Forking is the word of the moment in the cryptocurrency world. At least six forks are currently expected to take place over the next few weeks, each potentially creating a new cryptocurrency.
Demelza Hays, a research analyst at Incrementum AG and co-author of the firm's first cryptoresearch.report, has designated 2017 as the year of the fork and ICO (initial coin offerings). She identifies five forks.
- Super Bitcoin (15 December)
- Bitcoin Platinum (23 December)
- Lightning Bitcoin (also 23 December)
- Bitcoin God (please note that this is not a typo, its proposed name really is Bitcoin God and it is scheduled, appropriately enough for Christians who believe in such matters, for 25 December)
- Bitcoin Uranium (31 December)
- The clever people at cryptocurrencyfacts.com add Bitcoin Cash Plus and Bitcoin Silver to the list.
As forks are scheduled by block number rather than by date the final timing will depend on the speed of the network and how fast the miners are able to work through the blocks, says eToro, which claims to be the number one broker in the UK for trading cryptocurrency assets.
What are forks?
Forks are a way to upgrade a cryptocurrency's protocol, explains Mati Greenspan, a senior market analyst at eToro. There are two kinds, hard forks and soft forks. Soft forks happen when there is a minor change. Usually, it just means that the miners need to perform an upgrade on their mining software. Anyone who doesn't perform the upgrade will then be forked off the network.
A hard fork is required for deeper changes to a cryptocurrencies protocol. For example, changing the block size limit would require a hard fork. The procedure is similar to the copy/paste function in a word processor with the result being that you still have the old version and you have a new version as well.
For the users, anyone holding X amount of coins at the time of a hard fork will be able to keep his X coins and in addition will receive X amount of the new coins.
Courtesy of Mati Greenspan
If the network agrees to the upgrade the value will transfer over seamlessly to the new coin and the old one will drop to zero. This should not be compared to a stock split where the result is that you get two identical shares.
Soft and hard forks happen quite frequently in the crypto world but only sometimes make the headlines, Greenspan observes. If there is consensus among the network and everybody agrees that the upgrade is a good one, then they are quite seamless as everybody upgrades together.
If the network is split on how/if to upgrade the network things can get pretty messy. Greenspan points to the events of 1 August with Bitcoin Cash as a recent example. “This was a particularly contentious hard fork that many are still arguing about,” he states. “Anybody who was holding BTC at the time of the fork received an identical amount of BCH, which they could then do as they please with.
“It is now up to the open market to decide if they want to use the new currency and what its value should be.”
The importance of consensus
Michael Rauchs, whose job title is lead in cryptocurrency and blockchain at the Cambridge Centre for Alternative Finance at the University of Cambridge, Judge Business School, goes to some lengths to stress the importance of consensus in the process.
“Anyone can announce a fork but if no one follows it, it will not work,” he says. “There must be consensus. A fork creates a new social contract and it is the social contract that delivers the value.”
Who organises forks?
“Anybody!” says Mati Greenspan. “Blockchain technology is mostly open source. So anyone with a bit of programming knowledge is able to create a fork. The harder part is convincing people that your new coin holds any value and that people should actually use it.”
“The organiser writes the new code and announces the fork to the community. If the community gets on board, everyone does the upgrade and goes home happy. If not, the organiser can still proceed but if nobody wants the new product he's left with what we call a shitcoin.”
Many are organised by entrepreneurs that want to get rich quick, adds Demelza Hays, in less colourful language. Most of them want to make money off Bitcoin’s hype, but lack the competence to achieve their goals.
Courtesy of Demelza Hays
The honest forks are made by developers who perceive problems with the current version of Bitcoin (BTC). They aim to fix the problem by slightly changing the Bitcoin protocol and then releasing a new coin with a new name.
Forks will happen more and more frequently going forward, says Demelza Hays. As time goes on and the technology progresses more people will acquire the ability to perform forks. “There is good money to be made by developers,” she says.
Bidding up Bitcoin
Cryptocurrency traders bid up the price of Bitcoin before a fork because they want to have access to more coins from the new fork. For example, Bitcoin’s price shot up before the SegWit2X fork because traders wanted to have access to the SegWit2X coins.
Anyone who has Bitcoin and controls the private key to their Bitcoin are automatically entitled to the same number of new coins on the fork. When SegWit2X was cancelled, the price of Bitcoin dropped a little because traders would no longer gain access to the valuable SegWit2X coins after the fork.
