This study is designed to aid in the determination of whether an exchange, index provider, investment manager, or any market participant should support a new fork or credit holders of the parent chain with units of the forked asset. It was conducted with particular focus on the several months immediately after the fork event.
Deciding on which forks to support is an independent decision that each market participant must make. Although there are over 100 known forks of Bitcoin, only a small number have achieved meaningful market valuations. For the purposes of this study, three forks are examined: Bitcoin Cash (BCH), Bitcoin SV (BSV), and Bitcoin Gold (BTG). Coin Metrics’ coverage of network data and market data is complete for these three assets.
Comparing forks that may occur in the future with the baseline performance established by these three forks allows an objective method for determining whether to support the fork. Although Bitcoin SV forked from the Bitcoin Cash parent chain, it is still in competition with Bitcoin for mindshare and status among the community. Thus, Bitcoin SV data is still compared to Bitcoin’s data in the analysis below.
The following analysis examines the legitimacy of forked assets along two dimensions: market data metrics and network data metrics. Market data metrics are defined as metrics derived from off-chain transactions in the form of trades that occur on major exchanges. Network data metrics are defined as metrics derived from on-chain transactions that can be observed by running a full node.
Since forked assets have the incentive to give the impression of elevated activity, particularly in the moments immediately after the fork event, focus was given to metrics that are resistant to manipulation. Focus was also given to the state of the forked asset up to the 50th day after the fork event – a short enough time window for an operator to make a timely decision but also long enough for some limited market and network data to accumulate.
Measuring Legitimacy Through Market Data
Fork legitimacy is examined along three market data metrics: exchange support, price, and volume.
The degree of exchange support is an important determinant in a fork’s success. At the time of the fork event, each exchange must independently evaluate the legitimacy of a fork and decide whether to add new markets where the forked asset can be traded and whether to credit holders of the parent chain with the forked asset. Although few exchanges have publicly disclosed their criteria for deciding whether to support a fork (see Further Reading section), their collective actions can be examined as a measure of overall support among market participants. The decision of large exchanges can be particularly impactful. The direction of causality can be circular in that an asset’s degree of acceptance among market participants partially determines whether an exchange will support the asset, and the action of exchanges also determines an asset’s degree of acceptance among market participants.
At the moment immediately after the fork event, there are few exchanges that list the forked asset, but a handful of exchanges can telegraph their support of an upcoming fork by listing pre-fork futures markets. For the three forks in this study, in each case fewer than five exchanges supported the asset at the point of network inception. Bitcoin Cash and Bitcoin SV swiftly and consistently achieved greater support from exchanges over the subsequent months. Bitcoin Gold is an example of a fork where support among exchanges has stagnated. Historical data indicates that if a fork manages to achieve support from at least 8 major exchanges by the 50th day post-fork, it is likely to continue to achieve greater acceptance from additional exchanges.
Coin Metrics’ market data consists of data from 25 exchanges which in our determination are the major exchanges that most trading activity takes place on. For most exchanges, Coin Metrics has every trade since inception of the exchange, but a handful of exchanges do not allow users to query historical trade data. For these exchanges, the market data begins at the time that Coin Metrics began collecting it. Therefore, the numbers below should be seen as a conservative lower bound.
Cryptocurrency market microstructure is still in the process of maturing. Price anomalies, order book quote stuffing, price manipulation, large spreads between markets, and flash crashes can still regularly be observed. Despite these incidents of disorderly markets, the price and market capitalization of an asset are still an important indicator of fork acceptance by market participants (under the assumption that markets are still semi-efficient).
Since forks can happen during various market regimes and the size of cryptocurrency assets continue to grow, the price of forks as a percent of Bitcoin’s price is examined. Price is calculated using Coin Metrics’ Reference Rates which calculates an independent and accurate price using a robust methodology that is resistant to manipulation. The Reference Rates use a market whitelisting approach in which markets are scored using a systematic framework and only the highest scoring markets are selected to serve as sources of input data. This is particularly important in the early stages of a new asset where large spreads between exchanges can be observed.
