[jstanley]

Great writeup. Almost anything written by Matt Levine is worth reading.

This is a concise and accurate description of the fun that occurred with Bitfinex's handling of the BCH fork.

At least, it's fun if you weren't involved. If you naively held BTC on Bitfinex and were hoping to receive an equal amount of BCH you probably didn't think it was fun. If you carefully read Bitfinex's statements and decided to take advantage of their policy to acquire risk-free BCH, you probably think it's even less fun. But for the rest of us, it's fun.

[panarky]

Matt sums it up well in a footnote:

  Imagine if I announced tomorrow that I had created a new blockchain,
  called Bitcoin Matt, and that everyone who owned a BTC today
  will tomorrow own both a BTC and a BCM.

  Fine, great, you all own BCMs, congratulations. But also anyone
  short a BTC today will be short a BCM tomorrow, and will be
  forced to go buy in those BCM shorts.

  Even with no economic support for BCM -- with nobody mining
  it, or using it, or treating it as a store of value -- I have
  magically created demand for it, just because BTC short-sellers
  will be forced to buy it in to cover their shorts.

  And if no one else is using it, then it will trade very thinly,
  and it will be very expensive to cover. (And anyone who does sell
  it will make a lot of free money.) Nothing stops me from just
  announcing that I've cloned a copy of the bitcoin blockchain
  for BCM; the only way to avoid this abuse is for people to ignore
  it -- and that means not forcing short sellers to cover it.

[andy_wrote]

I'm not knowledgeable about BTC; this is the part that confused me. If you short a stock, and it distributes dividends or stock or ponies, as Levine says, you have to return that to the borrower. I'm not sure if this is law or just the overwhelming common practice of the markets, but either way we agree on this. You _could_ devise a short agreement where you say "no distributions are owed," but that's not the standard that the big securities-lending market has settled on and I'm not sure why people would demand that instead.

If on the other hand you short a stock, and a third party says "Hey, I'm going to give everyone who owns this stock on this date a bag of cash!" I don't think that shorts would be obligated to cover that. This is, I guess, like what happened with Dole, except that there the third party was a judge, who has the force of law at his back. And this strikes me as similar to what happened to BTC/BCH, except without said force of law. Wherein lies the ability of someone to compel a BTC short to now owe BCH too? What exactly is it that shorts have agreed upon to return to the longs that they borrowed from, and if it's just BTC, isn't returning a BTC enough? If not, what stops someone else from making their own fork and compelling shorts to come up with that too?

[thisisit]

I would check the notes to see what happened with Dole before drawing a conclusion. There is more at stake here than a judge with backing. One of the problems with Dole was tracking shares with DTC - It takes, I think, T+2 for settlement ie I sell you something today it gets updated two days later in DTC. This coupled with day trading and shorts (where btw "borrowing a share" is hypothetical) can cause a lot of headaches. So the solution is? A blockchain which tracks the share count and movement. That is the point being made in the article.

As for the other part. The whole BTC/BCH thing is like a spinoff. And yes the short sellers are on the hook if Stock A tomorrow becomes Stock A + Stock B. Can they say no, well Stock B is more than I paid for A+B combined so I am not paying? Not really because if that was the case it leaves open the door for someone saying - well stock A has appreciated more than I expected so no payout.

Now in case of forks and whether people can be on the hook for the other fork? Well, depends on how famous the fork is really. If it is as famous as BTC cash, well then that is a risk you have to take as a speculator. If not, then why was someone betting on bitcoin going down the drain after the fork? Were they not clear of the implication of the fork taking off? If not, then that's a lesson learned.

To paraphrase Matt Levine - "The basic appeal of the cryptocurrency revolution, to people like me who are not making any money off of it, is that it is fun to watch people rediscover all of the lessons of financial economics, one at a time, in public. "

https://www.bloomberg.com/view/articles/2017-06-23/buffett-d...

