in the world, at any time, and for almost nothing.

Bitcoin's biggest weakness is that it is not as widely used as other forms of money. Therefore, it may never gain mainstream adoption, but at the same time, it has unique potential. This creates a high-risk, high-reward scenario and is why early adopters have not been successful.

At this stage, there is still a ton of opportunity to invest, and it can be said that this is the best time to invest because there is still huge upside and the risk is much less than it was 5 years ago. Cryptocurrency is clearly here to stay. Because of this, mainstream hedge funds and investors are starting to invest heavily in Bitcoin.

The Bitcoin Scaling Debate

Unfortunately, the promise of Bitcoin (and its fundamental value) is threatened if it fails to meet the needs of an increasing number of users. This threat is already here as Bitcoin has become increasingly slower and more expensive to use.

For the past four years, the bitcoin world has been at war with how to “scale the network” — in other words, how to increase bitcoin’s transaction capacity to accommodate more users .

While this may be old news to those in the know, it is extremely important if you are an investor.

There are two competing views, one of which is consistent with the writings of Bitcoin creator Satoshi Nakamoto and his vision for Bitcoin as "peer to peer electronic cash." This school advocates increasing the size of Bitcoin's "block" to scale the network.

The second school of thought, espoused mainly by developers known as “Core,” is that blockchains cannot scale effectively. They argue that since Bitcoin cannot scale, it should become a settlement layer for a secondary system that runs on top.

Misleading Bitcoin Core Developers

It's not that I'm rude, but sometimes the truth is unpleasant to some people.

As surprising as this may sound, the fact is that Bitcoin Core developers have been spreading misinformation and engaging in a massive censorship campaign for years to prevent open and honest discussion of these issues.

This may be controversial, but they are highly relevant and I can give you some information you can use – without digressing from the important topic. If you don’t believe me, you can read some of my previous articles that discuss this in more detail, or you can do some research on your own.

Regardless, one of the main themes of the “Core View” is that hard forks are dangerous, meaning that a hard fork is a system upgrade that is not backwards compatible with older network nodes.

SegWit

As part of this myth, hard forks must be avoided, and the Bitcoin Core development team (Core) proposed a solution in 2015 called "Segregated Witness" (SegWit). SegWit is complex (5000+ lines of code), and introduces radical changes and dangerous economic incentives.

Meanwhile, those who simply wanted bigger blocks came up with a solution by adding a version of the software called Bitcoin Unlimited (“BU”).

At the beginning of 2017, BU had about 40% miner support, while SewWit had only about 30% support, and neither side could reach the majority needed to force an upgrade to the system.

New York Consensus, UASF and UAHF

Following a long-running stalemate in the dispute, an agreement called “SegWit 2x” was reached in May 2017, which was intended to be a compromise, including first activating SegWit and then expanding the block size from 1M to 2M within 6 months (Translator’s note: 494784 executed a hard fork).

The agreement was worked out in a closed-door meeting in New York City that included a wide swath of the industry, excluding Core.

This is where things start to get more interesting:

The “2x” thing is going on, and a proposal to (allegedly) force the activation of SegWit at the base level is gaining a lot of attention. It’s called a User Activated Soft Fork (UASF).

In response to the destructive UASF, Bitmain has developed a user-activated hard fork (UAHF) protection measure.

If the SegWit2x agreement was not implemented, UAHF would have been just a contingency measure, however, the 2x agreement did move forward and Bitmain did not implement the UAHF plan.

But to everyone’s surprise, UAHF was still activated (even though the 2x protocol was still being executed), and a new software called “Bitcoin ABC” was implemented.

This attempt gained a lot of traction and resulted in a hard fork of Bitcoin into a new currency called Bitcoin Cash, which increased the block size to 8M and did not use SegWit.

Bitcoin Core , Bitcoin Cash and Bitcoin 2x

As of August 1, 2017, Bitcoin Cash exists as its own currency: Bitcoin's fork, meaning that all Bitcoin holders as of August 1 also become Bitcoin Cash holders.

Bitcoin Cash is currently the fourth largest cryptocurrency with a market cap of $5 billion and a price of $300.

93% of miners have stated their support for the New York Consensus, but “Core” was never part of that protocol, and in fact they modified their software to reject support for SegWit2x.

This could mean that in November, Bitcoin could split again and we could end up with 3 different versions of Bitcoin.

There are many reasons why this might or might not happen, but we won't discuss those. Instead, let's look at the possible outcomes.

What's the point?

If SegWit2x is not activated, then there will only be Bitcoin Core and Bitcoin Cash. Arguably, this is good for Bitcoin Cash, as there will be more differentiation between the two Bitcoins, with Bitcoin Cash having a clear scalability advantage and lower fees.

If SegWit2x does activate (and there is no split), it would arguably be negative for Bitcoin Cash, at least in the short term, and positive for Bitcoin, as it would have the ability to hard fork and increase the blocksize.

The third scenario (Bitcoin splits, and we have 3 Bitcoins) is more unpredictable. This may be good for existing Bitcoin holders because they will have assets on two chains, just like what happened when Bitcoin Cash split.

It is doubtful whether all 3 versions will survive. Probably the least likely version to survive is the pure SegWit version, because it has everything that SegWit2x has, and also has things that SegWit2x does not have. And the SegWit version has even less hashrate support.

