OK crypto folks, I've been quiet about the up-coming fork because I haven't had a *clue* what to do, but I think I finally have something useful to say about it. The article is about strategy: asking the right questions and reducing risk at least as much as it is about making profit. As Buffet has said, wealth preservation must come first. And as Simon Black has *brilliantly* emphasizing in his investment advice, analyzing risk closely and minimizing it, should be a massive part of your analysis as you invest. So here goes...
NOTE: this is a long one, but follow me on this, check my premises, repeat my math, and please give me your comments. This is a work in progress. I will be very happy to have holes punched in this thinking. I'm seeking the best approach as well as sharing my thinking for others' benefit.
My approach (which I'll explain here): sell every bitcoin I own a few days before the fork. Then wait and buy back in whenever it looks like a good time. Let's look at the Why...
First, the relevant details and the important questions
- Bitcoin has appreciated quite a bit as people have bought in "to get my free coins".
- This appreciation includes plenty of money moving from alt coins into BTC just to capitalize on the "free coins".
- The 2x coin is valued (in the futures market) at around $1700 ATM. That's $1700/$7400 = 23% boost in your BTC value in "free coins".
- In this recent run-up, BTC has risen $7400 - $4850 (you could argue where this number actually is) = $2550 / $4850 = 53%. Let's do that more conservatively: it really started stair-stepping from $5800, which is $7400 - $5800 = $1600 / $5800 = 28%.
- Do you think there's a chance of all of this "I want my free coins" money leaving bitcoin after those free coins have been claimed? Do you think there's any chance the price might correct more than the 23% your free coins are worth? Especially as the price continues rising over the next 2 weeks, making the value of the "free coins" less as a percentage of your actual gains in BTC?
- Not to mention, to get the value from your "free coins", you've got to sell them, which requires (for most of us) wallets and exchanges to implement the means claiming your free coins. How long do you have to hold your coins post-fork before these changes are made and you can transact the free coins? Last fork (Bitcoin Cash), it was *weeks*. What will the "free coins" be worth by then? BCash fell pretty fast in value post-fork. So it was a race against time waiting for the ability to cash in that free BCash. Is it worth that risk to hold through the fork and ensuing (potential) chaos until you can unload the "free coins"?
- Over 80% of miners are still signaling that they will mine the 2x chain, which seems to point at 2x being the predominant chain immediately post fork. Now, this is the crypto world, so *anything* can happen in the next 10 days, but that's the status ATM.
- If 80%+ of miners start mining the 2x coin, you've got a *long* time to wait before the difficulty adjusts down on the BTC chain. During that time, block time will increase by about a factor 7 and as much as a factor *10* (the reduction in hash power represented by miners stopping mining BTC to mine 2x). So for 1100-ish blocks, the block time will be, let's say, 70 minutes or just over an hour. That also means that the adjustment period could also take 7 to 10 times as long to happen, leaving the BTC network *really* slow to transact potentially for *months* (1100 blocks * 10 minute ideal block time * 7x worst with the miner support dropping = 77,000 minutes before the difficulty adjustment, or 77,000 / 60 minutes / 24 hours / 7 days = 7+ weeks (11 weeks on the high side). See The World Crypto Network's interview for more details from Jimmy Song at time mark 32:45, who is also writing a medium article about this particular topic. It's very technical, but Song really knows his stuff.
- If the 2x coin has the majority of miners and is considered *the* bitcoin, what will happen to the price of your BTC? If you think it might plummet as a result, do you want to be dealing with 70 to 100-minute block times and people racing to sell all at once? and wait numerous ~90-minute blocks to have your transactions go through?
- Do you know enough about the 2 coins to then try to figure out which coin you want your money sitting in (or which coin you want to sell, given the "free coin" must be sold to be worth something...) post-fork while the bitcoin world goes *insane* as this shakes out over days or months? Are the odds of choosing the right coin to keep and the right coin to sell good enough to make that gamble?
That's the landscape and relevant questions as I see them...
Now an Alternative Approach: Sell Before the Fork
- The BTC price will continue to climb up until the hard-fork, at which time, it's anyone's guess, but once people have their free coin, 1) there's much less (perceived) incentive for those people to be in BTC and 2) much of that money will race back into alt coins, which have cratered in the last few weeks and represent screaming deals, or coinbase cash accounts or from wherever it came.
- What if we just sold a couple days before the fork? Sold it all (and relinquished our right to our "free coins")?
- All of the value of the price rise of the last few weeks is locked in, we avoid *all* the craziness post-fork, and we avoid the likely price decline post-fork as the money returns to wherever it was before this "I want my free coins" run up.
- If you think the post-fork decline could be anything on par with the value of the "free coin", this is the *far* less risky option, and it leaves you (in my estimation) with the *much* more sure position, avoiding virtually every drop of the risk and uncertainty that's built into the fork.
- Not to mention, you're now sitting on cash, "attack capital" as it were. You can sit comfortably on your new pile of cash feeling great about locking in your profits, and watch everything unfold. See which coin is the predominant coin, see what the prices do, listen to the people who know more than we do, and then buy back into whichever coin makes sense *after* the dust settles, *after* the money that came in temporarily for free coin leaves (pushing the price down), and avoiding any kind of technical risk contributed by the fork.
Conclusion
I think the best risk-mitigation approach is the sell before the fork, locking in the profits you've made as this run-up has happened, while the network makes that sale easy, fast, and cheap, and get back in at your leisure post-fork once we figure out how this is all playing out.
Special Thanks to Thomas Hunt of the World Crypto Network, as well as Tone Vays and Jimmy Song. Great sources of solid info and perspective on bitcoin and related topics.
Also a huge thanks goes to Carter Thomas who provided the seed thought for this post.
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