Jeffrey Tucker: A Beginner’s Guide to Bitcoin Chaos

I can’t remember a nuttier weekend in the history of Bitcoin than this one. That’s because the action gets more exciting by the day, with deeper plots, more options, growing complexities, and financial and personal drama all around.

You know why? Because this technology matters enormously for the future of the world. It’s Day One in the birth of a new way of doing business.

My own Twitter and instant messaging blew up with questions, assertions, declarations, and anathemas. I loved every minute, but that’s because I enjoy this world. Outsiders just getting into Bitcoin must be completely confused or even terrified.

I can only imagine what it must be like for someone who ventured into Bitcoin within the last 30 days. They must be wondering what kind of circus this is, especially if these people became curious and started examining the vibrant sector of Bitcoin news organizations. You can read this material all day and leave more confused than ever.

And it is true: Bitcoin is more confusing now than it ever has been. It’s the last place anyone thought we would be five years ago, but such is the nature of an emerging and massively disruptive technology. It’s going to be a long time before it is as easy and inevitable as electricity.

What exactly was going on? I could not begin to give a full account even if I did understand it all. I’ve got no real dog in the fight taking place right now but rather write as an enthusiastic observer and minor participant in the most exciting technological drama of my lifetime. It’s extremely hard to write about this for the uninitiated without seeming to speak Klingon, but here is my attempt.

BTC vs. BCH

Essentially a new currency called Bitcoin Cash (a “fork” from the main chain, meaning that all previous Bitcoin owners also own Bitcoin Cash) came into its own, after having been declared dead only a few weeks ago. I heard for weeks that this thing called BCH was “going to zero”…just before it didn’t. It did the opposite.

The shock was (and is) palpable. For years, people have been wondering if Bitcoin could forever maintain its top spot in the cryptocurrency world, given just how much competition is out there. Anyone can make a token. Surely Bitcoin could be challenged at some point.

Two nights ago, the least likely candidate emerged from the pack. Plain-old Bitcoin (BTC) is still #1 is market capitalization at $104 Billion. Pause to consider how large that is and yet it is only 2% of gold valuation, which suggests that it has a long way to go. The token for the Ethereum (ETH) blockchain (more of an asset than a currency) has been a far lower #2 for a long time at $29 billion.

Suddenly Bitcoin Cash (BCH) rocketed past Ethereum in market capitalization, peaking at a dollar exchange ratio of $2,400 (with a temporary market capitalization of $32.8 billion) before falling again and then ever faster, finally to land at $1,100 (with a market cap of $18.8 billion) as for this writing. It was a wild ride. 

And this suddenly raised the possibility that BCH, which has only existed for a few months, could become a popular currency at some point in the future. That is saying something given that the currency has limited wallet support, super low transactions, and is far from being mainstream. But the community that is speculating on prices now lives in anticipation of whatever is the next thing.

Critics say is a sure sign of a bubble. That’s not obvious to me, given that we are dealing with such a massively disruptive technology with applications for everything from money to finance to law. Wild swings are to be expected. 

What comes next is not decided upon by pundits or advocates, or even the biggest players in the markets, but market forces themselves. Markets are eminently more practical than intellectuals. 

The Advent of BCH

What kicked off the price increase (and new interest) in Bitcoin Cash were several factors.

First, the transactions fees and/or processing time of Bitcoin transactions have soared, robbing the Bitcoin ecosphere of what many of used to say was the key advantage of the cryptocurrency. This has happened as the network has become more crowded and the “mining” community that is confirming transactions with processing power are choosing high-priced transactions over others, which is to say, behaving like market actors (but in ways that users do not like). 

Second, a major solution to the problem called Segregated Witness, which separates signatures from transactions and frees up space (among other changes), was activated in August through a soft fork, a backward-compatible way to upgrade Bitcoin. The beauty of a decentralized development process is that we do not have to choose only one path forward.

