Analysis: the cryptocurrency civil war that’s cost $1m a day – and isn’t showing signs of stopping

The cryptocurrency markets continue to struggle, thanks to a civil war that’s sprung up, costing millions of dollars and counting…

by John Moore and Simon Brew for CNR

After months of relative calm, a period of relative serenity that had led to a slow growth of confidence in the market, the world of cryptocurrency was turned on its head last week. Dramatically so.

It was ignited by a fork in the popular Bitcoin Cash cryptocurrency, one that has led to a fierce battle between two different sides. On the one hand, there’s the newly-created Bitcoin Cash ABC, seen by many as an extension to the existing Bitcoin Cash protocol currency, albeit adding new features. This version is being supported by so-called ‘Bitcoin Jesus’ Roger Ver, and boss of major cryptocurrency exchange Bitmain, Jihan Wu.

But on the other there’s the Bitcoin Satoshi’s Vision variant of the fork. The latter is being fiercely backed by Dr Craig Wright, who claims to be one of the original inventors of Bitcoin (a claim that’s been questioned). Wright’s view is that this is a purer version of what Bitcoin should be (hence naming it after Bitcoin’s original developer Satoshi Nakamoto), and if anything, that it should be rolled back to the original idea behind the cryptocurrency.

Having two competing variants on a cryptocurrency in itself shouldn’t be a major problem. But this particular battle has heavily ignited, and is behind the dramatic crash in prices across the entire crypto sector last week (that’s continued already into this)

The headline was that in a matter of hours, over a fifth of the value was wiped off the price of Bitcoin – the most popular currency – for instance. Bitcoin had been trading in and around $6400-$6600 for a couple of months (after a year that’s seen its price fall from its peak of near-$20,000 at the end of last year). Yet at the time of writing, it currently stands at just just over $4600 – and the new cryptocurrency civil war is the reason why.

What, then, has happened? Why has it happened? And what’s likely to happen next?

What is a cryptocurrency fork?

Let’s start with the basics.

When a standard piece of computer software needs an upgrade, or when its publisher wants to add more features, generally some kind of update is issued. But in the case of blockchain software technology – that underpins cryptocurrencies – that isn’t possible in quite the same way. The software the underpins a blockchain (the blockchain being the technology that keeps record of a cryptocurrency, spread widely into small blocks so that, in theory, one person can’t control or manipulate it) sometimes requires new features, but to add them comes with notable complications. As such, a fork is required.

There are two types of fork.

A hard fork is a permanent change, one that makes the new version of the blockchain incompatible with the old. A soft fork has backwards compatibility built into it, and thus all previous transactions will be accounted for and recognised.

A hard fork is effectively a reset of the ledger. The existing variant of a cryptocurrency will still exist in almost all cases, but the new versions – with different features and ideas – will also trade alongside them. Thus, Bitcoin Cash forked out of Bitcoin, but both still exist.

Last week, though, saw a hard fork of Bitcoin Cash itself. A hard fork that ultimately led to two new variants, that have clashed spectacularly.

Who is involved in the battle?

The battle for Bitcoin Cash is being fought out by two the most contentious forces in the world of cryptocurrency.

Spearheading the ABC side of the battle is Roger Ver – a man who, for his zealotry in promoting cryptocurrency in the past five years, earned himself the nickname ‘Bitcoin Jesus’. A libertarian-leaning advocate of unrestricted financial freedom, he was instrumental in creating Bitcoin Cash as a fork from the original Nakamoto-created Bitcoin blockchain back in August 2017, following a prolonged internecine argument among the Bitcoin community regarding how to deal with increased use of the coin and the costs that incurred.

On the Bitcoin SV side, stands Dr. Craig Wright – a truculent polymath who around five years ago infamously claimed to be none other than pseudonymous creator of Bitcoin, Satoshi Nakamoto. That’s a claim he has since stuck with, despite failing to provide proof comprehensive enough to please the wider crypto community, and being branded as a fraud by many of them.

Indeed, even Ver himself has been forced to address his prior support of Wright, who was part of the Bitcoin Cash coalition that Ver brought together to attempt to challenge Bitcoin.

