• A hard fork occurs when one cryptocurrency (like bitcoin) breaks off to form a new currency (like bitcoin cash).
  • Hard forks take place when the community wants to make a significant upgrade or disagrees on how to move forward.
  • Examples include bitcoin cash, ethereum classic, and bitcoin gold.

Cryptocurrency Hard Forks: Explained

A hard fork is when one cryptocurrency spins off to create another. Think of it like a train track splitting in two. The new coin (and its blockchain) takes a new direction from the old, but they share the same history. It’s a simple fork in the road.

bitcoin hard fork diagram

Let’s take the example of Bitcoin Cash, which is a hard fork of Bitcoin.

In 2017, the Bitcoin community disagreed on how to make improvements to the network. One group wanted to stay true to the old rules and “protocol.” Another group wanted to make drastic changes to how transactions were processed.

Unable to reach an agreement, the second group “forked” off to create a new blockchain. Bitcoin Cash was born.

Bitcoin Cash shares the same blockchain as Bitcoin right up until the moment it forked. From that point onwards, Bitcoin Cash took its own path with its own rules.

bitcoin cash hard fork
Image credit

Bitcoin has forked countless times as the community seeks to improve the technology or disagrees on how to move forward. These forks are not always successful.

How Hard Forks Work

Every blockchain enterprise has its own rules. Those rules dictate how the system works. How large is each block? What rewards do miners get? How are fees calculated? And so forth. One day, the community disagrees on some tidbit, such as whether new code should be introduced or whether participating miners should receive a bonus.

A successful fork is where most of your users agree, collectively make the changes, and move over to the new blockchain. A contentious or experimental fork is where your users split. Some might stick with the present blockchain, some may migrate to the new blockchain, and some use both. Soon you have two versions of your cryptocurrency with different rules.

A failed fork occurs when too few users leap to the new blockchain. That new cryptocurrency quickly becomes worthless.

Hard forks also happen in the following cases:

  • To fix important security risks found in older versions – It took the dollar more than 300 variations to become today’s counterfeit-resilient currency. Blockchain developers aim to make their blockchains 100% breach-free.
  • To add new functionality – Windows 10 is enormously different from its very first version. Blockchain developers upgrade their versions from year to year, adding functions for improvement.
  • To reverse transactions – If website developers suspected a security breach, they could block the previous fork, declaring all previous transactions non-existent. Their new fork would herald a new start.

Hard Forks Can Mean Free Money

The new blockchain is a replica of the old, so all transactions barreling through blockchain A are replicated on blockchain B. If you’ve joined blockchain B, you receive those coins as well as new ones that are mined on your blockchain. Those new coins are known as an airdrop.

crypto airdrops falling

Image credit

When Bitcoin Cash forked, everyone holding bitcoin received the same number of bitcoin cash tokens, essentially for free.

There is a catch, though. You’ll want a secure, private wallet that supports the airdropped coins on the new fork. If you keep your cryptocurrency on an exchange like Coinbase or Binance, the exchange may keep them.

You’ll also want to check whether the forked coin has a future. The unfortunate truth is that most coins fail. Look at the reputation of the fork developers; what are their reviews? Also, see whether credible blockchain services have inspected and credited the open source code of this new coin.

Are Hard Forks a Good Thing?

Some people in the crypto community oppose forks fearing that the new coin will devalue their old. However, a successful fork usually means good news for traders.

When a new fork is announced, we often see a flurry of traders rushing to buy the coin hoping to get free airdrops. That naturally increases the price.

It’s true that the forked coins often become worthless, but some are successful and ultimately valuable, such as bitcoin cash. You’ll often see a profit from a successful airdrop.

Sometimes the hard fork is widely opposed by the majority of people. When that happens, it can strengthen support for the original coin, sending the price up.

Hard Fork Example: Bitcoin Cash

bitcoin cash logo

In August 2017, a group of Bitcoin stakeholders including investors, entrepreneurs, developers, and China-based miners quarreled over the size of the Bitcoin block. Some wanted to keep the one megabyte (MB) limit coded into Bitcoin by Satoshi Nakamoto himself. Others wanted to increase the size to two MB while other stakeholders fretted it should exceed 9,000!

The team eventually split. Bitcoin loyalists adhered to the old protocol, while critics created a new coin called bitcoin cash.