A separate proposal called SegWit2x that added in a change to increase Bitcoin’s block size through a hard fork (a non-backward compatible upgrade) failed to gain traction. This happened because a number of major industry players chose consensus over the risky step of imposing a hard fork on the protocol itself.

These realities are pressing concerns because Bitcoin is at a point where it needs to scale for the next stage of practical use. The question is how and this is what led to Bitcoin Cash. Making the blocks bigger addresses an aspect of the current problem, but everyone knows that it still kicks the can down the road. The point is that we don’t live in the long term; we must deal with current realities.

The other longer-term solution is creating multiple layers on top of a base Blockchain, kind of like highways. Think about it: are our computers getting bigger every year? No, they get smaller, but are faster and more efficient in what they do. The future of Bitcoin could take the same direction.

Further, defenders of the status quo point out that it was never intended to scale on chain. Early adopters understood that Bitcoin’s ledger would eventually come to operate as a system for final settlement of transactions, while encouraging further innovations to address more specialized financial needs.

Other currencies and services would step in and serve as more efficient systems for small transactions and for credit services. For example, developers have built second layer systems that sit on top of bitcoin, such as Lightning Network, that enable instant, high volume transactions that settle to the blockchain. Some such systems date back to the middle of 2013, though with limited adoption rates, but have low impact on how Bitcoin is used today.

The Near Term

It turns out that aspects of the long-term have arrived sooner than was anticipated. That creates a problem and an opportunity. People are currently using Bitcoin not only as “store of value” but also as a real money: a means of facilitating real transactions right now. Frustration with high transaction fees inspired a team to fork the original chain to create Bitcoin Cash (BCH), which multiplied the pre-Segwit Bitcoin block size by eight times, and hence will presumably work well for small transactions for some time to come.

Critics say that this approach takes us in the wrong direction toward disincentivizing miners and bringing about more centralization. On the other hand, and this is the beauty of a decentralized development process, we do not have to choose only one path forward. BTC, BCH, and a thousand other cryptocurrencies, can operate at the same time. This grants what F.A. Hayek called “choice in currency,” an idea that was a dream in the 1970s but is quickly becoming our current reality.

BCH is not the only contender to address the desire for cheap cryptocurrency transactions. Many services are working to upgrade their code to integrate SegWit transactions (some already have) and are preparing to utilize the second layer systems built over the past few years on Bitcoin. Meanwhile, many other currencies are competing to provide the services that Bitcoin cannot, including better privacy and faster confirmation times such as Litecoin, Dash, and Monero.

Aside from them, there are the asset-class cryptocurrencies such as Ethereum and Ripple which themselves could function as mediums of exchange under the right conditions.

But look out for the new kid in town: Bitcoin Gold (BTG). It has nothing to do with gold as a commodity. As incredible as it seems, this is yet another fork with a different ambition: to decentralize mining by providing a new and easier method. 

It has already received support from the industry because it includes several seeming improvements that would have been difficult to gain traction given the Bitcoin mining ecosystem. It began trade today, as of this writing, and it is already enjoying a higher price than most anyone in 2012 believed any cryptocurrency could obtain.

Does This Chaos Doom Bitcoin?

Presumptions of good faith seem to be in short supply.

The debate over the matter of scalability has been going on three full years and even longer. But as the price and user base have massively expanded (here are more charts on this than you will ever need), the imperative for a scalable way to use Bitcoin has intensified. The pressure built and built until the amazing explosion of change that has hit us in November 2017, a month that will surely go down as historic in the annals of cryptocurrency.

So intensely divided has the once-united community become that it’s impossible even to Tweet about the subject without being called ghastly names. Let’s just say that presumptions of good faith seem to be in short supply. For my own part, someone speculated that I’m personally behind the scenes manipulating the price of all these coins for my own benefit, a fact which would very much surprise my friends.

On top of all of this, you have the old world financial community that regards this entire sector as one big Ponzi scheme. People like Jamie Dimon would tell you that you are a fool for putting so much as one dime on this technology, whether BTC, BCH, BTG, ETH, or any other. 

