Bitcoin (Cash): Investment Thesis
Bitcoin has the potential to become the best and fairest form of money to ever exist. It essentially rolls gold, cash, and our credit card system into one. It takes the strengths of each and leaves the weaknesses behind. It has the limited supply quality of gold, but can be used to purchase everyday items. It has the speed of a credit card, but respects and protects your privacy. Transactions are settled instantly like cash, but are recorded on a public ledger. Here are further comparisons to our modern day financial system:
Unlike credit cards, there is little cost in sending money from one party to another
Unlike credit cards, there is no threat of fraud or charge-backs
Unlike government currencies, you will always know the exact quantity in existence
Unlike banks and credit cards, transactions are settled in seconds and minutes, rather than business days
Unlike banks and credit cards, funds are almost immediately available for use
Unlike banks and other money transfer systems, there is no added cost to send money outside the country
Unlike government currencies, the threat of a rapidly increasing money supply does not exist
Unlike government currencies, a country’s stability is not at risk due to currency mismanagement
Unlike gold, storage costs are minimal
Unlike cash, it leaves a trail
With Bitcoin, we have money that is issued in a predictable, automatic, and transparent way. With Bitcoin, we have securable money that allows us as individuals to be our own bank. With Bitcoin, we don’t need to worry about government debt loads or inflation. With Bitcoin, we have money that knows no borders, is perfectly divisible, quickly transferable, and transaction markable. With Bitcoin, there are no credit card fees for merchants upon sale, and once funds are sent to you, they’re yours. You no longer need to wait business days to receive or use your money.
These revolutionary aspects are what some financial gurus are missing when they say that Bitcoin is a fraud or a bubble. They are not able to see a new form of money superior to all forms before it; and frankly, it does not matter. Bitcoin does not care what they think. Bitcoin does not care, because as long as it retains the properties that make it great in the first place, it will remain superior and expand at its “internet-like” pace. However, if those superiorities disappear, then it is possible that those financial gurus could be right, and that leads us to Bitcoin’s problem.
The first and most important step in finding a solution to any problem is to pinpoint the source, or root cause, of the problem. Without an understanding as to what the problem actually is, a proper solution cannot be accurately and effectively developed.
The main problem with Bitcoin was not that it has had too little usage. On the contrary, Bitcoin’s problem was one that many small businesses face as they begin to grow quicker than anticipated. It reached a point where its limited capacity could not keep up with increasing demand; and as a consequence, a bottleneck formed and quality suffered. Specifically, the network could not process transactions fast enough, and this created a transaction backlog. As a result, fees rose from cents to dollars, and transaction times went from seconds and minutes, to hours and days. The user experience during this time was of such low quality that alternative cryptocurrencies began to take market share; and Bitcoin’s superiority was in question. For a moment, it seemed like those financial gurus could be right.
Then, on August 1st, 2017, a potential solution called Bitcoin Cash was born. Bitcoin Cash was created to eliminate this network congestion and scale Bitcoin by increasing the number of transactions it could process. Bitcoin, with a 1 megabyte (MB) blocksize limitation, was only able to process roughly 3 transactions per second. Bitcoin Cash chose to upgrade this limitation by increasing the blocksize to 8 MB; which allows it to process roughly 24 transactions per second. With an increase in transaction capacity, users no longer needed to pay inflated fee prices for quickly confirmed transactions. They would only have to pay pennies, and transactions would be confirmed within seconds and minutes. The network could once again give users the experience that made Bitcoin great in the first place.
However, this seemingly logical solution to the problem has been met with resistance; and because of this, adoption in Bitcoin Cash is not as widespread as it is for legacy Bitcoin. The majority of industry participants have been convinced to increase Bitcoin’s transaction capacity using alternative methods, and they perceive Bitcoin Cash as an afterthought. Just as those financial gurus dismiss Bitcoin, many dismiss Bitcoin Cash the same. To the naked eye, these conditions may lead one to believe that the future of Bitcoin Cash is bleak, and investment into it would be unwise. To a contrarian investor that thinks these circumstances will disappear once emotions die down and Bitcoin Cash’s superiority as a scaling method becomes apparent; these current conditions, and investment in them, make potential outsized gains possible – and that, is the basis for this paper.
Going forward, we will go into detail regarding Bitcoin Cash from an investment perspective and cover topics pertaining to it. The goal is to keep this paper non-technical, and to remain as objective as possible. Even if you do not agree with it, hopefully, at the very least, you can appreciate the perspectives within. Let’s begin with a brief introduction to the scaling proposals that led to a divide within the Bitcoin community.
