As expected the Bitcoin Hard Fork occurred around 12:20 UTC today. A new cryptocurrency, Bitcoin Cash (BCH or BCC depending on the exchange) was born. It shares the same history as Bitcoin up until today in what I’ve already referred to as a modern day Ship of Theseus paradox.
So which Bitcoin is the real Bitcoin? BTC continues with a similar price as before and Bitcoin Cash was a new node to begin with so certainly Bitcoin remains bitcoin.
But it’s another example of how a brand new cryptocurrency, one which a current market cap of over $6 billion, can be created seemingly out of thing air.
I understand that Bitcoin Cash has the support of some miners, and work went into the technical changes (it has a larger block size, in an attempt to overcome some of Bitcoin’s scaling issues). But is it really worth $6 billion?
The market seems to think so and that is all that matters in the present.
In the short term each BCH is trading for around $375 as of writing. My plan, which I previously shared, worked flawlessly.
Upon hearing about the hard fork, I moved my Bitcoins from an exchange that did not support BCH, to an exchange that did. When the fork happened I retained my original Bitcoins, but was also awarded an equal amount of Bitcoin Cash. I doubled my Bitcoins! (Sort of) The original Bitcoin is still trading around $2,700 and as stated above the new BCH I receive are only worth $375 each.
Learning from Past Mistakes
This is an example of how I was able to learn from a past mistake to benefit.
I missed out on coins resulting from when Ethereum forked. The place where I had my coins, hashflare.io, famous for unprofitable cloud mining, did not support the fork. I wasn’t about to let that happen again. If I’d been on an exchange that supported Ethereum Classic, or had my Ethereum in a wallet where I controlled the keys, I could have received 1 ETC for each ETH I held.
Cryptocurrencies are Inflationary
As I’ve written about before, one of the things that I dislike about cryptocurrencies is that there are no natural limits on the supply. Bitcoin Cash is a perfect example. Sure, the number of Bitcoins (BTC) did not increase, but a coin very similar to BTC, albeit with less network hashing power and some technological differences, was created, which in some sense doubles the amount of Bitcoins in existence.
Playing the Fork
The market doesn’t seem to care about the Bitcoin hard fork, BTC was trading up near around it’s all time high of $2,910 the day before the fork and is still at $2,700.
One could theoretically have purchased 3 BTC right before the fork for $2,900 each ($8,700 total). Then the fork happens, and the person gets to keep their 3 BTC and also gets 3 BCH, each worth $375 ($1,125 total). The price of BTC then falls to $2,700. So one would have lost $600 total on the BTC, but gained $1,125 on the BCH, for a net of $525. Not bad. That’s a 6% increase over just a few days.
Easier to talk about with the benefit of hindsight, but if someone is already holding Bitcoins, there is no financial risk to being a position to get the newly created cryptocurrency.
Long Term Problems
The market doesn’t seem to care about the Bitcoin hard fork, it was trading up near around it’s all time high of $2,910 the day before the fork and is still at $2,700. But in effect 6 billion USD worth of value was created out of thin air. Over the long term this simply isn’t sustainable. Is the price really coming from new money buying up BCH as the future cryptocurrency? It seems unlikely. The supply of cryptocurrencies continues to grow and Bitcoin Cash is only the latest example.
I’ll continue to hold various cryptocurrencies as a speculation that one or more takes off (even more) and reaches widespread adoption but as a long term investment I think it remains very risky.
Bitcoin is going to undergo a hard fork.
What is a Hard Fork Anyway?
A hard fork in cryptocurrencies is when one cryptocurrency effectively becomes two and the number of units of currency is effectively doubled, albeit existing in two separate, incompatible blockchains. This has already happened to the second largest cryptocurrency by market capitalization: Ethereum.
Ethereum underwent a hard fork back in 2016, so there are now two blockchains, Ethereum and Ethereum classic, which both trace their origins back to the 30 July 2015 launch of Ethereum in a modern day Ship of Theseus paradox.
More information about hard forks.
Hard Forks are Logically Bad for the Price of a Cryptocurrency
As I’ve written about in the past in What I Dislike About Cryptocurrencies cryptocurrencies, like Bitcoin, aren’t scarce.
More correctly, cryptocurrencies are not very limited in supply.
There are currently 16,475,250 BTC in circulation and that number will continue to grow by design until 21 million are mined, at which point the supply of BTC will cease to grow.