[andy_wrote]

It seems like it can be construed as a cash handout to owners of BTC, not a spinoff. At least there seems to be disagreement elsewhere on this thread, and from Levine's article.

I don't think refusing to require shorts to deliver BCH opens the door to any other complications. In fact, I think it's the simplest interpretation. You borrowed one BTC, or share, or pony, or whatever, and later you have to return one BTC. If someone else starts a new currency, fine, but that's nothing to do with your borrowing agreement. There's no mention of the price of anything; for all this simple agreement knows, BTC is the only asset in the world. (Though in practice I'm sure you'd have to post margin. Maybe some ponies?)

For shorting stock, the return of dividends and spinoffs is, I believe, a consensus agreed upon by the market as more closely reflecting what people would want - you can start a different stock-lending market that doesn't do this, but there doesn't seem to be much demand for it. To draw a clean analogy between BTC and an equity spinoff, you have to suppose this kind of agreement exists and the contracts signed. I'm not sure what it is that BTC shorts agreed upon, and it seems there isn't widespread agreement, but to me, the simplest and narrowest interpretation of a short, in case of any confusion, is "I borrow 1 BTC, I must return 1 BTC."

(Again, I have no BTC experience, just finance experience, so if someone out there really is short BTC and has wrangled with this stuff, I'd be happy to hear from them.)

[thisisit]

I had to re-read your post again to understand what you are getting at. It is not about what BTC shorts agreed upon rather what does Bitfinex agreement say about people shorting BTC on their platform. As jackgavigan pointed out - 2010 Global Master Securities Lending Agreement is clear on what the obligations should ideally be.

So did Bitfinex create an agreement along those lines for their short sellers? This requires looking into their T&C. A wild guess is they did not and never included a condition about such situations. That means asking BTC shorts to cover BTC cash had no legal legs at all. The best they could do is to pay the long BTC holders and exempt shorts.

You can bet they must have learned their lesson after this fiasco and updated their terms accordingly.

[smogcutter]

This is less like an arbitrary handout from a third party and more like a stock split. If you hold a security, you generally have no idea whether its been lent to a short. The idea of "your" stock being lent doesn't even really mean anything - the shares are fungible. So when the stock splits (or a company is spun off as in the paypal example, etc), you'd be awfully surprised to find the value of your stake halve because the new stock went to the short.

[repomies691]

It is most definitely not a stock split, but a free handout. Anyone can create a shitcoin at any time that gives "free shitcoins" to all bitcoin, ethereum etc holders. In fact, that is clever marketing for the altcoins because then the shitcoin gets attention, possible support from exchanges etc.

[smogcutter]

Is it possible to fork bitcoin in such a way that BTC holders can't get the new coins? If not, then it's not just a handout. The fact that anyone can fork it is an unfortunate property for your money to have that doesn't change what's happening here.

[an_account]

BCH _feels_ like a stock split. Where it's not like a stock split is that literally anybody can create a new blockchain just like BCH and give everyone who owns BTC a coin on this new blockchain. In that regard, it _feels_ more like a handout.

[dx034]

It's not really a stock split (where you get multiple shares for the same company) but a company split. If a company splits itself into two parts (e.g. Amazon to be split into retail and AWS) they can distribute shares of both new companies to the shareholders of the old company. In that situation you have the same problem. If the new AWS shares are not traded and you were short Amazon, you would have to cover AWS shares and therefore buy them.

In reality it's not an issue with large companies because it happens rarely and there are so many shareholders that a market would appear quickly.

[clarky07]

It's not that either though. if AWS left amazon that would be value leaving amazon stock and going to the new aws stock. in this case there is no value leaving bitcoin. bitcoin is still the same. someone just decided to start a new coin, and instead of starting from scratch, they are copying the bitcoin blockchain up to this point and giving everyone who has a coin now a new coin that has no real value to speak of yet. it doesn't do anything, isn't accepted anywhere, and currently functions worse in every way (these could all change in time, but for now they are true)

Anyone, anywhere, anytime can fork bitcoin and give away new worthless coins. Forcing shorts to go an buy all the worthless coins is simply unreasonable.