Bitcoin’s scaling options: Bigger Blocksize vs. Segwit + Sidechains
Problem defined: 1MB Limit = Network congestion = Slow confirmation times = High fees = Decreased user experience
Two proposals emerged for solving this problem. An increase in blocksize was one, and a technological modification called Segwit was the other.
With a larger blocksize, the network would increase the number of transactions it could handle by adding more transactions into each block. This method of scaling utilizes the actual Bitcoin Blockchain, and thus, is referred to as “on-chain” scaling.
With Segwit, part of the data normally included in each transaction is removed, and this decreases the size of the transaction. This decrease in size allows for more transactions to fit within each block, without actually changing the size of the block. You can think of this as an addition-by-substitution solution (For further explanation: Click here). Additionally, the Segwit proposal also plans to scale Bitcoin using a secondary method called the Lightning Network. The Lightning Network is billed as something that can take Bitcoin to VISA+ levels of capacity with instantly-settled transactions that cost nothing; except for an onboarding and offboarding transaction using the actual Bitcoin blockchain. Aside from those two transactions, all other transactions conducted within the network are of no expense, and take place outside of Bitcoin’s Blockchain. Hence, it is referred to as “off-chain” scaling.
What is the superior solution?
Before making this determination, we need to do the following:
Define Bitcoin’s goal and how it can be achieved
Understand the core problem in relation to the goal
Analyze the proposed solutions in relation to the problem and goal
Goal > Problem > Solution
The goal, or potential of Bitcoin, is to become the internet of money. That is, to become the backbone of our financial system, to serve as a store of value, and to be the main form of money used for everyday commerce throughout the world. More specifically, the goal is to have everybody in the world using Bitcoin. Not just the technically-savvy, not just the wealthy, not just the young: everybody. Bitcoin’s long-term goal is worldwide adoption. That is the objective.
The more that transact with this fair form of money, the better off we are as a society
As Bitcoin’s history has proven, the more people that use Bitcoin, the greater its value will be. If 6 people use it, it’s not very valuable. If 6,000 people use it, it’s going to be more valuable than 6 people using it. If 6,000,000 people use it, it’s going to be far more valuable than 6,000 people using it. If 6,000,000,000 people use it, it will be exponentially more valuable than 6,000,000 people using it. Simply put, adoption equates to an increase in value. For this reason, it is essential that growth conditions are optimal so nobody is restricted, or priced-out, from using it.
How does adoption continue to grow?
“As a good rule of thumb, proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage.” – Peter Thiel, Zero to One
One of the main points made by Peter Thiel in his book, Zero to One, is in order to dominate a market, it is necessary to create something 10x better than what currently exists. If you create something only marginally superior in a crowded marketplace, the superiority may not be recognized, and dominance is far less likely to be achieved. Bitcoin, as evidenced by its uniqueness and rapid growth since inception, qualifies under the 10x criterion. Specifically, Bitcoin is 10x better as form of money and 10x better as a payment system. Combined together, the following characteristics make it superior to the legacy financial system and the form of money used within it (Dollars, Euros, etc):
Cheaper to transact with
Faster settlement times
Superior store of value
Prior to the ‘high fee and slow confirmation time’ bottleneck, these four characteristics were Bitcoin’s main competitive advantages. Once Bitcoin lost the first two advantages, the alternative cryptocurrencies began taking market share away from it – just as any competitive business does when an industry leader takes a misstep. It was a lot like going to Chipotle for lunch only to find a line out the door and around the block, or with prices that doubled from your last visit. Under these circumstances, you, as the customer, would take your business elsewhere. You would go down the road to Panera Bread, or another alternative, until those conditions subsided. If those conditions persisted, Chipotle would lose you and others as customers, since people only tolerate those unfavorable conditions for so long. That previously long line at Chipotle would shrink, and so would their customer base. To ensure this type of scenario doesn’t happen to Bitcoin, those four 10x advantages need to remain.
‘Needs Improvement’ Aspects’
For Bitcoin to reach its full potential, it will need to retain those four competitive advantages and improve in three other major aspects as well:
Additional use cases
Keep it Simple Stupid (KISS)
For the average, everyday person, Bitcoin can be overwhelming and intimidating to use. To alleviate this issue, the user experience needs to improve to a point where the normal person feels comfortable using it, which means simple – but still secure – storage; an easy, inviting way to pay for things; and attractive, user-friendly interfaces. It should be so simple to use that your grandma could do it. Quite simply, the fewer the steps the better (click, click, boom).