Bitcoin cash never became as popular as the original bitcoin. In December 2017, bitcoin cash was worth $4,355.62. August, 2018, bitcoin cash sold for $519.12. The research firm Chainanalysis noted that in May 2018, the 17 largest payment processing services processed bitcoin cash payments worth US$3.7 million, down from US$10.5 million two months before

To date, Bitcoin’s hard fork iterations include the following:

  • Bitcoin Platinum (BTP). December 1, 2017. A scam, invented by a South Korean teenager in an attempt to kill the price of bitcoin and profit by betting against it.
  • Super Bitcoin (SBTC). December 15, 2017. Among other changes, Super Bitcoin included smart contract functionality, taking a leaf out of the Ethereum blockchain.
  • Bitcoin God (GOD). December 25 2017. Chandler Guo proclaimed Bitcoin God a Christmas gift to bitcoin holders. Most called it bizarre
  • Bitcoin Uranium (BUM). December 31, 2017. BUM was an attempt to democratize Bitcoin, which critics said had become dominated by a small group of entities over-exerting their power over miners. BUM was created as Satoshi’s original vision. It bummed.
  • Bitcoin Cash Plus (BCP). January 2, 2018. Promised “low fees and reliable confirmations”. It flunked almost from the start.

Bitcoin also spawned Bitcoin Diamond (BCD), Bitcoin Gold (BTG), Bitcoin Atom (BCA), Bitcoin Core (BTX), Bitcoin Private (BTCP or ZCL) and Segwit, among others.

Segwit was a soft fork which is quite a different creature.

What is a Soft Fork?

Hard forks are unique in that the changes are incompatible with the previous protocol. Soft forks are different because the software or protocol changes are compatible with the previous versions.

Think of a hard fork being the difference between PlayStation 3 and PlayStation 4. You can’t play PS3 games on PS4 and you can’t play PS4 games on PS3.

A soft fork, on the other hand, is more like Microsoft Excel. You can use MS Excel 2015, even with MS Excel 2005 running in the background. The upgraded version is compatible with the old. At the same time, the updates in the newer version don’t appear in the old. MS Excel 2015 shows features that don’t appear in MS Excel 2005. The new soft fork has additional – or different – features to its older version.

In other words, soft forks have backward compatibility. The new chain contains the previous rules with additions, while the previous blockchain continues unchanged.

segwit soft fork diagram

Image credit: Reddit user u/k06a

As you can see in the diagram, the SegWit fork of Bitcoin is a “soft fork.” It doesn’t create its own blockchain. It simply upgrades and continues the previous chain. In contrast, the hard forks, like Bitcoin Cash and Bitcoin Gold actively split off.

With a hard fork, you need 90 to 95% of the stakeholders, or nodes, to accept your changes for the system to succeed. For a soft fork, you only need a majority of miners to upgrade and agree on the new version.

Soft Fork Example: The SegWit Solution

One of Bitcoin’s greatest frustrations is its slowness. Ten transactions take about a second to slip through compared to Visa’s 5,000-8,000 transactions per second. This is called the “scalability” problem.

In October 2016, Pieter Wuille, a Bitcoin Core developer, tried to treat this problem by modifying the appearance of the Bitcoin block.

Bitcoin blocks have two sections:

  1. The header with its cryptographic data.
  2. The body with transactions and sender/receiver data.

The bulkier the block, the slower traffic.

Wuille divided transactions from sender and receiver data. He gave each their own blocks, creating, in effect, a freeway where bitcoin transactions zoomed through, while so-called witness boxes (SegWit, short for Segregated Witnesses) with scripts and signatures used the parallel lane.

SegWit is called a “soft fork” since it was compatible with Bitcoin’s old code. All Bitcoin needed was 95% of its miners to accept the changes, which happened in less than a year. The platform didn’t need a separate blockchain and currency to make alterations work.

Update:

Critics complained that Segwit fell short of solving Bitcoin’s congestion problems and that the platform needed major changes to decongest its platform. Dissension led to the string of hard forks like the previously mentioned Bitcoin Cash (BCH). In 2017, Bitcoin developers also promoted hard fork SegWit 2x to magnify blocks from 1 MB to 2 MB. That fork died a week before it was scheduled to occur.

Bottom Line

A hard fork:

  • Results in two new blockchains, both of which share the same past.
  • Changes a fundamental aspect of the blockchain or the rules that govern it.
  • Is not compatible with previous versions.

A soft fork:

  • Does not create a new coin or split the blockchain.
  • Upgrades the system with new features that are compatible with the old version.

It’s as simple as that.

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woman holding lots of gold bitcoin units

With one bitcoin currently worth more than $6,000, we need smaller bitcoin units and denominations to make it work as a day-to-day currency. We explain the units, from one bitcoin down to one “satoshi” (or 1 hundred millionth of a bitcoin).

Let’s picture a future where you walk into Starbucks and buy a coffee with bitcoin. You can’t exactly pay with one full bitcoin. It would be like paying with a $10,000 note or handing over a gold bar.