What Doesn’t Kill It

The current chaos is a symptom of Bitcoin’s successes, not its failures.

What’s the meaning of all this chaos? For my own part, I’m delighted by it all. Why? Because the more this sector is pounded on, denounced, broken, and forked, the stronger it grows. This is because it is the product of a dynamic and competitive marketplace rather than some kind of central committee. That makes it adaptable, robust, and intimately connected to human choice.

In other words, all the current chaos is a symptom of Bitcoin’s successes, not its failures. There is no greater contemporary example of order emerging from seeming chaos than you find in this sector.

I’m also delighted because I’m convinced that no one guru in this space, to say nothing of the planners and intellectuals outside of this space, can know for sure what the future holds. As for average investors, the slogan is probably right: “Keep calm and HODL.” (The misspelling is correct.) 

This much we can say: whatever emerges will be better than the systems that have monopolized world finance for the last one-hundred years. Moreover, this time, the sector will not be frozen in time but instead will never stop emerging.

Enjoy the ride!

Note: I would like to thank many the many specialists in the space who made suggestions and fixed errors on earlier drafts of this article. For more articles from FEE on the topic, see the above tags Bitcoin and Cryptocurrency. My favorite data and news sources are: Bitcoin.com, CoinMarketCap, Coin Telegraph, and Brave New Coin.

Jeffrey A. Tucker


Jeffrey A. Tucker

Jeffrey Tucker is Director of Content for the Foundation for Economic Education. He is founder of Liberty.me, Distinguished Honorary Member of Mises Brazil, economics adviser to FreeSociety.com, research fellow at the Acton Institute, policy adviser of the Heartland Institute, founder of the CryptoCurrency Conference, member of the editorial board of the Molinari Review, an advisor to the blockchain application builder Factom, and author of five books, most recently Right-Wing Collectivism: The Other Threat to Liberty, with a preface by Deirdre McCloskey (FEE 2017). He has written 150 introductions to books and many thousands of articles appearing in the scholarly and popular press. He is available for press interviews via his email.

This article was originally published on FEE.org. Read the original article.

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21 Responses to Jeffrey Tucker: A Beginner’s Guide to Bitcoin Chaos

  1. Tim Neilson

    On top of all of this, you have the old world financial community that regards this entire sector as one big Ponzi scheme. People like Jamie Dimon would tell you that you are a fool for putting so much as one dime on this technology, whether BTC, BCH, BTG, ETH, or any other.

    He’s conflating two things. Investing in the technology and investing $1,000’s to buy cryptocurrency are two different things.

    Bubble, bubble, toil and trouble…

  2. Texas Jack

    Any system that has the attractive feature of rendering obsolete whole sections of tax code across multiple jurisdictions is likely to have the useful life of a tulip craze…

  3. Texas Jack

    If I can buy that beer at The Ivy with untaxed Bitcoin trade earnings…..

  4. John Bayley

    The BCH move in recent days was a classic ‘pump & dump’. There is enough evidence to show that the large BCH miners/backers, most of whom are concentrated in a few Chinese outfits, flooded the BTC network with lots of spam transactions to drive transaction fees sky high and to create an impression that the BTC blockchain was being abandoned in favour of BCH.
    There is no denying that the BTC protocol has scaling issues now that it’s becoming almost ‘mainstream’.
    I am no IT guru, but I do understand that the technology change that was the reason behind the BCH fork (block increase as opposed to SegWit) is in itself no final answer to the scaling issue and in fact the very early fork of Bitcoin called Litecoin (LTC) is clearly superior in this aspect to both BTC and BCH. Yet Litecoin’s price has been remarkably steady – at least in crypto currency terms, anyway.
    The takeaway from all of this is actually quite exciting.
    The crypto space is one of the very few, if not the only, truly free market places, where innovation has been rapid and the rewards for early ‘pioneers’ have been truly huge.
    BTC may not ‘win’ in the long run, but the concept of trustless peer-to-peer transactions, with complete anonymity (Monero), is not only going away, but has barely just started.
    To me, by far the best thing about the crypto space is that it offers one of the very last ways to escape the total control governments are trying to exert everywhere. As witnessed by the fact that some Zimbabweans have in the last few weeks apparently been prepared to pay up to 80% premium to buy some BTC, and that Venezuelans are increasingly turning to the same space to protect themselves from their own ‘workers’ paradise’.