To attain global adoption, Bitcoin must be used in everyday commerce. Without use in commerce, Bitcoin lacks utility. It would not be very useful, nor would it be possible to unlock its full potential or value. This makes merchant adoption very important to Bitcoin’s long-term success. Fortunately, Bitcoin holds almost all key advantages over the predominantly-used, credit card system of today. To put this on full display, let’s glance over the advantages and disadvantages of the credit card system – in comparison to Bitcoin – from the eyes of a merchant or business.
Credit card disadvantages:
Merchants are charged roughly 3% of the transaction total ($100 charge = $3 fee)
Payment received is not immediately available
Payments take multiple business days to settle
The risk of fraud or chargebacks is present
Merchant is responsible for safeguarding customer’s data
Credit card advantages:
Main payment method used by masses
People are comfortable transacting with it
Easier to use
The currency used for transactions promotes spending over savings (will be discussed further)
The current advantages the credit card system has over Bitcoin can change, but the disadvantages cannot. Bitcoin easily outcompetes the credit card system in terms of speed and cost, as well as privacy. In addition, it is also advantageous for merchants to accept Bitcoin because the currency itself is of limited quantity and makes a better store of value. For that reason, as Bitcoin’s adoption grows, it is likely that merchants will offer discounts for customers that pay with it.
The ease-of-use and comfortability factors will likely remain advantages of the credit card system in the short-term, but over the long-term, they should lessen as Bitcoin becomes ingrained into society and easier to use. However, the last credit card system advantage may remain for some time due to the nature of Gresham’s Law, where:
“Bad money drives out the good”
Gresham’s Law asserts that people will save money thought to be a reliable store of value (gold) while spending the form of money thought to be an unreliable store of value (government currencies). The reliable store of value, or “good money,” will be hoarded; while the unreliable store of value, “bad money,” will be spent. Bitcoin, as a commodity/currency hybrid with limited supply, can be recognized as a good store of value. This is why, at this stage, we primarily see it held as an investment. This is likely to persist for some time because people are currently more interested in its price-appreciation potential rather than using it to pay for things. As Gresham’s Law emphasizes, why spend good money when you can spend the bad?
Potentially, in the distant future, it is possible that Gresham’s Law reverses, and good money drives out the bad. In this scenario, adoption would be massive to the point where Bitcoin’s market capitalization would be comparable to gold or other major currencies. If such a point is reached, businesses and everyday people will likely prefer Bitcoin over traditional currencies. If everybody has the good, why would you want the bad?
In the foreseeable future, however, Gresham’s Law will remain valid, and merchants will carry the task of extracting the good form of money from their customers. Since Bitcoin holds the main advantages merchants care about, it is in their interest to do so. That is, as long as those advantages remain.
To further expand adoption, the number of use-cases also needs to increase. In order for use-cases to increase, the soil at the base level must be fertile. Unsurprisingly, this means retaining the 10x superiorities – and most importantly, keeping fees low. With a fertile environment, the vast potential of Bitcoin and its Blockchain can be tapped into, and grow unencumbered.
Oh, the possibilities…
With its internet-like reach, Bitcoin has the ability to disrupt entire industries and give rise to things that were never previously possible. We’ve already started to see some of these potential disruptions in the realms of fundraising, financing, and the “tokenization” of assets. We should also see many other disruptions in the financial industry; as well as in the security, record keeping, publishing, and advertising industries. Like the internet, it is impossible to fathom its reach or how it will specifically shape the world in the years to come.
The lower the fees, the greater the potential for use-cases
One of Bitcoin’s easier-to-spot use-cases comes in the form of sending money across borders (remittances). As current money transferring options are vastly inferior to Bitcoin in terms of speed and cost, this market is ripe for disruption. The problem is, money remitted back to a family or friend needs to be easily spent on everyday purchases. Without it, there is no reason for them to have Bitcoin. Thus, this use-case example illustrates why merchant adoption is so important, and why fees need to remain low enough for attracting and encouraging use.
The “Yours” use-case (Yours.org)
One actual use-case comes in the form of a social media network that aims to disrupt the traditional internet-based advertising models (pop-ups, paid advertisements, etc). Instead of using these traditional methods, this network allows content creators to be paid in amounts of <$1, directly by viewers of the content. As credit card payments of <$1 are unfeasible because of costs, micropayments of this nature have never been possible. Content creators could only get paid based upon the number of views they generate (YouTube), or by selling advertisement space on their websites. Bitcoin is able to disrupt this model for the better, and the “Yours” network has built a working model to do just that.
