The planned Bitcoin Cash (BCH) fork on November 15th normally wouldn’t be a big deal, but this time it’s shaping up to be a lot more problematic. There isn’t consensus on the changes that will be made, so there are two rival groups competing for control of the direction the currency takes. Next week’s fork will likely result in two chains already being traded on Poloniex as tokens — Bitcoin Cash ABC (BCHABC) and Bitcoin Cash SV (BCHSV).
This is a near mirror image of the situation that created Bitcoin Cash from Bitcoin (BTC) last year. There was some drama over the scaling issue, and Bitcoin Cash ragequit Bitcoin via fork with Roger Ver and Jihan Wu’s assistance.
But this time, instead of forking Bitcoin Cash into existence, it may end up forking the Bitcoin Cash that we know right out of existence.
Cryptoassets as a class have gone down in value since peak prices last December and January, and trading volume has slipped along with it. That we all know.
But if we compare the performance of Bitcoin to Bitcoin Cash during that time, we can see some real problems for BCH.
From its peak price on Dec. 17, Bitcoin is down 66% in price from its high of $19264 to today’s $6393. Its daily volume is down a comparable 67% from $13.5 billion to today’s $4.4 billion. Ok, nothing new here.
Now let’s look at Bitcoin Cash. From its peak price on Dec. 20 at $4091 to the price as of Nov. 1, it is down 89.6%. That’s significantly more than Bitcoin but still comparable to many altcoins. So, not much new here either.
Volume is a different story, though. Bitcoin Cash’s volume has fallen from $12.2 billion to $228 million, a drop of over 98%. That’s a catastrophically bad number, far out of line with Bitcoin’s drop in volume.
The volume is up 400% in the last few days and price is up 30% in anticipation of this fork. This doesn’t come as a surprise because historically, price and volume increase before a fork. But it’s also likely to return to those weak numbers after the fork.
A peek at Blocktivity’s AVI Index (Activity Valuation Index) reveals something that compounds that volume problem. This index is a relative comparison of a blockchain’s transaction activity and its market capitalization to that of Bitcoin. Of the top 18 coins by daily transaction activity, BCH has the weakest AVI. It’s three times overvalued relative to BTC, meaning a fair price today for BCH would be $187. By this metric alone, Bitcoin Cash is overvalued not just compared to Bitcoin but compared to all the other most active blockchains. Why?
It’s the number of transactions.
While the market cap has gone down roughly in line with other altcoins, the number of transactions just aren’t enough to justify the market cap as it is.
Currently, at about 22900 transactions per day or approximately 159 transactions per block, just a casual look at the last few blocks shows some blocks with as few as 13 transactions. In the same time frame, BTC has a few blocks with under 1000, but most are in the 1500-3000 range.
BCH begs to be compared to BTC by almost every metric because it’s their whole raison d’etre.
As an indicator of value, the AVI doesn’t really mean very much, it’s just a relative comparison in an immature market with few real metrics. But it’s an indicator of a serious problem for BCH because transactions are its bread and butter.
BCH is meant to function as an everyday currency. If BTC can be a Store of Value (SoV) like gold, BCH, with its larger block sizes and lower transaction fees, is supposed be a better Medium of Exchange (MoE). But for a coin which claims to be the real Bitcoin, those volume and transaction numbers are anemic. It’s not even fulfilling its own value proposition.
Features like big block size or TPS (Transactions Per Second) are almost meaningless right now anyway. The two biggest and most important blockchains, Bitcoin and Ethereum, both have abysmally low TPS rates. There are dozens of cryptos with better TPS capability. So clearly, TPS is not the be-all, end-all of blockchain value, and neither are transaction fees or block size. It doesn’t matter how big those blocks are if they contain only 13 transactions.
Bitmain — whose CEO Jihan Wu is Roger Ver’s compadre in the creation of BCH — is holding 1 million BCH, which amounts to 6% of the total supply, and is under pressure as it is attempting to launch a questionable IPO at a questionable time. It is increasingly dangerous and potentially costly for Bitmain to hold all that Bitcoin Cash. And it certainly can’t sell 6% of all the BCH in a market with no volume.
So this surge in price and volume comes at a convenient time for BCH. Maybe that’s the point of it all.
Bitmain may have to make a choice — sell into this pre-fork upsurge or continue to hold 6% of the total Bitcoin Cash supply in the face of a potential complete collapse in its post-fork value.
The current spike in BCH volume is entirely speculative — people want to hold it through the fork to get the other chain (or chains) for free. But what will happen after the fork? They’ll sell again, and possibly sell the new forks as well. There may be extreme volatility.
In the past, this has worked for the individual investor with people trying to squeeze more value out of every fork. But last winter there were so many forks that people became fork-weary. What if it doesn’t work as well as last year? What if all the chains dump when everyone is trying to sell at the same time, and no one really wants to hold or use any of them?
This is a Bitcoin Cash stress-test playing out in the market, and it’s very vulnerable. There are fundamental weaknesses with BCH. There are technical weaknesses. It’s a bad time for a contentious hard fork, and there is no strength in the market right now to support it. This event may send Bitcoin Cash into a tailspin that it can’t pull out of.