How to Hedge SegWit – The Bitcoin Fork

August 1st is when the fun begins in Bitcoin. “BIP148” (aka “User Activated Soft Fork” dubbed UASF) is activated and the world finds out whether Bitcoin stays together or splits in two. If this is unfamiliar to you, then read here, or here or just give “SegWit” a googling. Avoid trying to research this on twitter, because you will find little outside of ad-hominem attacks between groups who cant agree on the best way to scale bitcoin. While I only have a peripheral understanding of the arguments what I do understand is that there is a real possibility of any of the following:

  1. The majority gets together and Bitcoin moves forward intact
  2. Bitcoin splits in two
  3. Bitcoin splits in two…hundred.

Why is there so much Bitcoin infighting?

I think it boils down to how much money is involved now. Bitcoin mining generates roughly $4million/day (1,700 bitcoins mined per day * $2,500/bitcoin). Thats big money. Money is a leading cause of divorce, and it appears thats whats ahead for Bitcoin.

How Does a Fork Impact Bitcoins Price?

At a minimum we will see Bitcoin transactions slow a great deal starting on August 1st. The Bitcoin community has argued about this for months, and it seems that even if Bitcoin does not fork there is a significant number of people who won’t go quietly into the night. If you hold Bitcoin today and there is a fork, you’ll likely end up with two new “types” of Bitcoin in your wallet (this happens automatically).

Ethereum went through a fork not too long ago, and it was pretty seamless. If you had Ethereum in your wallet, the next day you woke up to both the “new” ethereum and the “old” ethereum in your wallet.

Certainly Bitcoin splitting would hurt the price, at least initially.  Regardless of outcome party lines are so split that it’s hard to envision smooth sailing over the next few months. Who knows which version of Bitcoin to bet on? The general public is just warming up to Bitcoin and crypto – and know there will be several versions? Picture logging into your Coinbase account, ready to buy bitcoin for the first time. Surprise! There are now two versions. Which do you chose?

To me, this paints an ugly short term picture. I think this could hurt or at least keep a lid on Bitcoin prices for the short term.

How to you Hedge the Bitcoin Fork?

  1. Keep holding you Bitcoin and come back in 6 months. Its quite possible the fork produces two (or more!) versions of Bitcoin which both attract investment and you will have equally or more crypto value in a few months. Or, one of the two versions rockets ahead in price. No one knows whats on the other side of this forking.
  2. Move to cash. Bitcoins had a nice run…let the dust settle then figure out where to allocate your funds. (Side note, I’ve heard Tether can help here but have not investigated).
  3. Other Crypto: More below:

There are some very viable alternatives to Bitcoin, that are more or less copies of Bitcoins code. Many don’t realize that you can simply copy bitcoins current code, paste it into a distinct infrastructure and, voila, you have your own cryptocurrency. While this is indeed a massive oversimplification, the point is while two groups are hell bent on controlling the future of bitcoin, others are taking what they love about Bitcoin, making a few tweaks, and providing a cohesive alternative. Cohesive meaning the people with skin in the game aren’t at each others throats.

I chose the two below because they already have a fairly substantial market cap and existing mining hardware for bitcoin could flip to mine these other currencies. Bitcoin mining hardware isn’t “fungible” to all cryptocurrencies. Bitcoin mining hardware cant mine Ethereum for example.

This detail about mining is important. If you run a large mining operation you can’t simple close up shop because you think Bitcoins future is destroyed. There are bills to pay. You can however move to an alternative currency and I suspect most of these guys have fork contingency plans in place. Note that you could write dissertations on each currency. So, do some homework before investing.

My best bets to pickup Bitcoin market share?

  • Dash – Has a voting system in place (which resolves issues like forking quickly) and a unique structure to help fund future development.
  • Litecoin – Widely available its probably more accessible to new investors (at the time of this writing). Coinbase for example has Litecoin, but not dash. Litecoin’s sales pitch is essentially that its network is lighter and faster that Bitcoin.

It’s very hard to say what the best play is – what makes this so murky is the political split between Bitcoin factions. To me this is what makes investing in other currencies such an attractive idea.

After the Bitcoin Fork

Six months from now the dust should be settling and the crypto landscape will definitely look different. Its hard to remember that just a few years ago none of this existed and now its a multi billion dollar industry. Remember, regardless of what happens with the Bitcoin fork there are incredible developments ahead. 10 years from know this will all be just a blip on the radar – maybe that means there is no wrong way to play it.

 

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