Specifically, Yours allows users to showcase their talents and instantly be rewarded without requiring people to sit through time-wasting, annoying ads. The content creators can either set up a pay wall, or allow viewership for free. Regardless of which option they choose, it is always possible to receive tips from other users. Yours has also made an effort to minimize spam and trolling, by charging a few pennies to post content (10c) and leave comments (varies). This measure invites thoughtful dialogue, and naturally increases the quality of the content posted – something any Reddit user can appreciate. With the Yours network, people can post content and get paid without having to develop a vast audience or go through a third party. This use-case is only possible because of Bitcoin’s low-fee nature; and as a result, makes for a perfect example of why it needs to remain that way.
Problem and Verdict
We’ve touched on Bitcoin’s goal, the necessities to achieve it, and the roadblocks surrounding it. As we’ve alluded to, the most important roadblock Bitcoin must avoid is the roadblock of high fees and slow transaction times. Bitcoin will not be able to disrupt the traditional financial system or outcompete alternative cryptocurrencies if it loses these primary advantages. This is why, essentially, Bitcoin needs to be like Amazon.com. Amazon has thrived by combining the fastest delivery with the lowest prices possible. Amazon has scaled exceptionally well by adopting this strategy; and the reputation it gained from it causes people to start with them when shopping online.
Now imagine if Amazon switched gears and began significantly marking-up their products or stopped caring about how fast customers got their shipments. If they went this route, they would fall out of favor, and competitors like Wal-Mart would pick up the slack. Customers would likely convert for the simple reason that they have economic incentive to do so. After all, they are not going to pay higher fees or wait longer for delivery when they don’t have to. In that same sense, Bitcoin cannot lose its most important advantages either. Otherwise, the competition will take its “customers” away from it, just as Wal-Mart has hypothetically done to Amazon in this example.
Bitcoin cryptocurrency market share prior to bottleneck: >80%
Bitcoin cryptocurrency market share after bottleneck: <50%
Understanding the importance of retaining superiorities and fostering conditions needed to accelerate adoption growth, we can now determine how the two scaling options stack-up in relation to the problem and goal.
Blocksize increase (Bitcoin Cash)
Increasing the blocksize is a fairly simple method of scaling. It allows for far greater number of transactions processed within each block, and ensures transactions will not be backlogged. This method of scaling keeps Bitcoin’s basic transaction structure intact, and puts it on a path where scaling and high fees will not be an issue for the foreseeable future. This has been the scaling method used in the past, and this is the path that Bitcoin Cash chose. (Don’t fix what ain’t broke)
Segwit + Lightning Network
Segwit decreases the amount of data used in a transaction which effectively doubles the blocksize in its own right. However, this is a short-term scaling solution as the capacity increase alone will not scale Bitcoin to worldwide levels. As growth increases, the extra capacity that Segwit provides would fill up, and the cap would inevitably be reached again. Knowing this, the development team behind Segwit formulated a plan to scale Bitcoin using a sidechain called the Lightning Network. They are of the opinion that Bitcoin itself cannot scale to worldwide levels, but believe this network will give it that ability. This sounds great if a working implementation existed, but currently, it only exists in theory.
Without getting too technical, and to better understand why this is an inferior method of scaling, we will analyze how the Lightning Network works into the three “needs improvement” aspects necessary for accomplishing Bitcoin’s goal. First, a basic overview of how the Lightning Network operates:
Lightning Network = Conduct an on-the-blockchain transaction to get onto the Lightning Network > Open up payment channel(s) with others > Send money to others within the network > Close channel and leave network with an on-the-blockchain transaction
To open up a channel using the Lightning Network, a user is required to move their Bitcoin onto the network with an on-chain transaction. Then, the user needs to operate within the channel. Once they’re finished and wish to close the channel, they will need to conduct an on-chain transaction that records the net effect of their Lightning Network transaction(s). This adds additional steps, layers of complexity, and it still requires users to conduct on-chain transactions. For the highly technical, this might seem really cool. For the normal person, it sounds overwhelming. As a result, this added layer of complexity is unlikely to increase adoption of the everyday person.
When a person buys a product or service, they simultaneously pay and receive the product or service. They do not typically form an ongoing financial relationship with a merchant or business. As the Lightning Network requires parties to open up a payment channel with one another – and because it requires an on-chain and off-chain transaction anyway – why would anybody open up a payment channel to conduct a one-time transaction? Quite simply, they wouldn’t. Because of this, the Lightning Network’s use-case for merchants is limited. If the Lightning Network was the main method for scaling, it would not assist in growth of merchant adoption.
Additional use cases:
The Lightning Network does have theoretical use-cases itself, but because one has to enter and exit the network through the Bitcoin Blockchain, additional use-cases can only come from within. However, theoretically, it does have multiple use-cases itself such as forming payment channels between parties where many small, micro-transactions will be made; or between parties making many, recurring payments with one another. Using the Lightning Network to avoid mining fees under these circumstances could certainly be useful. Therefore, it does have use-cases itself, but only from within its own network.
