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.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?
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...
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.)
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.
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.
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.
(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.)
No part of this makes sense for a short to have to go and buy bch.
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;
Otherwise it's just noise.
(The real solution would be for HN to support an actual quote style, like Markdown's leading > style, but alas....)
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".
Sounds like an opportunity for exchanges to do off-chain transfers using legal contracts.
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.
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.
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.
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.
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.
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.
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.
No, this has been done a number of times. Clams, lumens, byteball, this thing: https://bitcointalk.org/index.php?topic=1883902.0 all come to mind.
It isn't done often because it's not seen as a useful technique mostly: you just gave a ton your asset to people who think it's worthless, and who may actively dislike it. Not a great way to maintain a market price.
Also isn't that splitting hairs about requiring the blockchain history? I don't think Matt said that.
Also if you do share history, it is much much harder to start, because you start off with the previous difficulty which is very hard to mine on. If you start a new altcoin with a clean history, the difficulty starts off very low.
Bitcoin Classic and Bitcoin XT have not actually forked the blockchain. So they are not separate coins yet.
You need to fork the code (with your changed rules) anyways and you can adapt the difficulty then. Bitcoin Cash did exactly that. They lowered the difficulty to something like 10% of Bitcoin anticipating 10% of the hashing power. They only got 1% and there was a gap of 9 hours without any new block. They seem to be at ~1h per block now. [0]
That's completely counter intuitive to what you're saying about Matt's example not having a history.
Published by another guy worth reading
> As one trader puts it Short 1 btc. Buy 1 btc. Get 1 bcc free :).
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.