[smogcutter]

Fair, and Levine points this out in the article. He also observes that part of what makes bitcoin tricky and non intuitive is that if it worked like a company spinoff, not much new value should be created. Post split the price of BTC plus BCC should more or less equal the old BTC price, but that hasn't happened, because these are tulip bulbs.

[filmackay]

It's not a stock split (which would issue you more BTC), but a demerger - or a spin-off. This is where a company gives out shares in proportion to existing shareholding. It's like BTC has "spin off" BCH which was part of BTC - but now trades independently. I'd say a LOT of people do not understand this, because the price of BTC should have fallen, which I guess makes sense since this BTC has no entitlements and therefore is driven, a little like gold, on future expectations or speculation.

https://en.wikipedia.org/wiki/Demerger

[nullc]

Except that many people believe these new shares are worthless, so the price drop should be ~$0. Don't assume the market doesn't know this and isn't telling you this already.

(And before you say something about the bcash price not being zero: right now there are no functioning markets where you can deposit any to sell it.)

[clarky07]

it's not a spin off though. nothing is leaving btc. no value is going away. someone else just created something out of thin air. also, bch was never a part of btc. it's simply something new that is using the past history of btc as a starting point, which creates new coins out of thin air, and distributes them to all the holders of btc.

No part of this makes sense for a short to have to go and buy bch.

[lmm]

There's no charter of incorporation for bitcoin. To a large extent it is what everyone agrees it is. I think people recognize that BCH is as genuine a "coin" as BTC whereas BCM wouldn't be.

[jackgavigan]

> If on the other hand you short a stock, and a third party says "Hey, I'm going to give everyone who owns this stock on this date a bag of cash!" I don't think that shorts would be obligated to cover that.

With stocks, the question of what the borrower is expected to cover will be addressed in the loan agreement. For example, here is a relevant paragraph from the 2010 Global Master Securities Lending Agreement:

Where the term of a Loan extends over an Income Record Date in respect of any Loaned Securities, Borrower shall, on the date such Income is paid by the issuer, or on such other date as the Parties may from time to time agree, pay or deliver to Lender such sum of money or property as is agreed between the Parties or, failing such agreement, a sum of money or property equivalent to (and in the same currency as) the type and amount of such Income that would be received by Lender in respect of such Loaned Securities assuming such Securities were not loaned to Borrower and were retained by Lender on the Income Record Date.

Here are some relevant definitions of terms used in the paragraph above:

Income Record Date, with respect to any Securities or Collateral, means the date by reference to which holders of such Securities or Collateral are identified as being entitled to payment of Income;

Income means any interest, dividends or other distributions of any kind whatsoever with respect to any Securities or Collateral;

[cletus]

I hate to be That Guy [tm] but can you please not indent quotes like that? It's a PITA to read on mobile.

[contingencies]

Asterisks are superior. Quotations with style.

[alttab]

Thank you!!!

[endgame]

Get a better phone browser?

[nothrabannosir]

Don't post that without an actual recommendation. Which mobile browser renders that legibly?

Otherwise it's just noise.

[mikeash]

Indentation is for code blocks. Such blocks are supposed to be rendered monospaced and unwrapped. A browser that didn't render them that way would be broken. The solution is to format quotes in a way that's appropriate for quotes, not using code formatting.

(The real solution would be for HN to support an actual quote style, like Markdown's leading > style, but alas....)

[filmackay]

I think this is a bit one-sided, that you've created "forced buy in". You've also created a LOT of supply as well, which goes a long way to counter-balance the demand.

Besides, the exchanges do not seem to have implemented this as a demerger spin-off (you were short BTC, but you do not need to return BCH - just bTC), and as a consequence NOT created "forced buy in".

