How the Bitcoin Cash Split Unfolded

Last week marked one of the most dramatic in crypto markets this year. The split in the Bitcoin Cash network unfolded — it rattled wider crypto markets. 

First some background: Bitcoin Cash spun out from Bitcoin in August last year through a hard fork. Hard forks are non-backward compatible changes to the underlying protocol. This contrasts with back compatible changes to the protocol, which are called soft forks. A soft fork is a tightening of the protocol, since these changes will still be valid on older versions of the software. Users can choose to adopt these soft forks or not — an example of a soft fork in Bitcoin is SegWit. Hard forks on the other hands are not opt-in, instead they create a new set of rules and if not everyone upgrades, you have created a new crypto network, and one such network is Bitcoin Cash. Hard forks can come in two forms:

  • Non-contentious hard forks — this is when there is a consensus around an upgrade in the network. Networks like Decred and Tezos are building on-chain voting mechanism to build consensus around protocol upgrades.

  • Contentious hard forks — this is when just part of the network upgrades. An example of this is Bitcoin Cash, when about 10% of the network ‘forked off’ into the new network.

Bitcoin Cash made a non-contentious upgrade back in May. They are planning to continue to upgrade the network every 6 months through hard forks.

The difference this time around was that a competing upgrade proposal by nChain, called Satoshi Vision (‘BSV’), went head to head with the Bitcoin Cash ABC’s upgrade (‘BAB’).

We have been monitoring this situation for some time as it can create interesting arbitrage opportunities. We knew that BitMEX — the world’s largest crypto futures exchange was very likely to follow only one of the new chains. This was also their policy when Bitcoin forked last year. 

We had conviction that BitMEX would only follow one fork in a contentious fork. However, we cannot make money from this view if the market priced that belief in…So, did this occur?

Bitcoin Cash future at discount to spot Nov 1.

Bitcoin Cash future at discount to spot Nov 1.

No. 

The future was actually trading at a premium to the underlying index. For us, this seemed like a big opportunity to sell the future either against a spot position in Bitcoin Cash (arbitrage) or by itself (risk-arbitrage).

In the week leading up to the split, Bitcoin Cash rallied strongly. We believe the momentum was based on investors anticipating the fork and wanting exposure to the potential ‘dividend’ in form of a new coin. We didn’t anticipate this strong ramp-up in Bitcoin Cash’s price.

Big pump ahead of the fork.

Big pump ahead of the fork.

What then happened was a situation where many exchanges, wallets, etc. announced initial support for BAB with the possibility of listing BSV at a later date. It was clear that ABC had the majority of the industry on their side. However, this was not going to be just a contentious hard fork, but fork where BSV main supporters Craig Wright and Calvin Ayer announced they would destroy the other fork through a ‘51% attack’. A miner having more than 51% of the hash power has the power to rewrite the ledger or to censor transactions. This could potentially create a negative spiral where price of the coin being attacked declines in value, making it cheaper to attack, leading to an even lower price.

With BSV friendly miners accumulating 70–75% of the hash power of Bitcoin Cash in the week ahead of the split on November 15 the outcome became very uncertain.

The spread on BitMEX exploded in the days ahead of the fork:

Long the spread might have been the trade of the year.

Long the spread might have been the trade of the year.

This now turned into a ‘hash war’, where miners friendly of BAB needed to gather enough hash power to keep their network intact after a split. Craig Wright threatened to sell Bitcoin in order to fund this ‘war’:

Empty threat?

Empty threat?

Jihan Wu, the CEO of Bitmain and a supporter of BAB on his side threatened to ‘fight till death!’

Jihan Wu getting ready to defend BCHABC.

Jihan Wu getting ready to defend BCHABC.

This lead to wider uncertainty and was a potential trigger for the decline in the crypto market that we saw last week.

On November 16 at around 4.40am AEDT the split in the Bitcoin Cash network happened. 

So far no attack on BAB has taken place; for now we have a permanent split in the network.

We now have two new coins side by side. 

Binance CEO CZ on the split:

Binance CEO, Changpeng Zhao, getting tired of ticker changes.

Binance CEO, Changpeng Zhao, getting tired of ticker changes.

I noted that CoinMarketCap.com still lists Bitcoin Cash, a coin that no longer exists:

This can be confusing….

This can be confusing….

Thanks to the decentralised nature of crypto networks, social consensus trumps miners’ wanting to control the rules of these open networks:

Polymath Nick Szabo weighs in on the ‘hash war’.

Polymath Nick Szabo weighs in on the ‘hash war’.

For now it looks like two chains will continue to live side by side, and for some this is a victory. 

Open blockchains are crypto networks which we can choose to join or not. Resolutions are not fought with real weapons but with ideas and free markets (hash power mostly follows the market). 

This is how Vitalik Buterin, the founder of Ethereum, puts it:

Vitalik on ‘hash war’ as the start of something better to come.

Vitalik on ‘hash war’ as the start of something better to come.

The decentralised nature of these network means many different forms of blockchains can be tested in the open market and in addition different types of governance will emerge — everything from the decentralised governance structure of Bitcoin to the more formal governance of Decred and Tezos. The last week presented some interesting trading opportunities, but perhaps more importantly, it was a test of the anti-fragility of some of these networks — periods of hostility will make these networks stronger and more robust in the years ahead.


Henrik Andersson is the Chief Investment Officer of Apollo Capital — Australia’s Premier Crypto Fund. The Apollo Capital Fund is a professionally managed portfolio of crypto assets, offering investors exposure to the fast growing crypto market. For more information, please see apollocap.io.