So while only 21 million Bitcoins will ever exist on a given Bitcoin blockchain because of how the cryptocurrency is programmed, if Bitcoin forks, there will eventually be 21 million units of Bitcoin A and 21 million units of Bitcoin B.
In one sense the number of Bitcoins that will exist is 42 million. Now certain places might only accept Bitcoin A and not accept Bitcoin B and the price of Bitcoin B could drop to a low value and no one uses it. So in that sense there are still only 21 million Bitcoins. But when a cryptocurrency hard forks, some people favor one fork over the other and the price is lower than it otherwise would be if there was only one blockchain.
If Ethereum had not forked there would only be around 93 million ETH in existence right now. But because Ethereum did hard fork there are now 93 million ETH and 93 million ETC. The market capitalization of ETH is currently around $18.3 billion and the Market cap of ETC is around $1.3 billion. It’s beyond the scope of this article to posit how much the hard fork impacted the price of ETH, but I think it is logical to believe that the price of ETH would be higher if not for the hard fork.
Bitcoin Hard Forks
On August 1st Bitcoin is also going to fork, forming two separate and incompatible blockchains: Bitcoin (BTC) and Bitcoin Cash (BCH).
The market does not seem to care and Bitcoin is trading near all time highs around $2,800.
Time will tell what kind of impact this will have on the network and the price of the cryptocurrencies. If the hard fork does not go well and the network is adversely impacted I could see short term price drops. It’s possible (although I would guess unlikely) that Bitcoin Cash becomes more popular than Bitcoin and overtakes it in price. It’s also possible (and in my opinion much more likely) that it becomes a somewhat niche cryptocurrency like Ethereum Classic.
Bitcoin currently has a market capitalization of $46,622,650,965. It’s certain that after the fork both Bitcoin Cash and Bitcoin will not both have a $46.6 billion market capitalization.
While we wait and see what unfolds I’ve taken one important step. I had my modest BTC holdings at Coinbase. Coinbase is NOT supporting the hard fork.
So I’ve moved my BTC to Kraken. Kraken IS supporting the hard fork. By moving my BTC to an exchange that does support the fork I will get Bitcoin Cash in addition to Bitcoin.
The reason for this is because if one were to hold one BTC (Kraken uses the abbreviation XBT) at Kraken during the hard fork, Kraken will award the holder of that BTC one BTC as well as one BCH. Whereas if BTC is held at Coinbase no BCH will be credited.
I like Coinbase and I plan to move my BTC back to Coinbase after the hard fork takes place.
If you don’t currently own any Bitcoins and are interested in purchasing some, check out my easy to use walkthrough guide How to buy Bitcoins on Coinbase. Using my affiliate link when buying Bitcoins on Coinbase to get $10 worth of bitcoins free when you buy at least $100 worth of Bitcoin.
A group of people go camping. Two of them are central bankers. The group decides to divvy up jobs. A couple people are in charge of setting up the tents, another group goes and gets some water, a third group is in charge of preparing food for cooking and the central bankers are put in charge of building a nice fire for cooking.
The central bankers have never
had jobs in the real economy built a fire, but they went to Harvard and Yale so they’re smart and they are certain they can figure it out.
“Lets think about fires first.” says the Harvard trained economist.
“Great idea!” says the Yale grad, “Whenever I see a fire, there is smoke. I saw a video of a building burning down once and I could see the smoke long before I saw any flames.”
“I’ve seen that as well. Smoke obviously causes fire, so if we get enough smoke I’m sure we’ll have a nice fire going in no time.”
So the central bankers asked someone else to stack up some firewood while they figure out a way to get smoke onto the firewood. They have a few hours before dusk, more than enough time to smoke up a nice fire.
They rig a hose up to the exhaust of one of their vehicles and feed the exhaust smoke over to the firewood.
No fire starts.
They try revving up the engine to get more exhaust smoke onto the firewood. They try a diesel engine from one of the other cars.
They continued to feed smoke into the firewood, confident that if they just got enough smoke a fire would ignite.
The people setting up the tents and preparing the food looked over and see all the smoke. “They must have a large fire going!” said one person preparing some beautiful steaks. “I can’t wait to cook these up and eat!”
But despite creating an unprecedented amount of smoke the central bankers are not able to start a fire.
The sun set and darkness falls on the campsite. They aren’t able to cook the steaks so the food is wasted, the cars are out of gas and everyone goes to bed hungry and frustrated.
