< What's the deal with Bitcoin Core and Bitcoin Cash?

I usually put article dates on the meta page. Keep it evergreen. But this article is about current events, so I'll put it on top. November 23rd, 2017. Happy Thanksgiving for those of you in the USA.

The Bitcoin Brothers

For a long time, I considered myself very different from my brother. He bought Nikon lenses when I went Canon. He did Mechanical Engineering when I did Electrical. His first car was a Toyota Celica and mine a Toyota Corolla1.

I could go on, but you get my point. So many differences. And yet, we look, sound and act the same. When things are similar, it throws the differences into sharp relief. You see two identical cars; one is white, the other is hot pink. All you see is pink.

So it goes with Bitcoin Core (BTC) and Bitcoin Cash (BCH). Thoroughly similar on so many levels, but that just makes the differences so much more profound.

The Bitcoin blockchain forked 1st August 2017. This resulted in two Bitcoin chains, usually referred to by their "ticker" symbols. BTC, commonly called Bitcoin. And BCH, normally called Bitcoin Cash.

There is (an acrimonious) debate about which is the "real Bitcoin." Let's put that aside for the moment. If you're a casual observer and you're reading about "Bitcoin," it's probably BTC.

There are a vast amount of cryptocurrencies out there. In fact, as I write this I imagine more have launched. Even some you'd find obscure are trading 100s of Millions USD a day.

So there shouldn't be a question about many cryptocurrencies co-existing. But in the specific case of BTC and BCH, this may not be the case.

Because of their common heritage, BTC and BCH compete for the same "hashpower." Miners use their hashpower to calculate the cryptographic hashes that secure the blockchain. For some currencies, this could be someone with their computer at home. In the modern Bitcoin era, this is vast warehouses of specialty-made computer hardware.

Approximately every 10 minutes, a BTC and BCH miner produces a block for their respective chains. This block has Bitcoin transactions, plus a reward for the miner.

And the mining infrastructure for Bitcoin is immense. It recently was estimated to consume more energy than most African countries. This infrastructure secures the Bitcoin Block Chain. And it's big money.

So why are there two chains? Why did the chain fork at all?

This is where the conversation online gets murky. Underlying it is a years-long debate about the direction of Bitcoin. Most of the conversation pivots on technical choices and the teams behind each. You don't need to dig far to find yourself neck-deep in conspiracy theories, ad hominem attacks, and fake news. The whole lot.

You'll find plenty of passionate (and even more trolling) on these technical differences. Big blocks versus small blocks. Segregated Witness (SegWit). SegWit2x. Difficulty Adjustment Algorithm (DAA). ASICBOOST. Layer 2. VISA-scale payments, Vaporware mining rigs. That's the tip of the iceberg. There are plenty more.

For the moment, put that aside. The technologies are less of specific importance. Actually. They're critically important. But more often than not they're used to obfuscate the conversation.

More useful is the direction they're taking Bitcoin. Even a small change is controversial. Some changes are big. Some could be tiny. But with Bitcoin, you're taking that change and blowing it up to a Trillion dollar scale. Both the stakes and the rhetoric get high.

For Bitcoin enthusiasts, these are topics of high passion. Decentralization, anti-fragile, peer-to-peer. Bitcoin leans libertarian. Taking down banks and corrupt financial institutions.

These beliefs underpin both sides of the BTC-BCH debate. And yet, you'll see a tidal wave of arguments that one or the other is centralization. Too much power to the miners, or the nodes, or whoever.

You'll see advocates for either side make passionate (and believable) claims that the other is slippery close to centralization. "Centralization" being antithetical to all Bitcoin.

Much of this communication is via memes, trolls and a whole lexicon of meme-terminology. If you're an outsider getting your first look into this multi-billion dollar industry, you're in for a surprise on the level of dialogue2.

So what's the difference?

At its core, BTC is going down a track of a "store of value." Others have called the chain a system of settlement. The Bitcoin become a piece of digital gold. As the chain gets mined, the price of BTC is set to escalate. It's promoted as the safe place to stash and grow your wealth.

BTC has limited transaction volume. Rather than solve this in BTC, the proposal is to use sidechain (Layer) solutions. Working to the side of BTC, these solutions are intended to provide the high-volume. Eventually, this all gets settled back to BTC.

Mining is critical to this Store of Value. I'd argue that the mining is the value. Although experts like Fred Wilson put forward a different view.

Either way, mining escalated to meet the value of BTC. Each block "mined" gives the miner a reward in Bitcoin. That reward is Bitcoin itself. Each time the cost of BTC goes up, the reward from mining goes up.

When the mining increases, the BTC algorithm adjusts to make mining more computationally difficult. This is called "Difficulty Adjustment". For BTC it happens approximately every two weeks.

It's easy to see how this rachet can work. Price inflation encourages more investment in mining. It doesn't matter if you believe mining leads the price or price leads the mining. The mining infrastructure is a reflection of the escalation of the BTC price3.

The BCH philosophy takes a different approach. The BCH community wants Bitcoin to be a means of exchange and payment. They also believe in the strength of the chain. These payments need to be on the blockchain, not externalized into other systems.

BCH wants to scale Bitcoin on the Bitcoin chain. The theory is the more people using the chain, the more robust it is. BCH proponents point to evidence that the chain can scale to meet demand. BTC proponents are less sure4.