Segwit + Lightning Network conclusion
In theory, the Lightning Network sounds like it could be an excellent scaling solution. Through thoughtful analysis however, it does not seem as likely. This type of sidechain has its own use-cases, but it does not promote merchant adoption, nor is it inviting to the non-technical crowd. In addition, if the cost is only pennies to conduct a transaction on the actual Blockchain, the need for the Lightning Network diminishes. After all, why would you bother moving money out of your hardware wallet and onto another network when it costs so little to simply use the actual Blockchain? Considering these reasons, and because there is no actual working implementation, it cannot be relied on as a primary scaling method.
With Segwit, we essentially get a doubling of transaction capacity through a decrease in transaction size. In the short-term, this should be, and has been, adequate for preventing transaction backlogs. Assuming that the number of transactions continues to grow, it will not be adequate in the long-term. Inevitably, an additional capacity increase will be needed. Understanding now that sidechains such as the Lightning Network only have specific use cases, the capacity increase will need to come in the form of an increased blocksize.
However, the developers currently responsible for maintaining Bitcoin are adamantly opposed to this solution. They are of the belief that Bitcoin cannot scale globally without sidechains, and the 1MB blocksize should remain. They have been unwilling to compromise on this issue, even when industry participants (miners and businesses) agreed to simultaneously adopt Segwit and increase the blocksize to 2MB (called “Segwit2x” – which is still on the table). This is unsurprising as they have pushed away those that disagree with them; and unfortunately, seem to have fallen victim of ‘groupthink.’
Bitcoin Cash, on the other hand, has multiple development teams working on it. These teams share the philosophy that Bitcoin can scale at a global level, on-chain, without relying on sidechain usage. These teams believe in Bitcoin’s goal, and are working on features that create more use-cases to accomplish it. In addition, fees are extraordinarily low, transaction capacity is a non-issue, and the conditions for adoption growth are bountiful.
For these reasons, the previously mentioned “Yours” network uses Bitcoin Cash for payments. They initially planned to use legacy Bitcoin, but because fees swelled to over $1, it became apparent that they could not. People were not going to deposit $5 when the fee was $4 itself, so they needed another option. That option came in the form of Bitcoin Cash. With the transaction capacity increase, fees would remain low, and it became a no-brainer that this was the Bitcoin network to use – so they did.
This real-life example aptly demonstrates what happens when you neglect your customer and don’t retain your core competencies. It also shows how important it is to foster conditions inviting for growth, with leadership that understands the importance as well. If something working successfully is neglected, and the intention is modifying it with something inferior, a consequence will result. Bitcoin Cash is that consequence, and with its superior transaction capacity, it is ready to serve the world.
Retain your core competencies. Leverage your strengths. Know your customer. Constantly improve and innovate.
Bitcoin Cash: The Investment
A SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis is an objective examination used by companies to determine what they are good at, what their weaknesses are, potential opportunities that exist, and any issues or problems that may threaten their business model. Bitcoin (Cash) may not be a business itself, but it shares many similarities to one. For this reason, the SWOT analysis is still an effective analytical tool, and we will use to it analyze and brainstorm its strengths, weaknesses, opportunities, and threats. (Please feel free to include any that were missed)
Reliable store of value due to limited quantity and known inflation rate
Transaction costs are minimal
Global reach and market
Transactions are settled almost instantaneously
Money is almost immediately available for use
Personal information is not required to transact
Privacy is preserved
Transactions are permanently recorded on a global, open-for-all-to-see ledger
Network is decentralized as no individual entity owns or controls it
Storage costs are low
Allows people to “be their own bank”
Allows people to cut out the middleman and pay each other directly
Allows merchants to avoid credit card processing fees
Allows merchants to receive payments without waiting business days
Cryptocurrency asset class is in a bull market
Network has a vast number of potential use-cases
In comparison to the legacy Bitcoin network, it has less support in terms of wallet, exchange, investment, miner, business, and user adoption
Mining is not widespread
Fluctuates in value
Part of the industry views it negatively
New and unproven
Legacy financial system is deeply ingrained into society
Requires people to learn something new
People still view cryptocurrency with skepticism
Regulatory status is in a grey area
Limited use-cases at this juncture
Relatively few businesses accept it
Can disrupt venture capital, financing, security issuance, and crowdfunding type of industries
Can be used for fundraising efforts in crisis or disaster areas
Potential to bring stability in commerce for underdeveloped nations
Potential to supplement or supplant national currencies
Global nature offers cheap remittances
Demand can come from across the globe
Potential to be labeled as a safe haven investment
Can be useful in any type of economic environment (1st world to 3rd world countries)
Potential to add brokerage / stock market / institutional investment
Potential to disrupt a variety of industries in a variety of ways
Other cryptocurrencies outperforming and taking market share by becoming more useful or efficient
Adoption never accelerates
Perception never changes
Government rejection or disallowance of trading or use
Attack on the network
The unforeseen (unknown, unknowns)
The SWOT analysis is fairly efficient for laying out the pluses and minuses, but there are other criticisms or commonly cited problems related to Bitcoin (Cash) that also warrant discussion. In this next section, these criticisms and problems are addressed.