As they drift off to sleep the central bankers sigh, “If only we’d been able to get enough smoke onto the firewood…”
Central Bankers in the Real World
The logic of central bankers is completely backwards.
Fires often have smoke. However, smoke does not cause a fire to burn. Smoke is a side effect of fire.
Similarly, when an economy is humming along rising consumer prices can sometimes be observed. But rising prices are a side effect and not the cause of a healthy productive economy.
There is nothing particularly helpful to an economy as a whole about rising consumer prices (some of America’s most prosperous years were during periods of falling prices). Most recently the computer industry and cell phone industries have grown and expanded despite the price of computers and cell phones falling.
Central bankers like Ben Bernanke (Federal Reserve Chair before and after the 2008 financial crisis) often can’t forecast the present
However, central bankers mistake a side effect for the cause, and they believe price inflation is what causes economic growth.
It’s an idea so absurd that only someone with a Ph.D in economics could come up with it.
If a non-Ph.D went around saying that the key to economic growth is to make things unaffordable people would rightly think that person was crazy just like people would think it’s crazy to try to start a fire with smoke.
There has been unprecedented central bank intervention in the economy. Interest rates were at nigh zero for roughly 8 years following the 2008 financial crisis (which was also caused by central banks). This is the economic equivalent of blowing smoke onto firewood to create a fire. It wastes resources and time and it causes damage with no benefit.
Often people will point to the historic highs of the stock market and low unemployment as evidence of a recovery. However, people dropping out of the labor force causes the unemployment rate to go down and if one person loses a full time job and gets 2 part time jobs that counts as a net job gain.
While the US stock market is at all time highs, this provides little benefit to people who don’t own stocks. It is also of little benefit to people who own stocks, if they don’t sell the stocks before there is an inevitable stock market crash. Printing money (and it’s digital equivalent) out of thin air to buy US government debt, which lowers yields and incentivizes investors into stocks rather than bonds (which in many cases pay a negative real yield) does not make for a safer and healthier economy. Companies issuing bonds and borrowing money to buy their own stock back (thus raising the price) does not grow the economy. It does create a lot of paper wealth as well as a stock market bubble.
Because the high stock market value isn’t due to economic fundamentals, eventually the stock market will crash.
If a camper believes that smoke causes fire they won’t be able to successfully start a fire no mater how much smoke they pour onto their firewood. If a central banker believes that price inflation causes economic growth they won’t be able to “stimulate” the economy regardless of how much inflationary monetary policy they adopt.
As long as central bankers continue to misunderstand what makes an economy grow, they will continue to pursue failed policies that waste resources, create financial crises and make recessions worse.
In order to grow wealth one does need to live in a society that values personal responsibility, property rights and equal protection under the law. Of course if one is fortunate enough to be born into an elite ruling class or a wealthy family that isn’t necessarily the case.
The United States of America was a country that made more wealthy people than any other up to that point was because the majority of people in the United States, among other things, valued personal responsibility, property rights and equal protection under the law.
It wasn’t because the United States had any special divine right, or “manifest destiny.” There wasn’t anything exceptional about the skin color of it’s residents or that the average person there was exceptionally smart.
There are certain values and principles that enable wealth creation and the United States adopted many of them.
Unfortunately many in the United States no longer hold those values. There is the attitude that the United States is inherently rich. “It’s the richest country in the world!” And that whatever financial decisions the US makes is good because it’s the US.
This nationalistic hubris has resulted in poor decision after poor decision by political leaders and the decline of the wealth of the US. Sure, there are wealthy people in the United States and the average person in the US is much better off than the average (or above average) person in the Somalia. But the debts, the decline in life expectancy (albeit small), the failed and pointless wars in Iraq and Afghanistan, the insolvency of states like Illinois and the collapse of the value of the dollar are all indicative of the decline of the United States.
Spending Like a Drunken Sailor
Both of my parents were in the Navy and exemplars of sobriety, so please forgive the analogy, but the United States has a huge spending problem.
The biggest and most entrenched are: Defense, Social Security, and Medicare.
I quote from Simon Black of Sovereign Man:
…just between those three programs, plus paying interest on the debt, the US government already spends MORE than it collects in tax revenue.
In 2016, for example, the government spent $2.87 trillion on Defense, Social Security, and Medicare, plus an additional $433 billion paying interest on the debt.