Traders will bid up the price of Bitcoin to the amount they expect the new fork coin to be worth. For example, if Bitcoin is worth $15,000 and they expect the SegWit2X coins to be worth $1,000 then they will bid up the price of Bitcoin to approximately $16,000.
After the fork
After the fork, the price of Bitcoin should deflate back to $15,000. Forks also push up interest rates on lending markets such as Poloniex and Bitfinex, she explains. If traders believe the exchange will credit them with the new forked coins, they will borrow more Bitcoin on the lending market in order to gain access to more of the forked coins. Interest rates will drop immediately after the fork is complete.
Michel Rauchs says that it is important not to overinflate the importance of forking. The majority of users do not hear about forks and so adhere to the one true Bitcoin, using language more often seen in an ecclesiastical context.
Which reflects the apparent elevation of cryptocurrency into a new religion, complete with its Bitcoin Jesus (Roger Ver) and Bitcoin Judas (Roger Ver). Ver, a Bitcoin-related start-up investor, earned the former nickname for his unswerving devotion to (the one true). He earned the latter for then switching his faith to Bitcoin Cash.
A scientist's perspective
The vast bulk of the interest displayed in cryptocurrencies is driven by financial motives. Michel Rauchs, however follows the subject from the perspective of a scientist rather than that of a financier. He openly wonders why more social scientists and anthropologists do not do likewise.
“It is a fascinating socio-economic experiment that we are witnessing in cryptocurrency,” he says, agreeing with the suggestion that the whole field is based on economics through the looking glass. “But like all experiments, it could end up blowing up in our face.”
Mark Mobius says
This observation serves as a neat transition back to the world of traditional investment, represented here by Mark Mobius, renowned emerging market investment specialist at Franklin Templeton. His comments indicate that he is as dubious about cryptocurrency as anyone of his vintage.
“I agree with whoever said that Bitcoin is making tulips look bad,” he says. “Mr Ponzi should be very jealous. I think we are in a millennial era where the internet encompasses life for so many people that it’s not surprising that the internet should conjure up a synthetic money.
“So many questions! Who is Mr Nakamoto [the supposed creator of Bitcoin]? What is this amazing algorithm? The way it’s touted it seems that there is a guarantee to make money if you buy since: (1) there are supposedly a finite number of Bitcoins that can be produced and (2) as more are produced the algorithm makes it more difficult to “mine” so each new Bitcoin is more expensive. It’s going to be fun to see how this all turns out.
“The bottom line on Blockchain is that if everyone knows a transaction takes place and all transactions are stored in each member’s block, what’s preventing a hacker from entering the Blockchain and entering illicit transactions, stealing data and generally messing up the entire chain?”
Here endeth the lesson
We end this lesson by switching back to cryptocurrency, and taking a look at a simple extract from the Bitcoin Gold frequently asked questions document. The aim is to remind investors of the central importance of investing only in assets that they can, hand on heart, say they understand.
Q: Is Bitcoin Gold a competitor of Bitcoin?
A: No. Bitcoin Cash were B2X are hostile forks that use the same PoW algorithm as Bitcoin – SHA256 – which results in a permanent state of conflict over a finite amount of ASIC mining hardware that is required for solving SHA256 proof-of-work.
Bitcoin Gold, on the other hand, uses the Equihash PoW algorithm, which cannot be solved using ASICs that have been designed for Bitcoin. This ensures that Bitcoin Gold is not in competition with Bitcoin over limited resources.
Instead, Bitcoin Gold has an entirely different mining infrastructure, consisting of general purpose computer hardware (GPUs).
Lost in translation?
This writer finds this incomprehensible, but thinks it might translate roughly as the emperor is wearing the finest suit of clothes available, if only you could see them. The sheer absurdity of cryptocurrencies is epitomised by the recent fashion for people to use non-existent currency to buy non-existent cats.
FFS, one might say in reaction. This is pretty much what my friends and I did when playing at shops in our council housing estate in the mid-1960s in Airdrie, central Scotland, exchanging pretend cash for pretend goods. We were seven or eight years old at the time.
If only one of us had thought to monetise our playtime. “This time in 50 years, Brian, we'll be virtual billionaires,” I don't quite recall anyone saying...