Criticisms and Problems
“It can’t scale to VISA+ levels”
Quite simply, it doesn’t yet need to. Demand is not close to requiring that level of capacity. Plus, as time passes and demand grows, the efficiency of the hardware will grow with it (Moore’s Law). Bitcoin Cash, without the blocksize limitation, will be able to keep up with demand as demand grows. Food for thought: Some people used to say that the internet could never scale, and look how that turned out.
“It is too complicated for the average person”
One great advantage assisting Bitcoin’s adoption process is that the average, everyday person doesn’t need to understand the technical workings behind it. If someone simply wanted to hold Bitcoin as a form of savings or use it to pay for something, they easily can. The network does not require them to mine or a run a node. If it did, there would be very little adoption of non-technical users. Fortunately, Bitcoin was designed with this in mind.
“Can’t governments shut it down?”
They can create laws or regulations to disallow exchanges or businesses from transacting with it, but Bitcoin itself cannot be “shut down.” Shutting down Bitcoin would be like shutting down the internet. Plus, because of its usefulness, it is far more beneficial for governments to embrace it, rather than fight it.
“It is not a currency. You can’t buy anything with it.”
As it mostly serves as a store of value as of this moment, it does act more like a commodity than it does a currency. This may be the case right now, but over time, it will be used as a currency for the simple reason that people will want it. They will want it because it is valuable, and that value will be the reason it is accepted as a payment mechanism (money). Gresham’s Law and investment demand may hold it back at the moment, but it is unlikely to remain that way forever (and BitPay might have something to say about that).
“Blocksize magic number?”
The blocksize does not have a magic number. It simply needs to grow as the number of transactions grows. If Bitcoin had a .1 MB cap instead of a 1 MB cap, this problem would have just come a lot sooner. In the earlier days of Bitcoin, there were ‘soft’ caps to the blocksize, and once transactions began to reach that threshold, it was raised. Quite simply, the magic number is constantly changing. As the number of transactions grows (demand), the transaction capacity needs to grow with it (supply).
“Spam transaction problem”
There have been allegations of ‘spam’ attacks on the 1MB Bitcoin network. As there is no way to prevent somebody from sending massive amounts of transactions through the network, the solution is simple. Make their spam inconsequential. Make it so it has no effect on the network. That is, keep capacity high enough so these types of transactions remain pointless. After all, sending massive amounts of transactions through the network does have a cost, so if it isn’t able to bog down the network, the effort will not be made in the first place. ‘Spam’ is only effective if capacity is limited. Besides, if the network can’t clear “spam” transactions, how can we rely on it to serve the masses?
“Emergency Difficulty Adjustment (EDA) mechanism”
Bitcoin Cash integrated a mechanism that allows mining difficulty to decrease when blocks aren’t mined quickly enough. This has ensured the survival of Bitcoin Cash in the early-going and should ensure its survival going forward. One drawback, however, is with the decrease in difficulty, blocks are found quicker, and the rate of new coins coming onto the market increases (inflation). Additionally, as a result of this mechanism, large gaps between blocks being found have formed, and this results in unreliable transaction times. For these reasons, this mechanism needs improvement; but fortunately, they are in the pipeline.
“Bitcoin Cash is behind on adoption”
Adoption Path: Initial Survival > Wallet Adoption > Exchange Adoption > Investment Adoption > Mining Adoption > Business/Use-Case Adoption > Consumer Adoption
When compared to the legacy Bitcoin network, Bitcoin Cash does have some catching up to do. Fortunately, the adoption process has been accelerated because of how it came into existence. When Bitcoin Cash was launched, every user that held Bitcoin received an equal amount of Bitcoin Cash. As a result, the number of users holding Bitcoin Cash is widely disbursed. Additionally, as all wallets and exchanges would receive Bitcoin Cash, they needed to learn how to use it. Since exchanges were required to distribute Bitcoin Cash to account holders with Bitcoin balances anyway – and because they make money conducting trades – it made sense to add Bitcoin Cash trading onto their platforms (not all have, however). For adoption purposes, being traded on many exchanges is important since it increases investment into it. Thus, without exchange adoption, investment adoption would not be possible; and that would make it very difficult to gather adoption for the other aspects as well. Luckily, because the method of issuance was favorable, the adoption process has been accelerated – but with ample room to grow.
