Earlier today, Coindesk published an article on this morning’s BCH halving featuring some thoughts from Unbounded Capital’s Managing Partner Zach Resnick. The focus of the piece was BCH specific but the logic of Zach’s criticism extends to BTC’s approach to scaling while conversely praising BSV’s approach. These long term economic and technical advantages of BSV were a primary catalyst for Unbounded Capital’s shift towards exclusively investing in BSV and businesses leveraging it.
The following is a brief elaboration on Zach’s (and Unbounded Capital’s) thoughts regarding this month’s halvings. For our more detailed thoughts on the topic, check out our blog post from yesterday, The Halving, Miner Profitability, and Chain Death.
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At Unbounded Capital, we see the upcoming bitcoin halvings as most likely being short term non events with long term existential implications for chains that refuse to properly scale. The conventional crypto wisdom that the halving magically induces a bull run such that the real USD value of miner revenue does not cut in half is naive wishful thinking encouraging investors to be fooled by correlation/causation. Given the current market conditions, this bullish speculative frenzy coming to counteract the halving doesn’t seem likely this time around. Thus, miner revenue will truly halve, leading to many miners becoming unprofitable and shutting down.
For this halving, since there are three major versions of SHA256 bitcoin that halve at different times over the next 30 days, there will be the introduction of added game theory as “nomadic hash” is incentivized to flee already-halved chains for chains that continue to retain their 12.5 coins/block block subsidy. Because of this incentive to arbitrage across chains we expect hash rate to be volatile, but we don’t expect this to have a significant impact on coin value.
However, what will be of paramount importance to the value of coins moving forward is having a viable path towards replacing the disappearing block subsidy with transaction fees. This solution needs to be both technically and economically viable:
Big Block Approach
The big block bitcoin forks of BCH and BSV plan to follow Satoshi’s initial design and scale the blocks to allow for a greater number transactions paying small fees. A key point of divergence between BCH and BSV is where to find this higher volume of transactions. BCH hopes to increase merchant and user adoption for payments while BSV hopes to increase enterprise adoption as well as non-payment-specific computational/data storage transactions leveraging BSV as a backend. At Unbounded Capital we think the BCH path is not viable for several reasons but one crucial reason is the recognition that the clock is ticking on the subsidy and merchant adoption is not growing quickly enough to replace it.
Small Block Approach
Because the small block bitcoin fork of BTC has refused to scale the size of its blocks, in order to continue to compensate miners they will need to either remove BTC’s absolute scarcity (do away with/alter future halvings) or convince users to accept paying ever growing transaction fees to use the network. The latter remedy seems unlikely as both the obvious lack of utility and pending existential threat to the network will grow while users are expected to value BTC more highly as measured in their willingness to pay higher and higher fees.
This long term miner incentivization problem has always existed in bitcoin, the halving simply makes it more obvious. Both BCH and BTC have implausible solutions to this problem as they largely ignore its existence. BCH and BTC miners and investors may be able to continue ignoring this inevitable threat this month, but they won’t be able to forever.