For bitcoin to become a viable cash system, we need to break it down into smaller units and denominations.

Those denominations already exist, but they’re not yet widely used. Here’s how it breaks down, at a glance:

Bitcoin – 1 BTC
DeciBit – 0.1 BTC
CentiBit – 0.01 BTC
MilliBit – 0.001 BTC
MicroBit – 0.000001 BTC
“Finney” – 0.0000001 BTC
“Satoshi” – 0.00000001 BTC

A “Satoshi” is 1 Hundred Millionth of a Bitcoin

The smallest bitcoin unit is called a Satoshi (or a “Sat,” for short). It’s named after Bitcoin’s mysterious founder, Satoshi Nakamoto. At the time of writing, 160 satoshis are worth about one cent.

But why would such a tiny denomination exist?

Well, it gives you a sense of how big the bitcoin community expects the cryptocurrency to grow. One satoshi is expected to be a usable form of currency one day, perhaps similar to a penny.

Only 21 Million Bitcoins Will Ever Exist

We also need to break bitcoins into tiny units because there will only ever be 21 million of them.

Compare that to the 10 trillion dollars in existence and you start to see why bitcoin needs many denominations.

There simply aren’t enough full bitcoins for each person to own 1 BTC. (In fact, there are more people living in Shanghai than there are bitcoins).

In other words, if bitcoin becomes a true global currency, only a very small group of people will own a full bitcoin. The rest will own and spend much smaller units and denominations.

The “Finney” is a Nod to Hal Finney

Hal Finney was one of the first people to work on Bitcoin besides Satoshi Nakamoto. In fact, many have claimed that Hal Finney is Satoshi Nakamoto, but he has always denied the claim.

Although the finney is not an official denomination, it’s often used by the community as a nod to his work on the project.

Should We Stop Using the Term Bitcoin?

Some have argued that “one bitcoin” is an intimidating way to introduce new people to the cryptocurrency.

Buying one bitcoin at more than $6,000 sounds pretty overwhelming to most people.

At the same time, pricing a coffee at 0.001 BTC (roughly the cost right now) is ridiculous. Instead, you might say that one coffee costs a milliBit, or colloquially an “emBit”.

Or you might feel more comfortable investing in a deciBit (about $600) or even a centiBit ($60).

How Much is Each Bitcoin Unit Worth?

At today’s price, the denominations are worth the following:

Bitcoin – $6,340
DeciBit – $634
CentiBit – $63.40
MilliBit – $6.34
MicroBit – $0.06
“Finney”  ~ half a penny
“Satoshi” ~ 160 satoshis to a penny.

Prices correct at September 19th, 2018.

a highway at night with speeding cars
  • Ripple has partnered with 120 banks, but none of them are yet using the XRP token.
  • xRapid will change that, using Ripple’s cryptocurrency XRP to settle payments.
  • Ripple’s Sagar Sarbhai says xRapid will go live in the “next month or so”

Ripple’s astonishing rise in 2017 was driven by its partnerships with banks like Santander, American Express, and Western Union. However, most people misunderstood one thing:

The banks aren’t actually using the cryptocurrency XRP yet.

That might be about to change as Ripple prepares to push the button on its XRP product, xRapid. Ripple’s Sagar Sarbhai, told CNBC that xRapid will go live in the “next month or so.”

“I am very confident that in the next one month or so you will see some good news coming in where we launch the product live in production.” Sagar Sarbhai.

But what is xRapid and how does it use cryptocurrency? First, let’s clear up a few terms.

The Difference Between Ripple and XRP

Ripple is a company that aims to speed up cross-border payments. Ripple has partnered with over 100 banks and boasts a range of  money transfer services using blockchain and cryptocurrency.

XRP is the cryptocurrency created by Ripple. It is not currently used by banks, but it’s a big part of their future plans and the forthcoming xRapid service.

The Current State of Ripple’s Bank Partnerships

Ripple has so far partnered with more than 120 banks and money services. As you know, it traditionally takes days to send money abroad (and the fees are enormous). Ripple aims to speed up the process and eliminate fees.

A list of Ripple bank partnerships and logos

Most of the partnered banks are using a Ripple service called xCurrent. It uses blockchain technology to help banks make faster payments and communicate better.

But it does not use XRP to settle transactions. That’s where phase two comes in: xRapid.

What Is xRapid?

xRapid aims to make those transactions even faster and cheaper. Most importantly, it does use XRP to settle the money transfer.

XPR is used as a “bridge currency” in the process.

Here’s how it works…

Let’s say Bob lives in the UK and wants to send £1,000 to Alice in India.