In a recent video for bitcoin.com, a visibly frustrated and seemingly incredulous Ver told watchers that it was hard to admit to being “fooled” by Wright’s claims, before relating some of the personal attacks he has received from him. He also related another refusal from Wright to provide conclusive cryptographic proof that he is actually Nakamoto, despite repeating the claim.

Arranged behind each of these figureheads, are some of the biggest names operating behind the scenes of cryptocurrency. Chief among these are the rival mining concerns, the owners of the massive computing ‘pools’ that do the complicated mathematics required for a cryptocurrency’s blockchain to operate.

Beside Ver stands Jihan Wu, one of the co-founders of Bitmain – the world’s largest supplier of hardware to cryptocurrency miners, and the owner of the large Antpool mining concern. On the ABC side, stands Calvin Ayre, a online-gambling billionaire-turned-crypto-advocate, who owns and runs the CoinGeek mining pool website.

They are basically the major forces supplying the firepower that the war is being fought with. The question is, with the costs mounting – as we’ll see below – does anyone have pockets deep enough to continue a prolonged conflict?

Why are they fighting, though?

A hard fork doesn’t have to be contentious, and it doesn’t have to cost massive amounts of money. When Bitcoin Cash initially forked from Bitcoin, there was plenty of hype, but little by way of warfare.

That hype mainly came from the creation of another, new, seemingly legitimate, cryptocurrency from what amounted to thin air. While there was plenty of zeal from Ver regarding why Bitcoin Cash was the ‘real Bitcoin’ and best placed to fulfil the ideas of Satoshi Nakamoto for bypassing banks and putting monetary power back in the hands of the people, there was little of the bad blood that has been seen between the opposing teams here.

Almost uniquely, however, this clash of crypto personalities has been ignited by threats – largely from Craig Wright’s Bitcoin SV side of the fence – to attempt to take control of both the blockchains created by the split in order to enforce a singular vision for the future of Bitcoin Cash. While it all may seem a little on the petty and personal side, for both there are high stakes on the table, not just in terms of reputation or their stated ideological goals.

There have been a number of possible methods mooted for how any takeover could potentially be done. In a social media barrage before the fork last week, Dr. Wright was more than happy to give the impression that implementing one or all of them was indeed his plan. Much attention in this area has thus been directed towards the relative ‘Hash Powers’ of the two sides – basically the amount of computing power they have dedicated to their networks, as pretty much all of the proposed vectors for one to inflict damage on the other, revolved around having enough such power to take percentage control of the ‘Hash Rate’ and/or mine blocks quicker.

While, with the backing of several major mining concerns, Bitcoin SV appeared to be in the ascendancy in terms of Hashing, alongside some subtle (but controversial to the community) technical tweaks to its code, Bitcoin ABC’s main form of defence up until now has been up its own hash rate to ensure that it fends of anything the Bitcoin SV side throws at it.

This is why what’s been going is being dubbed a ‘Hash War’, as Hashing is the process of guessing the numbers that are required to mine proof-of-work based cryptocurrencies like Bitcoin and Bitcoin Cash, and add the blocks to the blockchain. For committing their computing resources to doing these sums, miners are rewarded with fees from those using the network, and also with the cryptocurrency they’re mining, which – depending on their business model – they sell when they see fit.

It takes power to run a mining rig, and a lot of power to run a lot of mining rigs – therefore, the amount a miner receives in fees and crypto must exceed their costs or they will simply turn the machine off, or look for a different cryptocurrency to mine. While some operations, like CoinGeek, are somewhat ideologically driven to support a certain ecosystem, others routinely switch between mining different coins to gain the most profits.

It is widely thought that much of the extra power being dedicated to mining Bitcoin Cash ABC in recent days has been borrowed from mining pools – like the Bitcoin.com pool – that are generally employed mining on the so-called ‘Core’ Bitcoin blockchain. At the moment, mining Bitcoin is a far more profitable endeavour than mining Bitcoin Cash, so why are they doing it? Well, someone is footing the bills and making up what they could have earned, by the looks of it.

