Tag Archives: hard fork

What I am doing during the hard fork drama

Published / by kgao

The possibility of a hard fork is on everyone’s minds. It’s reflected in Bitcoin’s price volatility, in the altcoin run-up, and in the toxic and sometimes panicked discussions on r/btc and r/bitcoin. Many great companies and thought leaders in the space have either taken positions or discussed what they have done / are planning to do in such an event. There’s never been more to read and analyze and for a text junkie like me it’s fantastic (in a way).

What should you do with your Bitcoin portfolio right now?

The safest answer is nothing. Just hold onto your Bitcoins and do nothing until (or if) a hard fork happens. I expect the community will come to a resolution by July or August, if not sooner. The price will continue to be volatile but in the long-run (1-year plus), there is no doubt in my mind Bitcoin is the cryptocurrency leader and won’t lose its position.

If you only hold Bitcoin, I recommend diversifying into altcoins in a rough index-like approach. For example Ethereum is roughly 1/4 of Bitcoin’s market cap, so it would be good to eventually have a comparable stake in ETH. You may not want to buy that position all at once, because I think altcoins are overvalued right now. Dollar cost average and invest weekly. My own portfolio right now contains BTC, ETH, DASH, XMR, and a little DCR.

Here’s what I’ve done:

I sold ~5% of my Bitcoin stash in early March when it hit the ATH, and then bought ~1% back after the dip to $1150 brought on by the SEC’s denial of the COIN ETF. Right now the price is trading around $950. It feels low, but it could go lower. I will probably dollar cost average and steadily buy more. Sub-$1000 Bitcoin just doesn’t reflect the value in the network and community and technology. This is more stark and apparent when you compare Bitcoin to the recent price performance of altcoins like Dash and Monero and even Ethereum. But because the next few weeks, maybe months, will continue to be volatile, dollar-cost-averaging seems a better strategy than a big one-time buy.

While altcoins hold promise and are good for portfolio diversification and network innovation and potential upside, Bitcoin is still the best bet in the cryptocurrency space and the network that’s likely to win. When the hard fork drama is resolved, the price will rebound too and probably with a vengeance. Once I figure out exactly how and what I’m doing to buy back in, I’ll share in the portfolio letter that I send around.

Let me know if you have any questions!

March 21 Bitcoin News Letter: Crypto gets crazier by the day. Long email ahead. Sorry

Published / by kgao

The below is an email I send out, just bcc for now, to a small group of readers. Then post here a few days later. If you’d like to be on the list, tweet or email me and I’ll add you. At some point I’ll migrate to MailChimp. Also I didn’t link to the sources below because I was too lazy.

Crypto gets crazier by the day. I thought this email would just be a brief summary of the ETF rejection but nope. Crypto has a mind of its own and the mind is accelerating…

The SEC rejects the Winklevoss Brothers’ COIN ETF application. The top reasons given:
#1 the major bitcoin markets are largely unregulated
#2 the exchange COIN will use for ETF basket creation and redemption (Gemini Auction) is too thinly traded

While the door remains open for future approval, we won’t see a bitcoin ETF in 2017. Here’s the full SEC report. Bitmex CEO Arthur Hayes had a great write-up on the ETF’s denial. Subscribe to his newsletter here.

But people almost immediately stopped obsessing about the ETF and began obsessing about a potential hard fork where Bitcoin splits into two competing versions:
#1 Bitcoin Core (Bitcoin as we know it today), and
#2 Bitcoin Unlimited, a version that allows the blocksize limit to increase by miner consensus

If a hard fork happens, you would effectively double the number of coins you own. But each version would trade at a different price and have different features. Most people think its bad for Bitcoin given brand confusion and reduced network effects and security risk.

Roughly speaking a hard fork is like a stock split, if the newly created share were to represent a second company, and the companies are now battling each other for marketshare and mindshare. Yup…pretty weird.

Very roughly speaking, developers and exchanges support #1 Bitcoin Core and large miners and an outspoken group of users support #2 Bitcoin Unlimited. But this is a hornet’s nest and the above sentence is like snapping a photo of the nest using my iPhone from 50 meters away.