Now, let’s transition into the contrarian logic and wisdom behind Bitcoin Cash as an investment.
The Contrarian Take
‘Buy when sentiment is lowest, sell when sentiment is highest’
The quote above summarizes the contrarian investor’s philosophy. Adhering to this philosophy allows an investor to maximize potential gains and minimize potential losses. In the cryptocurrency marketplace, a good example of contrarian investing recently presented itself when rumors circulated that the Chinese government was shutting down Chinese exchanges. At that time, sentiment quickly shifted from euphoric to pessimistic, and the price dropped from a high of $5,000, to just above $3,000. With a contrarian investor’s mindset, the low-sentiment environment would signal a time to buy. For an investor with a non-contrarian mindset, the negative sentiment may entice them to sell.
Investing in this manner provides the greatest upside potential while also decreasing downside risk. This gives an investor the best chance for potential price appreciation. Furthermore, the best opportunity for even greater price appreciation potential comes with investing in something new and unproven, yet still holds promise and the ability to grow rapidly. Exponential gains come from investing in something of this nature, or more specifically, before it has made an impact or becomes well-known to the rest of the market. Once the investment is well-known and has already scaled exponentially, the chance for outsized gains diminishes. Investing in Microsoft before everybody had a computer in their homes would have allowed participation in those gains; but once everybody had a computer in their homes, the exponential potential ceased to exist.
Of course, it is very difficult to know what company or investment will actually provide these types of returns. With the very high risk that goes along with investing of this nature, it is not for the faint of heart. If you cannot afford to take that risk, you most certainly should not. Rather, investing in something stable, safe, mature and proven should be your course of action. Your gains may be limited, but your capital will be preserved. At the very least, you can still adhere to the contrarian philosophy by investing when sentiment is low.
Buy low and adopt early
An investor seeking significant upside potential invests when sentiment is more negative than positive, but at some point, seems likely to change. Additionally, this significant-upside-seeking-investor invests in assets with great scaling potential, but well before they reach that potential. Bitcoin Cash qualifies under both. Sentiment is low, and it has plenty of room for growth.
Sentiment is low for a few reasons: the creation of Bitcoin Cash was sudden and controversial; the community is passionately for or against it; it is going through some growing pains; and lastly, people have a natural inclination to support the legacy chain and development team currently working behind it. As these reasons are mostly emotion-based, and because emotions can change at the blink of an eye, sentiment can shift just as easily.
Bitcoin Cash is new, unproven, and yet to make a significant impact, but it has plenty of room for growth. At the moment, Bitcoin Cash’s value is significantly less than legacy Bitcoin; it doesn’t have scaling issues (fees, transaction times, questionable vision); the developers are working towards global adoption; the majority of the world has yet to invest in cryptocurrencies; and most of all, it is not taking market share away from a company, but rather the multi-trillion dollar gold and currency markets. With a current market capitalization of less than $10 Billion, Bitcoin Cash has plenty of room for growth when you consider the market it aims to tap.
Ultimately, investing in Bitcoin Cash is the opposite of investing in a big, already grown company. When you look at the possible disruptions, the use cases, and the fact that it is competing for investment dollars with the trillion dollar gold and currency markets, it is light years away from becoming one of those giant size companies. The risk may be enormous, but so is its potential.
The “Black Swan” potentials
A “Black Swan” is a term popularized by Nassim Nicholas Taleb in his book, The Black Swan: The Impact of the Highly Unprobable. Essentially, a Black Swan refers to impossible-to-predict, extremely impactful or paradigm-shifting events that change the status quo. Examples would be events that suddenly crash the stock market, political uprisings, or wars. In the context of this paper, it will be used to describe potential events that could cause dramatic increases in demand.
Bitcoin (Cash) already holds the potential to increase in value due to its scarcity and its superiority over the competition. Furthermore, there are events in the world that could cause swift, dramatic accelerations in demand as well. These scenarios include:
Flights to safety in times of economic decline or uncertainty
Devaluation or excessive money-printing by central banks or governments
Other various economic events that trigger flights to alternative assets with limited quantity
In addition to these negative-based events, positive occurrences could also accelerate demand. This could come in the form of:
Significant investment from central banks, banks, governments, or companies throughout the world
Influx of important businesses accepting it (ie: Amazon, Netflix)
Favorable regulatory rulings
Institutional investors and money-managers mandates change to allow investment into it
Exchange Traded Fund (ETF) or easy investment access with a standard brokerage account
Traditional banking institutions or well-respected companies give customers investment access
Unforeseeable use-cases that dramatically impact adoption levels
There are many “Black Swan” scenarios that could cause a significant increase in demand, but they are only possible if the base layer sits on solid ground with conditions ripe for expansion. With the proper groundwork laid, Bitcoin (Cash) can thrive and give rise to the possibility of these scenarios playing out.