That totals over $3.3 trillion, which is more than they collected in tax revenue.
In other words, they could cut EVERYTHING ELSE in government: Homeland Security, national parks, funding for the arts, the Department of Energy. Everything.
And there would still be a budget deficit.
There is no mainstream US politician that discusses cutting defense spending. There is no mainstream US politician that discusses cutting Social Security spending. There is no mainstream US politician that discusses cutting Medicare. Politicians on the American “left” don’t cut defense spending. Politicians on the American “right” don’t cut defense spending.
Many in the United States celebrate Independence Day today. Ostensibly celebrating fireworks, food and America. Originally the celebrating was to commemorate the Declaration of Independence of 13 British colonies.
Dependence on Debt
However, the colonies that would become states that would become the United States have become enslaved to debt. This debt is a problem. A large problem.
The debts owed by the United States certainly won’t be repaid honestly. The United States could default on it’s debt, which would be the honest thing to do, or it could monetize the debt by printing the money the repay the debts. This has and will continue to destroy the dollar.
High taxes and regulations are also a crushing burden on the productive capacity of the United States. Honest productive business that bring valued goods and services to consumers are most hurt by this, while politically connected businesses with powerful friends benefit from unequal enforcement and cronyism.
The United States became an economic superpower because people who created value were rewarded. People who took calculated risks to bring value to others were able to reap the benefits. Capital was allocated not by government ministers or overlords but by private individuals closest to the decisions being made. People worked hard and smart and those that didn’t work hard and smart had to suffer more negative consequences than they do today.
The United States has strayed far from those principles that made it successful but the 4th of July celebration of this country goes on.
When an entity has no savings and the entity spends more money than it gains in revenue it must be going into debt.
This basic truth applies to people, households, businesses, governments and any other organization.
Many people and most governments don’t particularly care about this fact. Spending today and paying for it in the future is more politically popular than saving and fiscal discipline.
A great example of this recklessness and the ensuing crisis is Illinois. But the dire warnings aren’t coming from some fringe blog or conspiracy theorist. They come from Illinois Comptroller Susana Mendoza.
“I don’t know what part of ‘We are in massive crisis mode’ the General Assembly and the governor don’t understand. This is not a false alarm,” said Mendoza, a Chicago Democrat. “The magic tricks run out after a while, and that’s where we’re at.”
As of today the state of Illinois has a payment backlog of $15.1 billion. It’s not because the state isn’t making the payments fast enough. It’s because the state of Illinois doesn’t have the money to make the payments.
Illinois hasn’t had a budget in 2 and a half years. The state’s debt has the lowest credit rating of any of the United States.
It’s also very telling what “solutions” are being proposed. Raising taxes and printing money.
Mendoza channels her inner Yellen stating: “Once the money’s gone, the money’s gone, and I can’t print it.”
The answer is never that there has been financial recklessness and irresponsibility. The answer is never that spending should be reduced. It’s borrow more, print money and raise taxes.
Illinois is a preview of the United States
The borrow, print and tax is a tired set of plays from an old playbook that doesn’t work. But I think it’s the same set of strategies the Federal United States government has been and will continue to use. The main difference is that the Federal government has a virtual printing press and can monetize the debt. Illinois doesn’t have it’s own currency that it can create more of out of thin air.
When the US Federal government has a debt that is due, they can issue more debt (US Savings Bonds, Treasuries, etc) and they find a willing buyer in the United States Federal Reserve as well as private investors and other governments.
When the Federal Reserve buys US government debt it is very harmful to the economy and it’s the reason why the US dollar has lost most of it’s value.
But knowing the playbook the government uses allows you to pick appropriate defensive plays. Insolvent governments try to raise taxes so investing in tax advantaged retirement vehicles is smart.
The government inflates the money supply so invest in assets like gold and silver that can’t be devalued by money printing.
Some folks like Simon Black even recommend US citizens getting a second passport so that if things get really bad, one can simply leave the country.
I’ll be keeping an eye on Illinois. It’s a example of how a government will react when it’s insolvent. I think it will look very similar to what the US will do when it’s debt problem hits the fan. The X factor is that Illinois does not have a printing press, so the effects of fiscal recklessness are much harder to paper over (pun intended). But the printing press only delays the inevitable. If a government could print wealth then Zimbabwe, Venezuela and Weimar Germany would be the richest countries in the world.