Bitfinex allows you to split your Bitcoin into tokens representing the two competing implementations and trade them. Currently Bitcoin Core is trading at 4x the price of Bitcoin Unlimited [source].

A nice visual summary of the different constituents with influence over the hard fork. From my perspective the groups with the most power seem to be, in falling order: Developers. Miners. Exchanges. Large investors. [source]

In other Bitcoin news…

The idea that Bitcoin is stale and that Ethereum will come to the rescue without stumbling on all the same milestones of growth that Bitcoin has overcome is a fiction. – Andreas Antonopoulos [source]

Bitcoin transaction fees are growing and companies are starting to pass those fees onto users. Coinbase will no longer pay off-site transaction fees for its users [source] and Bitpay raised its minimum invoice to $1 USD [source].

As an asset, Bitcoin’s price correlation with other store of value assets such as Gold, US sovereign debt, and safe haven fiat currencies is surprisingly low [source]. Continues the “Bitcoin as uncorrelated asset” storyline which started with ARK’s seminal paper [source]

Former Legg Mason investment chief Bill Miller’s evaluates bitcoin by imagining 2 long-term outcomes and assigning a probabilistic weight to each of them: Bitcoin as the new Gold, and Bitcoin as a leading payment processor [source]. Interesting to understand how an investing legend approaches a new asset like Bitcoin

Bubble expert says Bitcoin not a bubble for following reasons [source]:
#1 Not a lot of leveraged trading (eg, on margin, using derivatives)
#2 Governments not propping up prices
#3 The market of new users and potential investors is nowhere near saturated

People keep arguing Bitcoin mining wastes energy [source]. But they seem to overlook the fact that up to 99% of Bitcoin transactions already happen off-chain, both within companies and between them. For example crypto gambling sites are known to process millions of daily transactions off-chain [source]

Chris Burniske: Below $875 per coin, it doesn’t make sense for miners to deploy new machines. Below $337 per coin, miners are actively losing money [source].

China continues to slowly increase regulation and oversight of local Bitcoin exchanges, the latest salvo being the potential requirement of in-person registration for new users [source and source]. @cnLedger is a must-follow for China crypto news

In Ethereum news…

The Ethereum ecosystem continues to grow and this is starting to reflect in the price. This is even with minimal participation from China and Japan which together represent <2% of ETH trading volume [source].

Darknet market AlphaBay will accept Ethereum for payment starting in May [source], further validating ETH as a payment currency.

Ethereum is the only blockchain with a common continuum between public and private implementation environments. – William Mougayar [source]

Ethereum also went through a hard fork for entirely different reasons back in October of last year. Grayscale published an investment thesis to explain why they support the minority chain Ethereum Classic (ETC) over Ethereum (ETH). Main reasons seem to be [source]:
#1 ETC maintained its trustless nature by refusing to hard fork and return DAO investor funds
#2 ETC won’t switch to Proof of Stake until ETH can prove it works and is stable
#3 There’s a hard cap on ETC supply unlike ETH which is still unspecified

In altcoin news…

A Dash investor analyzes its decentralized funding process and finds: 90% of funds go to core team for salary and marketing. And while a vote to increase Dash’s blocksize limit was quickly passed, transaction volumes are so low that it won’t be needed for some time [source].

Early Coinbase employee Nick Tomaino thinks Monero is leading the race to be the top privacy-centric altcoin [source]. (this was written two months ago so his opinions may have changed, but it’s still interesting to read his thought process)

ICOs remain hot. From Coindesk [source]:
Perhaps most notably, almost a third (29%) of entrepreneurs without ICO fundraising experience had seriously considered raising with a token sale, and nearly all (91%) of investors who had participated in an ICO said they would consider participating in future blockchain token launches

Thoughtful analysis of the WeTrust ICO [source]. The strengths and weaknesses he identifies in WeTrust are proxies for ICOs in general. Strengths such as access to new customer segments and investor groups, and increased transparency in a company’s operations and product development. Weaknesses include regulatory uncertainty, the influx of fast / speculative money over long term investment, lack of proven go-to-market and distribution strategies.