  5. Speedbox

    Certainly has been a wild ride!

    The success of Segwit2X was never guaranteed. The New York Agreement was showing cracks from the beginning. But, some people being eternal optimists (or thinking a new coin would be issued like BTG thus free money), pushed BTC prices. Then, FOMO (Fear of Missing Out) took over some people and the BTC price rose accordingly.

    But, in the end, the bang was a whimper.

    Anyway, whether BCH can maintain a current price of about $US1,100 into the near future remains to be seen although many have taken their profits and moved on.

    What is undoubted is the interesting market dynamics at play. There is geo-political intrigue; mammoth investors stomping around the market; increasing numbers of Chinese slipping money past their currency controls; upcoming formalized futures trading; and, of course, the growing impact of Blockchain (which is an entire other story).

    Hang on tight because the ride isn’t over yet. In fact, its only just beginning and I remain convinced that cryptos and Blockchain present once-in-a-generation opportunities.

  6. ar

    I’m a bit sick of johnny come lately academics posting long essays about bitcoin and crypto on The Cat- you’re better than this. If you were ahead of the game then you would have been posting about (and investing in) crypto in 2015 or before when it was boring and the price was terrible due to MtGox.

    Crypto is obviously in a bubble and the only relevant question to answer now is “What is the correlation between crypto and other assets in a crisis?” Give an option on this and I’ll have more respect for you. Specifically tell me if crypto or gold will do better in a crisis and why? E.g. gold/crypto will do better because governments will ban crypto/gold in a crisis and crypto/gold is easier to smuggle. Alternatively tell me how/why crypto won’t be diluted by ever Tom, Dick and Harry launching their own Crapcoin every time they disagree with the incumbent community.

    On a slightly different topic- if you like “Blockchain” but don’t like any specific cryptocurrencies then tell me why? Blockchain is just hashing data (or near equivalent) to make it very hard to change. This has been done with passwords since at least the invention of MD5 in 1991. The hashing algorithms have gotten better and harder to crack but no one has made any money from it. Why is blockchain different? It’s a good algorithm and that is all, it’s not a profitable algorithm.

    Next thing you know you guys will be talking about “caching” or “compute at edge” like it’s going to save the world.

  7. Rohan

    And what happens when the bitcoin servers get attacked by a Wannacry type crypto-ransomware virus, that demands payment in bitcoins for the decryption key?

    Ha, didn’t think of that. Doofuses.

  8. John Bayley

    And what happens when the bitcoin servers get attacked by a Wannacry type crypto-ransomware virus, that demands payment in bitcoins for the decryption key?

    There are no ‘bitcoin servers’. Please study up on the topic before making comments that don’t make sense.

  9. John Bayley

    Alternatively tell me how/why crypto won’t be diluted by ever Tom, Dick and Harry launching their own Crapcoin every time they disagree with the incumbent community.

    For the same reason gold has not bee diluted by governments launching their own fiat currencies.
    It is a free market. There are now almost 1,200 cryptocurrencies out there. Yet BTC has continued to go up in value, both against fiat and in its purchasing power.
    Most of the alt-coins will fail. BTC itself may fail and something else will take its place.
    Ain’t free market & free choice great?

  10. Nerblnob

    It’s Day One in the birth of a new way of doing business.

    It’s Day One again?

    Look, Cat posts I read on BitCoin are the nearest I get to understanding this shit, so I’m not just taking the piss.