How much is all of this costing?

A lot.

Every day that the battle goes on, both sides are losing at least six figures in US dollars according to conservative estimates by researchers for the crypto exchange, BitMEX. Based solely on a rough estimate of the power consumption of the machines currently engaged in the showdown between the two Bitcoin Cash factions, they have spent $3.3m between them in the less than four days since the fork, at a rate of approximately $860,000-a day (or over $35,000 per hour).

Bitcoin ABC, which has consistently boasted the higher Hash rate, at least until today, accounts for approximately $2.5m of that total, costing it north of $650,000 a day. That, however, is a wildly conservative estimate of what the real cost to Ver and his team is, because it does not take into account the opportunity cost of those miners who could be making bigger profits on Bitcoin right now.

BitMEX, again, has some figures on this. Early on in the process, it came up with a rough figure for what the cost of mining a Coin was on each Blockchain, and compared it to the cost of mining Bitcoin in the same period.

Such comparisons are not what they seem however, as were all the processing power from the Bitcoin Cash network suddenly pointed at Bitcoin, it would become much more difficult to mine the more expensive crypto, and thus profits would suffer. However, according to fork.lol’s reckoning, over the last seven days it has been 40% more profitable to mine Bitcoin compared to Bitcoin Cash. So, if Bitcoin Cash is funding the cost of all that extra mining power to protect its network, it is almost certainly paying that cost to.

Again, BitMEX’s team has tried to account for this cost, by pricing in the cost of the kind of processing power that has been thrown at the problem. For reference, at its peak, the Bitcoin Cash ABC hash rate of 9,000petahashes/s was high enough to have made it the biggest mining pool in the Bitcoin at the time, and nearly double the size of its nearest rival. That’s on a network that is routinely hashing at above eight times the total volume of BCH’s. That’s a boost in clout that BitMEX reckons could be costing the ABC team nigh-on another $1m-per day.

Even with the deep pockets underwriting this endeavour, in a market that appears to be dropping in value by the hour, one wonders how long losses of those kinds can be sustained. The cost of not mining Bitcoin compared to the two new cryptos is only going to grow as prices keep falling too, it would seem. According to CryptoCompare the last 24hrs has seen ABC lose 17% of its value compared to SV’s 26%. Considering Bitcoin has seen a dip of 8%, that opportunity cost of the choice to back one of the sides here just got even higher.

While both sides seem to want to convince onlookers that it’s not about the cost as much as the principle, with markets seemingly in heavy decline, their conviction may be tested much sooner than they initially imagined.

What happens now?

Just under a week on, and the length of the civil war is hard to determine. Primarily because one of its protagonists has real appetite to keep it going. Wright is a man on a mission, and he’s made his intention clear in regular updates to his Twitter feed. Here’s an example…

Caught in the middle of this are investors and members of the cryptocurrency community who don’t feel this is their fight. Yet because of the feral nature of it, they’re inevitably affected. Many cryptocurrency exchanges are effectively frozen by the state of the market, with the shadow of uncertainty over it. They just want this sorted, one way or the other.

When questioned by one user on Twitter as to how long Wright intends to carry on with his attacks, he replied “years”, adding that “you do not understand… we have a path forward without exchanges”.

Whether Wright has the resources to continue what’s proving to be a very costly fight for so long is unclear. What’s very clear is that he has the resources, voice and platform to do so now, and pretty much the entire market has suffered as a consequence. If his intention was to swing a wrecking ball into the status quo, then so far, he’s achieved that.

Yet he’s also damaged confidence in cryptocurrency entire. 2018 has seen crypto make inroads towards presenting itself as a viable alternative to existing monetary systems (notoriously, the Venezuelan government has introduced a state-backed cryptocurrency to try and reverse its financial crisis), and the prolonged period of stability it’d enjoyed since the summer had helped.

But if a currency can lose 20% of its value in a matter of hours, down to the actions primarily of one person? That’s a sizeable issue, and one that’s going to hold the adoption and acceptance of cryptocurrency back. The knock-on costs of every day the battle continues are likely to be felt for some time.

Image: BigStock