That’s it, thanks for reading! If you actively trade crypto and need a good tool to track your performance and portfolio, try CoinTracking.info. Impressed with its ease of use and exchange integration. I have no financial relationship with them.

I send a “news letter” every other week and a portfolio letter sometimes. Some of the content is also published here. Love to hear from you and talk crypto here or on Twitter.

Bitcoin newsletter: ICOs still red-hot and top-heavy; I increased Dash holdings and took some BTC profits

Published / by kgao

Here’s the email newsletter that I send out every two weeks. For now it’s just a bcc-ed email list, though I post it here a few days later.

Since these newsletters only get longer, here are the highlights:

  • In this author’s view the altcoins most likely to outperform Bitcoin in the near term are Ethereum and Dash (although since I took a big position in Dash @ $17, it has more than doubled to $44)
  • ICOs are still, on average, opportunistic grabs by questionable projects for dumb money, but the money is getting smarter, and the projects / teams are getting better
  • Blockchain tech enthusiasm is waning – as it should – even as the ecosystem and its demonstrable value are growing
  • China’s regulatory influence on bitcoin is waning even as it doubles down on its already leading position in mining

My portfolio: Increased Dash, took small Bitcoin profits

  • I increased my Dash position to 9% of my portfolio, and a portion of that to a Masternode share program, where you earn an estimated 10% annual return on your Dash holdings for providing a level of security and governance for the Dash blockchain. I was very bullish at $17 but it’s risen to $44 in less than a month. Would still recommend, in a balanced crypto portfolio, hodling a small stake in Dash
  • After bitcoin hit $1200, I sold 5% of my stake to take some profits. Had previously told myself that when bitcoin reached its ATH I would sell 20% of my portfolio, although I ended up only selling 5%
  • Here are my current holdings:
    • Bitcoin: 80%
    • Ether: 9%
    • Dash: 9%
    • Monero: 1%
    • Litecoin: 1%

Vinny thinks a bitcoin ETF is too early and not good for the ecosystem [source]. He thinks an ETF should wait until bitcoin’s price is in the $3-5K range. An ETF would cause a price bubble and these boom/bust cycles slow bitcoin’s adoption.

ICOs are still red hot, and unevenly distributed. Asset management platform Melonport raised $3M of tokens in under 15 minutes [source] and cloud computing network DFINITY raised almost $4M in a day [source]. 80% of ICOs are held on the Ethereum blockchain, and in 2016 there were 64 total ICOs raising $103M [source]. While ICOs are improving, I’d still avoid investing unless you have an insider’s edge or significant discount on the tokens.

The first-come first-serve frenzy of Melonport’s crowdfunding has resulted in a distribution to less than 150 Ethereum addresses with an average buy-in of over $15,000 — both numbers being extremes in recent crowdsale statistics. [source]

China’s regulatory influence wanes. The PBOC is running out of regulatory moves, and with each move the price of bitcoin falls less. The volume on LocalBitcoins (the peer to peer bitcoin trading platform) saw a surge in CNY volume from 2-3M per week to almost 60M ($8M USD) [source].

…while Chinese miners double down. Bitmain – the world’s leading producer of bitcoin mining rigs and currently its largest mining pool – built and sold what will become the largest bitcoin mine in the world, to be based in Xinjiang or possibly Szechuan. [source 1, 2] Would increase network hashrate by 25-33%. Bitmain’s CEO Jihan Wu is an outspoken supporter of Bitcoin Unlimited (BU) although Bitmain has explicitly stated it “has no say in what pool the users of that farm may choose to mine on.” [source] Business projects of this scale can’t go forward without the explicit approval of the Party organ at multiple levels

If you’re not reading Bitmex CEO Arthur Hayes’ notes, highly recommended. Here’s his analysis of the COIN ETF.