Using xRapid, Bob’s bank instantly transfers the £1,000 into cryptocurrency, XRP. It is sent to India in seconds where it is transferred to rupees.

The fees are almost zero and the whole process takes four seconds.

Had Bob used the traditional bank system, it would take days and cost him a large fee.

a depiction of how Ripple xRapid works
Source: Falling Grace

xRapid: An End to Nostro Accounts

The description above is a very quick outline of how xRapid works, but there’s a reason why it’s so powerful:

Banks need liquidity (i.e. lots of available money) to make a foreign exchange. And the current way they source liquidity is wildly inefficient.

Let’s go back to Bob and Alice. To send money to India using the traditional system, Bob’s UK bank needs a “nostro account” in India. The nostro account is pre-funded with millions in local currency. (This is the liquidity).

The money is exchanged through the bank’s nostro account before being sent to Alice’s bank in India.

Banks have pre-funded nostro accounts like this in every country with a different currency to facilitate cross-border transfers. It’s expensive and incredibly inefficient.

By switching the local nostro accounts for a digital cryptocurrency, there’s no need for bank accounts full of foreign currency all over the world. It’s faster, cheaper and more efficient.

Got It. But Are Banks Using xRapid?

No. Not yet, anyway.

The vast majority are using xCurrent, but Ripple is trying to nudge them towards xRapid. Some banks have begun testing the xRapid product and reported 40-70% savings.

Ripple CEO Brad Garlinghouse said that “dozens of banks” will be using xRapid by the end of 2019.

But it’s a big task. As Ripple’s Sagar Sarbhai explained, “a couple of years ago the narrative was: blockchain good, crypto bad.” Banks were open to blockchain technology, but wary of using cryptocurrency to settle payments.

Sarbhai says that’s beginning to change.

“I think that narrative thankfully is now changing because policymakers, regulators are seeing that there is a strong benefit that digital assets, cryptocurrencies bring in.”

xRapid to Go Live in the “Next Month or so”

This is the moment that most XRP holders have been waiting for. xRapid is considered Ripple’s silver bullet because it actively uses the XRP token to settle payments.

If banks do adopt xRapid, the volume (and price) of XRP is likely to increase dramatically.

Let’s look at this way. If xRapid replaced just 1% of the current international bank transfers through SWIFT, the daily volume of XRP would increase 250x.

We’ll keep you posted if and when xRapid is finally deployed.

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bitcoin ethereum and ripple coins on a black background

The flippening is a hypothetical moment in the future when ethereum, ripple, or another cryptocurrency overtakes bitcoin.

Bitcoin is currently the largest cryptocurrency on the planet, but it’s not impossible to imagine ethereum or ripple catching up.

At the start of 2017, bitcoin had a true monopoly in the world of digital currency. It accounted for 87% of the total crypto market value. By January 2018, that figure had fallen to 33% with ethereum, ripple and others eating into bitcoin’s market share.

Some predict that one of these altcoins (alternative cryptocurrencies to bitcoin) will overtake bitcoin entirely. That future moment is the flippening.

The Rise of Altcoins

While bitcoin dominated the blockchain space for eight years, new cryptocurrency projects were stirring under the surface.

Vitalik Buterin launched Ethereum – a “world computer” which took the concept of blockchain way beyond money transfers. Ethereum became a platform for companies and developers to build anything on the blockchain.

Ripple emerged to revolutionize the way we transfer money between banks and across borders. Ripple’s native cryptocurrency XRP was the fastest growing token in 2017, briefly overtaking ethereum.

These altcoins gained huge media attention through 2017 and rose more than 1,000% in value. The momentum lead many to predict that ethereum and XRP could surpass bitcoin in the coming years.

The Flippening: A Measure of Market Capitalization

It’s worth pointing out that the flippening refers to market capitalization (or market cap), not the price per coin.

For example, XRP is worth just 27c per coin, compared to ethereum’s $195 and bitcoin’s $6,332.

Bitcoin is by far the most expensive coin because there are only 17 million in existence (there are 100 billion XRP tokens and more than 100 million ethers).

Bitcoin, Ethereum and Ripple: Where Do They Stand?

At the time of writing, the top three by market dominance looks like this:

1. Bitcoin – 56%
2. Ethereum -10%
3. Ripple – 6%

chart depicting bitcoin, etheruem and ripple market capitalization
Chart: CoinMarketCap

Through the course of 2018, “the flippening” has moved further away. Bitcoin has re-established its dominance, while altcoins like ethereum and ripple have fallen. This is perhaps because bitcoin is seen as a “safer” haven during the long market downturn.

Could the Flippening Really Happen?