    But – you wrote “vibrant”, so fuck off.

  11. Michael Muscat

    Remind me again how well your cashless society idea works out when the lights go out this summer.

  12. cuckoo

    It’s going to be a long time before it is as easy and inevitable as electricity.

    Whoever wrote that doesn’t live in Australia.

  13. Zatara

    Bitcoin Mining Is Still Happening in China

    In a meeting hosted by the International Telecommunication Union in October, Yao Qian issued the following statement:

    “The value of cryptocurrencies such as bitcoin primarily comes from the market speculation. It will be a disaster to recoganize it as a real currency. And the lack of a value anchoring inherently determines that bitcoin can never be a real one.”

    Here’s How Hackers Can Hijack Your Online Wallets

    Two French hackers used their computer skills to reconstruct a blurred-out code on TV and claim bitcoins worth $1,000 (£760).

    Hackers aren’t going to go away and no cryptocurrency is insured. Once it’s gone it’s gone.

  14. .

    Government currencies fail all of the time and they are a vehicle to coerce money from taxpayers by stealth.

    The horror stories about BTC apply equally to banks right now.

    Microsoft, 300,000+ stores in Japan and AMZN all accept BTC for payment.

    You can accept it or you can be left behind.

    If the power goes out; what am I going to spend cash on?

    Spoiled meat? Sit in a dark pub with no cooling? You can’t run down to Origin or Energex and throw coins at their offices until your A/C hums into life again.

    Nor will we have continuous faults; the issue then would be illiquidity rather than capital going to 0.

    BTW CoinJar have an EFTPOS card that allows BTC to be used as AUD or withdrawn at the POS or an ATM.

  15. Zatara

    AMZN all accept BTC for payment.

    No, Amazon does not accept bitcoin.

  16. hzhousewife

    In the future governments could be wise to only provide benefits to people who can show they have contributed to such governments by way of taxes. For example, I fully understand that they could not withdraw roads, but they could withdraw driving licences. Just musing. All the people who want to pay no taxes seem to me to be very keen on benefiting from modern society but not contributing to it.

  17. .

    Okay, PayPal…with a lot of rumors that AMZN will accept soon (given the domain names they have registered).

    That might change everything. IIRC around 20% of internet traffic goes through their servers.

    A bubble doesn’t last for a decade; BTC is surrounding by fiat currencies which have endured not only typical “mild” inflationism but almost a decade of QE.

  18. .

    In the future governments could be wise to only provide benefits to people who can show they have contributed to such governments by way of taxes.

    Maybe they can start only taxing those who seek such benefits? Some families over generations have paid literally for the government expense of thousands if not millions of their fellow citizens. James Packer’s kids will never receive back what their family has “contributed”.

    All the people who want to pay no taxes seem to me to be very keen on benefiting from modern society but not contributing to it.

    Take a step back. What if by funding government you are actually actively participating in a lowering of our living standards? Then it is your moral duty to NOT pay any tax.

  19. Zatara

    Paypal doesn’t “accept” bitcoin. It allows its participants to exchange it. But you can bet paypal gets their cut in US dollars.

    On the other hand, Amazon is an actual merchant who sells things so if they accept bitcoin there comes a conversion issue as their suppliers and the businesses they allow to trade on their system won’t necessarily accept it because guess what? Many people don’t trust bitcoin and for excellent reasons.

  20. .

    Many people don’t trust bitcoin and for excellent reasons.

    Such as? Seignorage? Banking system collapse? A lack of openness? Manipulation? Quantitative easing? Price fixing? Entire exchanges collapsing due to the greed of their own employees/traders? Governments implanting RFID devices in currency?

  21. .

    Paypal doesn’t “accept” bitcoin. It allows its participants to exchange it. But you can bet paypal gets their cut in US dollars.

    Let’s go back a few years:

    Cyldesdale Bank doesn’t accept GBP. It allows its participants to exchange in it. You can bet the head office (NAB) gets their cut in AUD…

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