The historical data shows that the three forks in the study can debut at varying prices and that a volatile period of price discovery follows. Significant movements can occur after the 50th day post-fork. Moreover, Bitcoin Gold, an asset that has achieved less long-term acceptance than Bitcoin SV, nevertheless outperformed Bitcoin SV early in its history. Liquidity is sparse early on in a forked asset’s existence. Since price discovery for forked assets can take a long period of time, a fork’s price performance should be examined with caution. Price should instead be examined in the broader context of the other metrics presented in this study.
Among the six metrics presented in this study, volume is the most susceptible to manipulation. Recent research from Bitwise and others have presented strong empirical evidence that widespread wash trading exists. Therefore, extreme caution should be used in using volume to evaluate fork legitimacy. In addition to the systematic presence of wash trading on certain exchanges, supporters of a new fork are especially incentivized to artificially generate market activity early on in a fork’s existence.
An examination of Bitcoin Cash’s volume immediately after the fork event illustrates the danger of using aggregate volume figures. On an aggregate basis, Bitcoin Cash experienced extremely high trading activity early in its existence but trading was highly concentrated on Bithumb, a large Korean exchange where certain market participants made a concerted effort to increase prices. At its peak, 2.4 million Bitcoin Cash was traded on Bithumb during a single day. Volume analysis is more helpful when analyzing the distribution of volume across exchanges and examining whether reputable exchanges have economically meaningful volume figures.
Despite the questionable activity on Bithumb, Bitcoin Cash managed to secure the support of Poloniex and Kraken by the 50th day post-fork – two exchanges with markets that score highly on Coin Metrics’ Market Selection Framework, a systematic quality scoring framework. This momentum was enough to compel Bitstamp and Coinbase to list the asset several months later.
Bitcoin SV presents a more healthy distribution of volume split across major exchanges roughly in proportion to each exchange’s global market share. Bitcoin SV was able to secure the support of major reputable exchanges very early, including Binance, Poloniex, and Kraken. However, most recently, some major exchanges such as Binance and Kraken have begun delisting Bitcoin SV.
Bitcoin Gold has also experienced highly concentrated trading on Bithumb. At the 50th day post-fork and up to the present, Bitcoin Gold has not been able to secure the support of any major exchange based in the United States or Europe. However, Binance decided to support the asset and volume on Binance steadily grew during the asset’s first 200 days of existence.
Measuring Legitimacy Through Network Data
Similar to volume figures on exchanges, certain network data metrics are susceptible to manipulation. Due to the nature of previous Bitcoin forks where block space is not scarce, many metrics related to active addresses, transaction count, and transaction value can be gamed. Therefore, particular care was given to choosing network data metrics that are economically meaningful, measure genuine use or acceptance among network participants, while remaining resistant to the actions of a small group of committed actors that may be incentivized to artificially generate network activity.
In this section, fork legitimacy is examined along two network data metrics: fork uptake and hash rate market share.
In this section, we introduce a new metric that measures “fork uptake”. This is a metric that begins at zero at the start of the fork event and is uniquely resistant to manipulation. It then measures the running total of the number of native units that have been activated, where activated is defined as being sent to an address post a fork event. The intuition here is an attempt to measure how many native units of the forked asset are claimed by owners.
Over time, as Bitcoin mining rewards are distributed widely to different miners and existing long-term holders slowly sell their holdings, Bitcoin has decisively trended towards reducing the concentration of ownership. The top 100 Bitcoin addresses by size consist of only 20 percent of current supply, a figure that is significantly lower than other assets. An alternative measure of the degree of concentration of ownership is to examine the number of addresses that own at least some minimum amount of native units.
As an illustration, the number of Bitcoin addresses with a balance greater than 0.01 native units is examined. The 0.01 native unit threshold, while arbitrary, represents a value that is large enough to exclude accounts with miniscule dust balances while also small enough for the value to be economically meaningful for most people in the world. Such a threshold represents approximately $10 U.S. Dollars at current prices. The latest day indicates that there are 7.5 million such balances and growing steadily. This is one estimate of the number of economically meaningful owners of Bitcoin, although the true number of owners is unknown because the address-to-person relationship can be many-to-one or one-to-many.