However, the Core team could distribute it to different proof-of-work algorithms, potentially yielding some surprises.

Hard Fork Fear

The market didn’t seem to be spooked by the Bitcoin Cash split, with the price rallying to a high before August 1st because everyone wanted to receive their “free coins”, and perhaps for the same reason, the market won’t be afraid of the SegWit2x split.

It is possible that too many splits could cause investors to lose confidence in the Bitcoin brand because it would be seen as unstable, but I do not buy into this view because there is clear protection for their investment in the history that many people know and can explain.

To me, Bitcoin would clearly be more competitive than Bitcoin Cash if Bitcoin also increased 2x. But doing so is clearly not in line with Core’s agenda.

What is strange is that many people believe that Bitcoin will not upgrade to 2x because many "small blockers" (Core supporters) and "big blockers" (Bitcoin Cash supporters) do not welcome the 2x upgrade.

Bitcoin Max and Network Effects

Bitcoin has a larger market cap than any other cryptocurrency, primarily because it has the first-mover advantage and the largest network.

The so-called network effect is self-sustaining because users (new and existing) are naturally drawn to the largest network because it has the biggest benefits. This is why Facebook has no serious competitors.

However, network effects are not absolute. If a network becomes unreliable and no longer useful, it will lose its users. If another network becomes significantly better, it will start to attract users from the old, larger network until the new network becomes king.

This is exactly why when Facebook replaced MySpace as the main social media network, the user experience of Facebook was much better.

Although Bitcoin Cash takes a different approach, Bitcoin Cash is a direct competitor to Bitcoin, and perhaps only one Bitcoin will capture the users, merchants, investors, and miners.

It was 'Bitcoin' then.

But remember, network effects can be eroded and challenged. If Bitcoin doesn’t offer competitive fees soon, it will continue to lose users and merchants to Bitcoin Cash. Investors will follow, and then miners.

Institutional investors aren’t necessarily the smartest money in Bitcoin

Typically, institutional investors are professionals who are considered the “smartest money” because they invest and trade for a living.

However, Bitcoin is a new asset class and many hedge funds are not even close to being in the game. Many professional investors who have not invested in Bitcoin say “I don’t understand this.”

Is Bitcoin a bubble?

In the absence of real (non-speculative) demand, markets will bubble up and even collapse. In this case: when the currency is not actually used for payment, it is built on its reputation.

Some major currencies have already used SegWit and called it a good scaling solution, but in reality it is not. In addition, many people mistakenly assume that SegWit2x is a completed transaction.

I do not view Bitcoin’s price action to date as a “bubble” because Bitcoin is fundamentally a superior payment system and form of currency.

However, if investment continues to flow into Bitcoin, which is not actually a useful payment system (because Bitcoin is expensive and slow), then a real bubble will form, with potentially terrible outcomes for investors.

A successful investment strategy

The core roadmap of Bitcoin Core is to build second-layer networks, but these layers are unproven in terms of technology and demand, and may not be as good as traditional on-chain Bitcoin.

This is why some people say that Bitcoin Cash is the real Bitcoin because it will continue to run the way Bitcoin has always run, while Bitcoin Core wants to make radical changes.

Bitcoin Cash has better fundamentals, but a smaller network. In a way, comparing Bitcoin Cash to Bitcoin is like comparing Bitcoin to Fiat when Bitcoin first came out.

The difference is that Bitcoin could swallow up the value proposition of Bitcoin Cash through large blocks, but this seems unlikely to happen, as the whole reason Bitcoin Cash came into being is to prevent this from happening to Bitcoin.

Holding Bitcoin and Bitcoin Cash is a successful strategy, and at least one of them is continuing to realize "peer to peer electronic cash", thus making Bitcoin a real application in the future.

In this way, Bitcoin Cash acts like an ongoing regulator that will always be there no matter what happens.

Mining Wars

To complicate matters further, Bitcoin Cash uses the same SHA-256 authentication algorithm as Bitcoin, meaning miners who invest in ASIC chips can mine either chain.

If we assume that miners are rational and profit-driven, they will mine on the most profitable chain.

Bitcoin Cash initially had the same mining difficulty as Bitcoin, but after it forked, a new algorithm was used to quickly reduce the difficulty.

If Bitcoin Cash can make a profit for a longer period of time or is more profitable than Bitcoin, it will cause a large number of miners to switch to the Bitcoin Cash chain.

snatch?

If miners leave Bitcoin and move to Bitcoin Cash, it could have devastating consequences because Bitcoin can only adjust difficulty every 2016 blocks. The worst case scenario for Bitcoin is that it is stuck and forced to use a new POW algorithm.

If this happens, Bitcoin Cash will explode in value in a very short period of time, while the price of Bitcoin will plummet.

This could be one of the reasons why Bitcoin is so expensive right now. Perhaps pumping is happening to prevent mining profits from flatlining.

Given all these factors, an investment in Bitcoin Cash has a favorable rate of return at the current time (in my opinion).

But we also need to acknowledge that Bitcoin has demonstrated impressive resilience and global demand, so it is important to proceed with caution when considering an investment.

in conclusion

This is a complicated time for Bitcoin. I encourage you to do your own research and thinking. Personally, I am holding Bitcoin while continuing to accumulate Bitcoin Cash.

If I were a brand new investor today, I would consider buying small amounts of both assets using a dollar cost averaging strategy.