Sheldon Thomas


Bitcoin Trading a Hard Fork

With the release of Bitcoin Classic, the mining of the first block indicating support for it, and the outspoken support of the CEO of Coinbase for the 2-mb hard fork, there's an endless number of blog posts floating the web about what's happening to bitcoin itself. I'll try and not let this be that.

There aren't so many blog posts telling bitcoin-currency users (as in holders) what they should do about the upcoming situation themselves. Since almost nobody who might be using bitcoin for payments, speculation, or any of the properties of money does any mining, there's very little voting that currency users can participate in.

Like most market-tradeable events, the 2mb hard fork is binary. It happens if 750 out of 1000 blocks indicating support are mined and someone then chooses to mine a block with more than one million bytes. At that point, a binary change has occurred which is unacceptable to the 1-mb blockchain and the hard fork outcome is now binary YES.

From users' perspective this event occurs outside their control, which leaves these users with a question: how should one trade their currencies during such an event?

Perhaps the ever prescient Satoshi left a clue on this. In their only recent email to the bitcoin development mailing list, satoshi@vistomail.com said on August 15th, 2015:

When I designed Bitcoin, I designed it in such a way as to make future modifications to the consensus rules difficult without near unanimous agreement. Bitcoin was designed to be protected from the influence of charismatic leaders, even if their name is Gavin Andresen, Barack Obama, or Satoshi Nakamoto. Nearly everyone has to agree on a change, and they have to do it without being forced or pressured into it. By doing a fork in this way, these developers are violating the "original vision" they claim to honour.

Now, to be clear certainly not 'nearly everyone' has agreed upon this fork. A big part of the story is the immense opposition to it. Even if 75% of miners do indicate support, there are many developers and deeply smart bitcoin community folks who do not want this hard fork. After the fork, the 1-mb blockchain of Bitcoin Core will live on, even if it has very little mining power because most miners have switched to the 2mb blockchain. Because of this, all pre-fork bitcoins can be spent on both the 2-mb forked blockchain and the 1-mb blockchain which is still respected by 'Bitcoin Core'. All bitcoin holders will now have a bitcoin on either side for every bitcoin they had before, and they'll be able to choose which to sell, which to hold, and which to buy. But let's get back to what Satoshi said.

If you choose to value your 2-mb blockchain bitcoins and call those your money, you are obliging a modification to the consensus that, as Satoshi warned, was enacted by the majority against the will of the minority. Unless the Bitcoin Core team then decides to merge in the 2-mb fork post-event, you're also abandoning the intellectual capital of the Bitcoin Core team. Over time these two factors will cause miners to defect back to the now-weakened but still perfectly normal and functional 1-mb blockchain.

Therefore, I believe the correct trade is siding with the ideological in this case and refusing the 2-mb forked coins. Therefore to maximize profit sell your 2-mb blockchain bitcoins and buy 1-mb blockchain bitcoins immediately after the fork.

How?

Spend your bitcoins into a larger than 1MB block. Do this by repeatedly sending a transaction spending them back to yourself until one of those transactions lands in a greater than 1-mb block (aka the 2-mb blockchain only). Sending to yourself is the right way because you can try multiple times. You can't control (without help of a mining pool operator) whether the block that mines your transaction is larger than 1-mb. Once you've done this, load your private keys into Bitcoin Classic by opening your wallet.dat on a fresh install of Bitcoin Classic, send your coins to Coinbase in any block, and sell them and get dollars.

Now open Bitcoin Core, download the blockchain, and your coins will still be there, because the block you spent them in when you sent them to Coinbase is invalid to Bitcoin Core. Take the money from Coinbase, and go to another Bitcoin exchange which has pledged support for 1-mb blockchain bitcoins. Buy bitcoins there. Even if the 1-mb blockchain has slow confirmation times because it's mining difficulty dropped dramatically, it's difficulty will adjust and the problem will be temporary. Over time, miners will rejoin the weakened (but still functionally valid) Bitcoin Core blockchain, and as they do, Bitcoin Core bitcoins will appreciate again. There is no reason to think that the Bitcoin Core blockchain will be immediately dead, unmined, or invalidated in some way if a bunch of exchanges and miners cause this fork.

Based on tweets & decks from Coinbase, Coinbase claims they will "always support the longest valid chain" (slide 24). I believe what they are saying is that whichever chain has the most mining work done on it, at the highest difficulty, will be the chain that they make a market in. Since the fork requires supposed 75% miner participation, immediately after the fork Coinbase should be making a market in 2-mb blockchain bitcoins since it will have 75% or more of the current network mining capacity leaving 25% or less for the 1-mb blockchain. However, miners will quickly realize that Bitcoin Core isn't going to merge in the 2-mb code or move it's intellectual capital to the other side of the fork. Miner defections back to the 1-mb blockchain will occur, and as they do, people will suddenly realize that the largest re-org in bitcoin history is incoming, as the 2mb fork becomes just another 'not bitcoin' cryptocurrency. And those who made the right trade might see some of the biggest returns of the entire bitcoin story.

You get fiat money and 'unforked bitcoins'. If you use that fiat to buy 1-mb blockchain bitcoins gains can be multiplied to staggering factors, depending on your market timing. Whatever 'unforked bitcoins' means to you is up to you. To me that means something better than an election, it means a system in which the minority which cannot have the will of other imposed on them no matter what.