October 21, 2022
Greg Cipolaro

Research Weekly - Important Lessons from a Bitcoin Fork


  • Strange events on a Bitcoin fork highlight some important facts about blockchains and mining.
  • Bitcoin’s volatility dips below that of popular equity indices.
  • What stablecoins are saying about crypto markets.

What We Can Learn from a Bitcoin Fork with a Minority Hash Rate

This week, one of the organizations supporting Bitcoin SV (BSV), a distant cousin of Bitcoin (a fork of a fork), reported that a majority of the hash rate on the BSV network had been dedicated to mining empty blocks, excluding transactions broadcast by users. While the incident report went to lengths to describe the miner's activity as dishonest, the reality is that mining empty blocks and forgoing user transaction fees that are paid to the miner is well within the protocol ruleset. This also applies to Bitcoin SV’s antecedent, Bitcoin. While empty blocks are mined on Bitcoin from time to time, it is not a regular occurrence. The reason is that miners are profit-maximizing entities usually unwilling to forgo the revenue associated with transaction fees.

There are some important lessons to learn from this event. First, cryptocurrencies operate in adversarial environments, and events such as what has been occurring on Bitcoin SV can arise for economic, technical, or even philosophical reasons. Accounting for all these edge cases and getting a blockchain to operate autonomously is no small feat, which is why the continued operation of Bitcoin has been such an important achievement. The other important lesson is that strange things can happen when a protocol has a minority hash rate compared to another protocol. Bitcoin SV relies on the same SHA-256 proof of work consensus mechanism as its larger predecessors Bitcoin Cash and Bitcoin, which means they use the same ASIC mining rigs. Unfortunately for Bitcoin SV, the hash rate of Bitcoin and Bitcoin Cash are 431x and 2.3x greater than Bitcoin SV, meaning that a 51% attack on Bitcoin SV is a very real threat. Just a fraction of the hash rate dedicated to mining Bitcoin would need to be pointed at Bitcoin SV in order to cause issues. Indeed, Bitcoin SV has been subjected to numerous 51% attacks in the past.

This ability to direct hash rate is because Bitcoin, Bitcoin Cash, and Bitcoin SV all rely on the same SHA-256 ASIC mining rigs. This also results in choices for miners on the coin they mine. It is tempting to think that differences might make one coin more profitable to mine than another. And while that may be true over the short term, market forces have a way of balancing out the economics between the coins. The following comparison shows that while profitability differences do arise between hash prices of Bitcoin and Bitcoin Cash (a time series of Bitcoin SV data is hard to come by), they tend not to be consistent.

Bitcoin’s Volatility Collapses Amidst a Rise in Equity Volatility

This week, bitcoin’s volatility, as measured by the 1 month-realized volatility, has fallen below that of popular equity indices, the S&P 500 and Nasdaq Composite. The collapse of realized (observed) volatility for bitcoin is reflective of the sideways price trend over the past few months, while the increase in equity volatility is reflective of the turbulence in traditional financial markets. We point this out because volatility is one of the top reasons traditional investors have often declined to invest in bitcoin. While the flip in this volatility dynamic is a recent event, perhaps investors will appreciate that equity market volatility has been suppressed for some time, while at the same time Bitcoin’s technology and investor base is maturing, making it more suitable for traditional market participants.

Stablecoins Recede as Players Jockey for Position

One of the killer use cases for blockchains to emerge over the past few years has been stablecoins, digital assets designed to mimic fiat currencies, predominantly the US dollar. The stablecoin industry was pioneered by Tether, the polarizing asset that launched in 2014 on Bitcoin’s Omni Layer that has now spread to over a dozen other blockchains. While stablecoins come in a variety of styles, such as off-chain fiat collateralized (Tether, USD Coin, etc.), on-chain collateralized (Dai), and algorithmic (TerraUSD, USDD, etc.), and have at times introduced systematic risk into the industry (which was the case with Terra (LUNA)/TerraUSD (UST)), their growth has not gone unnoticed by industry participants and regulators. At their peak, off-chain fiat collateralized stablecoins, such as Tether and USD Coin, accounted for $150B in value. But now money is flowing out of stablecoins as the crypto cycle has turned and yields are available for cash and equivalents that are not paid to holders of stablecoins. This is resulting in a variety of strategic moves as competitors vie for market share.