These philosophies may not seem diametrically opposed, but they are in practice. Each puts forward a different view on how Bitcoin grows and how Bitcoin is robust.

BTC wants to be digital gold. A store of value that is robust through adoption and layers of new technology. It's supported by the "Core" development team. A group of high technical ability. Faith in the Core team is important to many BTC-backers.

BCH wants to be ubiquitous. Proponents see the robustness emerging from the network. If people globally are using BCH to exchange payments, make transactions and save. This network brings both the robustness and the value.

I'll fess up. The BTC model makes me nervous. As a store of value, it's vulnerable to corrections. If a "store of value" loses value, it's integrity could shatter. Perhaps that'll never happen, but it's not hard to at least find scenarios where it does.

I like how BCH is robust through its utility. It also has underlying fundamentals that make it possible to price. I've taken the same approach with BTC and struggled to find the fundamentals. Equally, for BCH to succeed, it needs adoption. And that remains a big question.

And yet, that BTC versus BCH could be academic. Both are under pressure from other coins ("Alts"). There is plenty of innovation happening outside Bitcoin.

Other narratives often follow the "true Bitcoin" or "Satoshi's vision." These discussions are moot. The key point is both philosophies are valid. It's a matter of personal belief and working through the scenarios yourself.

The (Very) Short Horizon

Let's zoom back in to November 2017.

"The Flippening" is a transfer of value from BTC to BCH. The "flip" is intended to mean BCH is now worth more than BTC. Right now5 BCH hovers around 10-15% of the BTC price. The mining hashpower follows the same metrics, as the mining infrastructure will work the chain that gives the highest reward.

The flip may seem like an unreal prospect, but it's already happened to a limited extent. Early in November, the BCH "Emergency Difficulty Algorithm" kicked in. The EDA coincided with major BTC players deciding to abandon the SegWit2x fork.

It's a complicated cocktail, but the result was easy enough to see. Cancellation of BTC SegWit2x fork caused some to change positions from BTC to BCH. In a similar timeframe, the BCH difficulty stepped down. The BCH price elevated and hashpower flooded over to BCH.

BCH lept from a steady state of 300-400 USD to the high 2,000s. BTC shifted sharply downwards. At the same time, the transaction queue (mempool) on BTC blew out. Costs of BTC transactions escalated. Both of which made the issue worse. It's since normalized, but pundits saw at least the hallmarks of a bank run.

Since that point, BCH has transitioned to an adaptive difficulty adjustment, called the DAA. The DAA leveled out the hashpower required to maintain the BCH chain. Many more prominent players have been taking positions between BCH and BTC. While still volatile, this has at least causes some leveling out between the two coins.

The next major event is the difficulty adjustment for BTC. The adjustment will set the mining difficulty for BTC for (approximately) the next two weeks.

The exact change and the time it'll occur bounces around. Mining is stochastic, so there is some randomness. Also hashpower moves in and out of the system according to BTC-BCH price, time zones and energy costs. You can track this at cryptothis.com or fork.lol. Right now the adjustment is lining up for tomorrow (Nov 23) early afternoon Pacific Time.

The reason why this difficulty adjustment is material is the timing between BCH and BTC.

The previous "flip" of hashpower was short-lived. One key exchange locked out and the price of BCH dropped. With BTC locked into a new difficulty level, and with BCH having an adaptive algorithm, that may change.

If BCH price jumps, hashpower will move to this chain again. This will put pressure on the BTC network, slowing transactions. If this does occur, this will put downward pressure on the BTC price. As the BTC price drops, hashpower leaves, compounding the problem.

With a high degree of speculation built up in the BTC price, it's tough to say how damaging a sharp correction will be.

I'm not going to say the "flip" is going to happen. But it is at least a plausible scenario, even if you disagree on the probability. It's also possible the contagion of a sharp correct affects BCH equally.

It's true that people are anticipating it. It's volatile because it's volatile. To make it more complex, there are multiple communities at play. BTC and BCH sentiment in China, Japan, Korea and the USA is obviously different. This is evident in price shifts across time zones and region-centric exchanges.

Over the next 24 hours, many traders will be on edge trying to just movements up and down.

Be Careful Out There

If you're new to Bitcoin and cryptocurrencies, take caution. There are plenty of articles out there talking about Bitcoin being worth Millions.

The best view of cryptocurrencies is high-risk, high-reward. As part of a blended, diverse portfolio its got a place.

Volatility is part of the cryptocurrency world. However, even if you're taking very long-term positions, this is a unique window in time.

Plenty of people got wealthy by getting in early. The fear of missing out is real, but the cryptocurrency journey is going to be long one.

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Footnotes

  1. The Celica was far cooler. But that Corolla is 33 years old now, and I imagine it's still running. 

  2. "Hodler, To-the-moon, Golden Lambos, Whales, The Flippening." This is the noisest layer, but it should give any new investors at least some pause. Cutting through to the signal is the most important skill if you're a serious investor. 

  3. This has an environmental impact too. This is a major challenge for the Bitcoin community to face. I'll discuss this another time. 

  4. The first foray into this discussion is the Big vs Small Blocks debate. BCH moved to 8MB blocks when BTC stuck with 1MB blocks. 

  5. Actually, some miners are actively choosing sides, but for the most part, this is true.