[makomk]

Except that you haven't created a lot of supply, because people may not be able to sell theirs and if the coin's useless it may not be worth it even if they can. For example, I don't think either of the major exchanges offering shorts (Bitfinex and Kraken) are accepting BCH deposits yet, and they certainly weren't initially after the fork. Even if they were there isn't enough mining power on the chain to make transfers possible in a reasonable amount of time at the current difficulty. So any shorts could only be closed by buying BCH already on the exchanges, which only existed in the same number as there were BTC on the exchange at the time of the fork. This small supply drove up BCH prices squeezing short sellers. There's also been quite a lot of price divergence between exchanges because people can't transfer their BCH between exchanges.

[eternauta3k]

> There's also been quite a lot of price divergence between exchanges because people can't transfer their BCH between exchanges.

Sounds like an opportunity for exchanges to do off-chain transfers using legal contracts.

[petertodd]

It is significantly harder and more expensive to do those off-chain transfers in practice.

I should know: I'm actively trying to sell BCH right now with just that kind of mechanism. What would have otherwise been a few clicks on a screen is proving to be hours worth of back-and-forth, and that's for a relatively small deal with a large degree of trust on both sides.

[TrickyRick]

Could a similar trick be used by a company to screw over short sellers? Say by issuing a class of shares which are essentially worthless, forcing short sellers to buy it to cover their shorts? Or would a short seller simply "borrow" those shares as well?

[thisisit]

Not really, because stock prices are adjusted downwards in case of forward splits or stock dilution etc. If they the diluted shares are "worthless" so to speak then it doesn't matter.

What the real scenario is when there is a spin off where Stock A becomes Stock A + Stock B. In that case short sellers are responsible for the value of stock B. Though no one will try going this route just to screw some short sellers. If the spun off division (or company) is worthless, the stock prices will come around to reflect that and even Stock A's price will suffer from this "trick" used by management.

[TrickyRick]

Yeah, that makes sense. The share class example was a stupid one, but perhaps then it would work with a spin-off company? Although as you say, no one would probably do it, if nothing else because of the probable backlash of PR. Although it does make for an interesting thought experiment.

[aeorgnoieang]

It seems like it could work with a spin-off company, especially if the market judged the company (minus the spin-off) and the spin-off as being of greater value for whatever reason, e.g. 'focus'.

[koliber]

I don't think that would work. I'm presenting my understanding of things. Please chime in to correct me where I am off.

Let's start with a simple example. A company has a single class of shares. All these shares are fungible. This means that it does not matter that you hold share number 545 our of 1,000,000 or share number 390,056 out of a million. Each of these million shares is identical to the others. Just the same way each $1 bill is identical to each other $1 bill.

A stock split happens. Now there are twice as many shares. However, at the moment of the split, each share is worth half as much. The total market value has not changed. Of course, trading continues and the shares will move up or down in value.

Short holders will need to come up with 1 additional share for each 1 share that they hold. This is because the stock split affects the exact class of shares that the short holder owe.

If a company issues more shares of the same class, short sellers do not need to do anything. Nothing happened to their shares. I would imagine that the value of each outstanding share would drop, and short sellers would actually profit.

If the company issued shares of another class, that would not introduce new responsibilities to short holders.

Short holders are obliged to do things on shares that they actually own. A dividend affects existing shares, hence short sellers need to pay those dividends. A split affects existing shares, hence short sellers need to find extra shares to make the lender whole. A new stock issue does not affect those existing shares: new shares are being introduced.

Another way to think about this is to think what happens if you are long 1 share of a company. If a dividend is paid, then you are paid 1 share's worth of a dividend. If a split happens, your 1 share is now 2 shares (each at half the price of the original). However, if a company issues more stock, you do not get more shares. The same rules govern short sellers. However, they must give instead of receiving.

[lmm]

I imagine it would be no different from how we handle regular stock splits or rights offerings.

[tpallarino]

Except your clone doesn't have miner support, community support, and get listed by major exchanges. I hate that people are acting like anyone can just go and make a fork for free money.