The observation that money has flowed out of stablecoins is itself a sign of two things. First, the crypto winter, which is nearing a year in length, has likely affected investor willingness to deploy capital into the asset class. Second, the rising rate environment has made it more interesting for investors to hold money in cash, which can generate a yield, rather than stablecoins, which pay no yield. It is unclear to us whether the stablecoin supply is a lagging or a leading indicator of crypto prices, though, as we have seen instances of both. Top of mind is the events of October and November 2018 which saw a precipitous drop (45%) in the supply of Tether precede a 50% collapse in the price of bitcoin. On the flip side, the ensuing rally in bitcoin in April 2019 preceded a change in Tether supply that ramped as investors piled in capital to chase price gains.

The second important observation is that the composure of the off-chain fiat reserve-backed stablecoin market has changed meaningfully over the past few years and even in the past few months. The longer-term trend has been a secular loss of share for Tether, even as it has exploded in size. Late 2018 saw a Cambrian Explosion in Tether competitors, who sought to capitalize on investors’ desire for clarity on underlying collateral for stablecoin issuers. The most successful of these competitors has been the USD Coin, which is a joint effort from Circle and Coinbase. Recently, however, USD Coin has itself lost share to Binance USD, which perhaps can be partially explained by some competitive changes on the Binance trading platform.

A little over a month ago, Binance announced it would automatically convert all user balances of USD Coin, Paxos Dollar, and TrueUSD into its own stablecoin, Binance USD, and cease trading and offering products based on those competitor assets. While this was done in the name of liquidity and capital efficiency for users, it has not gone unnoticed that this favors the platform’s own stablecoin, which has been issued in partnership with Paxos. Yesterday, perhaps in a competitive response, Coinbase waived fees for purchasing USD Coin with fiat. While elbows are being thrown between Binance USD and USD Coin, the real prize might be Tether, which boasts nearly 45% more trading volume than Bitcoin. Of course, all these market dynamics are subject to change depending on the bi-partisan stablecoin bill being hammered out by legislators, the text of which has yet to be released publicly.

Ironically, the major winner of all this, despite the market machinations, is the US dollar. All major off-chain fiat collateralized stablecoins, which represent the lion’s share of the stablecoin industry, are backed by the US dollar. Absent an official Central Bank Digital Currency (CBDC) issued by the US Treasury, which seems a way off, crypto just might be the US dollar’s Trojan Horse to keep its preeminence.

Market Update

While down 1.6% on the week, bitcoin continues to trade in a narrow range centered around the $19K level. Stocks were off again this week as the risk-off environment continues for traditional markets. The S&P 500 was down 0.1% and the Nasdaq Composite was down 0.3%. Bond markets continue to struggle amidst the rising rate environment with Investment Grade Corporate Bonds down 2.1%, High Yield Corporate Bonds up 0.1%, and Long-Term US Treasuries down 4.5%. Gold price fell 0.8% on the week even as inflation expectations rose. Real yields were mixed on the week. Oil prices fell 3.5% as the Department of Energy released 15M barrels of oil from the Strategic Petroleum Reserve.

Important News This Week


FTX Recovery Plan Could Reimburse 72% of Voyager Users' Funds - Decrypt

Fed Set to Raise Rates by 0.75 Point and Debate Size of Future Hikes - WSJ


Mastercard to bring Crypto Trading Capabilities to Banks - Mastercard

Regulation and Taxation:

Crypto Exchange FTX.US Under Investigation by Texas Regulator Over Securities Allegations - Coindesk

IRS Expands Key US Tax Language to Include NFTs - Coindesk

Coinbase Files Amicus Brief In Support Of Grayscale Spot Bitcoin ETF - Bitcoin Magazine

Upcoming Events

November 2nd – Next FOMC rate decision

November 4th – United States Non-Farm Payrolls

November 10th – Consumer Price Index

Thanks for joining us again this week. Please reach out with any questions or comments.

The NYDIG Team

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