Blockchain is more hype than substance [source]. The author’s highest value use cases: #1 decentralized digital currencies, #2 micro payments, #3 proof of existence on blockchain. Quotes:

  • Lots of hype. Not many tangible solutions. But a foundation for opportunity exists. Add it to your innovation priority list.
  • I for one am for the government having the right level of visibility to keep us safe, however Blockchains present a very creepy possible future that I don’t like the feeling of. At all.

So, when IS a blockchain useful?
“Blockchains make sense for databases that are shared by multiple writers who don’t entirely trust each other, and who modify that database directly. But that’s still not enough. Blockchains truly shine where there is some interaction between the transactions created by these writers.” – Gideon Greenspan [source]

A simple breakdown of Segwit and Bitcoin Unlimited, the two competing poles of Bitcoin’s future [source]. In this author’s view, BU has a weaker technical team but more alignment with the broader Bitcoin community, while the team behind Segwit is second to none technically but has #1 conflicts of interest vis a vis Blockstream and #2 an operating style that resembles “my way or the highway”

I think a hard fork is likely. While a hard fork comes with significant risk, I do think the Ethereum / Ethereum Classic hard fork was not a disaster as some people made it out to be:

I do want to make the point that hard forks can be beneficial (both logically and empirically) when users have irreconcilable political differences that they are willing to leave the community over.  Existing holders have nothing to fear from a split: their value will continue to exist on both sides of the chains, and remains protected regardless of outcome. – Philip Daian [source]

If you invest in crypto, read Woobull! One of the smartest blogs specifically on crypto investing. Examples:

  • Even applying a $10m market cap filter which should bring us beyond scam-coins, to coin platforms that should promise higher returns from their new and untouched markets, these guys (well below 10 coins introduced per year) continue to be outperformed by bitcoin. [source]
  • For a currency with a tiny market cap of $10b, compared to say the Euro’s M1 money supply of $7.5t, bitcoin’s price stability is ridiculously good. [source]

Analysis: Bitcoin price most correlated with Litecoin [source 1 and 2]. Dash and Monero come next, then Ethereum. But these three pale in comparison to Litecoin.

More analysis: Gold now shows a strong negative correlation with Bitcoin price [source]. Prior research had shown a positive – albeit weak – correlation.

Crypto funds are growing and attracting Wall Street money [source]. An article I wrote that divides professional bitcoin funds into 3 categories: #1 public buy and hold funds (eg, GBTC); #2 private buy and hold funds (eg, Pantera); #3 hedge funds (eg, Metastable, Polychain).

Emin Gun Sirer’s State of the Bitcoin network [source]. Takeaways:

  • “…the provisioned bandwidth of a typical full node is now 1.7X of what it was in 2016. The network overall is 70% faster compared to last year.”
  • There are 5700 nodes on the Bitcoin network, with a 2.6% stale rate which the authors think is “unexpectedly high”

Enterprise Ethereum announced on February 28th. Ether’s price has risen ~75% in the 3 weeks surrounding the announcement [source]

  • Ethereum has a larger community of volunteer developers, and more computers on its network than Bitcoin. And the members of the new alliance — which include Banco Santander, BBVA, Credit Suisse, ING, Intel, Thomson Reuters and UBS — say the real-world testing of Ethereum makes it stronger than the alternatives.
  • “Ethereum has this massive advantage of having the public network that has been tested for two years,” Mr. Gray, of Microsoft, said.

What exactly is a smart contract?
Smart contracts were first defined in the early 1990s as “a computerized protocol that executes the terms of a contract” (Szabo, 1994). [source]

Quotes of the week

By contrast, the Chinese government hasn’t taken much action against bitcoin. They have put in a “kill switch” but they are not using it, because their main concern is to maintain China’s foreign exchange reserves, and moving money from bitcoin doesn’t negatively hit their reserves. The Chinese government has put in the ability to shut down bitcoin transfers if they want do, but right now they don’t want to. – Bitquant [source]

…WHEW THAT’S IT. THANKS FOR READING!

Hit ‘reply’, find me on Twitter @kgao, forward it along. Happy to add other emails to the distro list too.

Cheers and happy investing,

Kevin