[thisisit]

Oh, but they can. Here's what this whole drama has proven:

Any one can fork a coin. Then attach a significant market value to the given fork by promoting it heavily. Or if required they can do it after the fact - They can be on the buy-side and creating an ever increasing bid to pump the fork.

As for the support, you will have human greed play a big role. Everyone holding x coin gets 1 x coin + 1 fork coin with significant value which means it will create some market as well as intice miners to mine a coin with much smaller difficulty.

[kerkeslager]

I'm not sure what you're saying here. Are you claiming that Bitcoin Cash doesn't have those things? Or are you saying that those things are important factors which differentiate Bitcoin Cash from other forks?

[tpallarino]

"Nothing stops me from just announcing that I've cloned a copy of the bitcoin blockchain for BCM"

You can't just make random forks and have them be worth something. This is the culmination of years worth of debate and has a significant community following.

[bduerst]

Aren't all the alt-coins examples of this happening? That anyone can fork a blockchain and give it their own rules?

The market value of a coin isn't limited to a strict mathematical function of mining power or exchanges backing it. That's the point Matt is making.

[DoctorBit]

You're (understandably) confusing a code fork with a chain fork:

Code fork: taking the source code from one project, modifying it, then offering the result as a new project. This is what the overwhelming majority of altcoins are. For example Litecoin is a five-year-old code fork of Bitcoin. Even though Litecoin's code is nearly identical to Bitcoin's, Litecoin from the beginning created its own blockchain, which shares no data with Bitcoin's blockchain.

Chain fork: taking the blockchain from one project, and adding new blocks to that chain that are not compatible with the chain's original style. Variations of this are soft forks (the block-adding rules are made more strict), and hard forks (the block-adding rules are made less strict). Both this week's BTC-BCH fork and last year's ETH-ETC fork were hard forks.

Complications: obviously, a chain fork requires changes to the relevant code to be able to work, so a chain fork usually comes with a code fork, but not necessarily. For example, theoretically, a completely new code base could be created from scratch in a clean-room kind of environment to add new kinds of blocks to an old blockchain.

[mabbo]

Before Bitcoin Cash, all (afaik) other alt-coins weren't based on BTC's blockchain history. Ethereum, for example, raised development money by selling off the early coins on the chain.

[clarky07]

Not really. It's 1 mining pool with maybe 1-2% of the total hash rate of bitcoin. I'm not sure it has significant community following or backing. I suspect the majority of the community would have preferred not to have the confusion in the market and avoided the split entirely

[jmah]

The point is, what's the threshold for "enough support"? Already for Bitcoin Cash, different exchanges have come to different conclusions on whether it's sufficiently supported to list on their exchange.

[tpallarino]

There is no threshold, it's clearly a gradient. Some exchanges want to list it, others don't. Certain exchanges listing it gives it more value than others, and if it's impossible to trade/spend, then the coin has 0 value.

[supermdguy]

Enough support that someone's willing to exchange cash for a "coin" from your bitcoin fork.

[Grangar]

If you own a big mining pool you can get support. And with a simple propaganda campaign you can get people to support your fork much like BCH.

[dclowd9901]

Couldn't you just set the value to 0 and allow a grace period for those who are long-ing or short-ing the currency to trade before "starting" it?

[mikeschmatz]

Probably started by this http://hackingdistributed.com/2017/07/29/bitcoin-impending-a...

Published by another guy worth reading

> As one trader puts it Short 1 btc. Buy 1 btc. Get 1 bcc free :).

[eloary]

It was exactly this kind of fun that led me to stay in my altcoin holdings and not participate at all in BCH. Liquidity puts a serious damper on a lot of slick crypto trade ideas - it's a "tortoise and the hare" kind of scenario.

[mikeash]

Thanks for pointing out that it's a Levine article. I need to remember that bloomberg.com articles on HN are likely to be him, and actually click through.