Rome wasn’t built in a day
Even if Bitcoin Cash is the economically superior chain and solution, it will still take some time before all facets of adoption materialize. It is a work-in-progress and it is not realistic to think that it is going to become the dominant cryptocurrency over night. At the moment, the legacy coin has everything going for it: it is significantly higher in price; it is on every exchange; it has far greater use; and the businesses that accept cryptocurrencies, accept Bitcoin. With its advantages, it can outcompete; but there is still a mountain to climb.
Bitcoin is money. That is Bitcoin’s primary and most important function, and what cannot be forgotten or neglected. Without being a useful form of money, Bitcoin is nothing. All application and use-cases built on top of it would cease to exist. No commerce would be conducted, and no business would accept it. Nobody is going to send “Bitcoins” to somebody when they are valueless.
But Bitcoin does have value. Bitcoin has value because, quite simply, it works. The entire system underpinning Bitcoin works: the economics, the mining, the cryptography, the coding, the mathematics, the global ledger, everything. The model simply works. Most of all, it works because it can process transactions at a level of efficiency not found outside of crypto.
It has worked so well that the network became overworked and required a boost in transaction capacity. Unfortunately, those responsible for increasing capacity do not share the belief that Bitcoin itself is able to scale to worldwide levels; and thus, have avoided a direct capacity increase (larger blocksize). Instead, they chose to carry out an alternate vision and invested their efforts into a short-term scaling solution (Segwit), and an unproven, theoretical method for long-term scaling (Lightning Network). Due to their unwillingness to bring forward a direct capacity increase to Bitcoin, a faction of the community chose to continue Satoshi Nakamoto’s vision by creating Bitcoin Cash. An initial, direct capacity increase, paired with a vision to increase capacity as needed.
With the increase in blocksize, the path that worked and brought us to this point will be continued, and the high fee and transaction time roadblock should never get in the way again. Bitcoin Cash has retained the superiorities that create conditions conducive for adoption growth; and in doing so, sent us down a path that allows it to reach its full potential and accomplish the goal of being used by everybody in the world.
Getting to that point will not be effortless, though. There will be bumps along the way, but the goal is achievable even if current sentiment is unfavorable. The unfavorable sentiment can easily reverse, and it can also be seen as a positive when viewed through the eyes of a contrarian. With the negative sentiment; an upgraded capacity; a united, positive vision; and the fact that it is fighting for investment dollars with trillion dollar markets, this investment, quite possibly, is a contrarian’s dream come true.
Bitcoin (Cash) is here to stay whether the financial gurus like it or not. No matter how many times they call it a fraud or bubble, it won’t be. They can repeat it over and over again, but it won’t magically become true, because it doesn’t listen to them. It listens to the people interacting with it, on their own free will; and as long as it retains the properties that make it more efficient to use, it will be something the financial gurus will just have to live with. If they don’t, and they choose to sit on the sidelines while it revolutionizes their entire industry, they have every right to go the way of the horse and buggy after cars came into existence and made their presence felt. Bitcoin Cash will gladly assist them with the process.
“The existing Visa credit card network processes about 15 million Internet purchases per day worldwide. Bitcoin can already scale much larger than that with existing hardware for a fraction of the cost. It never really hits a scale ceiling.” – Satoshi Nakamoto
The author is bullish and holds Bitcoin Cash, but is not an investment professional. The opinions are the author’s own, and they could very well be wrong. The author does not recommend investing in something just because somebody else recommends it. Rather, you should do your own research, form your own conclusions, and don’t invest an amount that would cause you to lose sleep or cry over (in the event you lost it all, because it is possible). Lastly, do not keep money on exchanges. Keep your money safe in a hardware wallet. Don’t let Mt.Gox happen to you.
Oh, and if you don’t want your Bitcoin Cash, feel free to send it to the address that follows. I’ll gladly take it off your hands. 1MLnbXPha8YRRjAoTTJpWFRnoNGV7qSx3s
Going past the paywall you will find words for the Bitcoin Cash community, my take on Bitcoin as money and a positive consequences of it, a letter to the Yours network, and a little piece on Bitcoin’s leadership. I spent a good deal of time on this, so I hope you enjoy it and find it worth a dollar.