Since any Bitcoin fork must adopt the UTXO set of the parent chain, the diluted nature of Bitcoin ownership is inherited by all current Bitcoin forks and all subsequent forks. Importantly, this property cannot be changed by a small group of committed actors.
For many forks that fade into obscurity, fork uptake remains near zero because no owners have claimed the fork asset. For example, if an individual holds Bitcoin in a wallet that the individual controls during a fork event, then subsequently transfers the forked asset to an exchange to sell, those native units are included in this figure.
Due to the diluted nature of Bitcoin ownership, this metric represents a gold standard for measuring adoption and use by the community, and is relatively resistant to manipulation. A small group of committed actors cannot force owners to claim their forked asset. On the 50th day after the fork event, nearly 4.5 million native units of Bitcoin Cash and Bitcoin SV had been claimed. Bitcoin Gold lagged behind with only 2.5 million native units claimed. In contrast to some of the noisy metrics introduced in this study like price and volume, this fork uptake metric is quite smooth and predictable. After only 50 days or perhaps even sooner, an operator should have a good idea of the future success or failure of a fork.
A related measure is the number of addresses with a balance after a fork event. Similar to address count metric introduced in the beginning of this section, this measure is an estimate of the number of owners of the forked asset, subject to the same caveats discussed earlier. On the 50th day after the fork event, both Bitcoin Cash and Bitcoin SV had roughly 200,000 addresses. This almost certainly undercounts the number of owners, however, because many owners tend to consolidate their holdings of the forked asset or send their assets to omnibus exchange wallets to sell. Nevertheless, the shape of the curve and establishing a baseline that future forks can be compared to can be useful.
Hash rate also represents a metric that is relatively resistant to manipulation because mining equipment is a scarce asset that incurs high variable costs in the form of electricity. Like ownership, miner market share is widely distributed, although perhaps less so than because most miners assemble into a small number of large pools. Bitmain has an outsized impact as the primary manufacturer of most Bitcoin mining equipment and have shown willingness to use their influence to support Bitcoin Cash in the past. Regardless, an examination of mining market share is also an important metric to examine because it reflects the consensus of miners, an important stakeholder in the ecosystem and a powerful arbiter in a forked asset’s fate.
The hash rate of the forked asset as a percentage of Bitcoin’s hash rate is shown below. For this metric, only Bitcoin Cash and Bitcoin SV are able to be examined because all three share the SHA-256 hash algorithm. Bitcoin Gold hard forked to use the Equihash hash algorithm, an algorithm designed to be resistant to ASICs, so the hash rate cannot be directly compared to Bitcoin’s.
The amount of mining directed to a particular chain is, among other things, a function of profitability. Since prices were so volatile early on in the forked assets’ lives (especially Bitcoin Cash), the hash rate is similarly volatile. Interestingly, at the 50th day after the fork event, Bitcoin Cash had a hash rate market share of roughly 15 percent while Bitcoin SV had less than 3 percent.
When faced with a fork event, operators must make a timely decision whether to support the asset or not in the face of incomplete information. In this study, Bitcoin Cash, Bitcoin SV, and Bitcoin Gold were examined, giving particular focus to the 50th day after the fork event to simulate the situation in which an operator must make a timely decision. If an operator is faced with a fork event in the future, the performance of the forked asset immediately after the fork event can be compared to the baseline performance established by these three significant forks.
Five metrics were presented to evaluate fork legitimacy:
- Exchange support, defined as the number of exchanges that have listed the asset, a powerful determinant of future fork success
- Price, representing the collective degree of acceptance among market participants under the theory of semi-efficient markets
- Exchange volume, a potentially manipulatable metric, but still useful in seeing how volume is distributed and which exchanges have significant volume
- Fork uptake, a network metric that is resistant to manipulation and is the gold standard for measuring fork adoption among owners of the parent asset
- Hash rate, representing the collective degree of acceptance among miners, an important stakeholder in the ecosystem
Coin Metrics has extensively examined Bitcoin and its forks using additional network data metrics. For a more complete study of Bitcoin forks, please reference Evaluating Bitcoin forks with network data and A Comparative Analysis of Bitcoin Forks.