Theoretically, yes. Bitcoin has a number of practical issues that hold it back, not least its transaction speed when compared to other blockchains. There are faster, more efficient projects out there that could, ultimately, become more valuable than bitcoin.

However, bitcoin has one major advantage: reputation. 71% of Americans have heard of it. Could the same be said for XRP?

For most people, bitcoin is the first cryptocurrency they buy. On many of the major exchanges, you have to purchase bitcoin before you can buy an altcoin like ethereum or ripple.

Not only that, but Wall Street is slowly embracing bitcoin. We’ll soon have a bitcoin exchange-traded fund (ETF) and institutional money pouring into the market. That money will go to bitcoin first.

In other words, it’s very difficult to knock bitcoin off the throne, because it’s engrained as the world’s first and largest cryptocurrency.

Ethereum or Ripple?

Let’s say the flippening did happen. Which coin is the most likely to overtake bitcoin?

Ethereum has tremendous practical application. The likes of JP Morgan, MasterCard and Microsoft are all experimenting with the Ethereum system. Others are building dapps, smart contracts and new cryptocurrencies. These projects each require ether as a payment token. As Ethereum grows and develops, the demand for (and the price of) ether may rise higher than bitcoin.

Ripple also has a practical application. Ripple aims to deploy its cryptocurrency, XRP, as a “bridge currency” for banks to transfer money abroad without fees or delays. If the world’s banks opt to use the XRP token, the market cap could soar beyond bitcoin’s. It’s worth pointing out, however, that no bank is yet using XRP beyond a pilot scheme.

Ultimately, Ethereum remains the best candidate if the flipping were to happen, simply because it is easier to buy than ripple. Only a handful of exchanges allow you to purchase ripple with fiat currency (like USD). You can’t buy ripple on Coinbase, for example. Instead, you would have to purchase bitcoin or ethereum before transferring it to another exchange to buy ripple.

The difficulty in buying it means it’s unlikely to overtake bitcoin anytime soon.

Does It Matter?

Ultimately, bitcoin, ethereum and ripple each exist for very different reasons. They are not direct competitors, so comparing them as such doesn’t get us very far.

However, it’s still an important (hypothetical) moment. If another coin overtook bitcoin, it means that particualr coin was being used in a meainstream, day-to-day, practical way. And that’s an exciting prospect for blockchain technology.

There are 17.3 million bitcoins in circulation right now. Only 21 million bitcoins will ever exist which means there are just 3.7 million bitcoins left to be created, or “mined”. However, the question of how many bitcoins are there is much more complicated. Millions have been lost or stolen, making it difficult to pinpoint how many bitcoins are left.

21 million: maximum number of bitcoins that will ever exist

17.3 million: number of bitcoins currently in circulation

3.7 million: number of bitcoins left to be “mined.”

4 Million Bitcoins Are Lost Forever

Theoretically, 17 million bitcoins are out there already, but almost a quarter are gone forever. In the early days of bitcoin, millions were accidentally lost. They were forgotten on hard drives or lost on paper wallets. One man threw away 7,500 bitcoins on an old hard-drive. (People were much less careful about storing cryptocurrencies when they were only worth a few cents each).

infographic depicting the number of bitcoins lost

It’s estimated that up to 3.79 million bitcoins are gone forever (almost a quarter of those currently in circulation). That’s $23.9 billion worth based on today’s price.

5 Million Bitcoins Are Held by a Handful of “Whale” Investors

Then there are the enormous hoards of bitcoin stashed away by early investors. According to Chainalysis, five million bitcoins belong to just 1,600 wealthy people. They’re known as “whales” because they own enough bitcoin to make a splash on the market when they buy or sell.

Among these whales, we know that Bitcoin’s founder, Satoshi Nakamoto is estimated to have nearly 1 million bitcoins in his digital wallet. And the Winklevoss twins own 1% of all bitcoin in circulation.

So if we take into account 4 million “lost” bitcoins and 5 million “whale” bitcoins, that only leaves about 8 million bitcoins left on the open market.

1 Million Bitcoins Are Stolen

But wait, what about stolen bitcoins? 850,000 bitcoins were stolen in the infamous Mt. Gox hack and at least 150,000 were taken in 2016 from the Bitfinex exchange. Many thousands more have been stolen in smaller heists.

While these coins are not lost, they are probably held by thieves and not circulating on the open market.

That leaves around 7 million available bitcoins. To put that into perspective, there aren’t enough freely available bitcoins for each person in New York.

Only 21 Million Bitcoins Will Ever Exist

One of the key features of bitcoin is that only 21 million can ever exist. This number is hard-coded into the system. We are scheduled to hit this hard-cap in the year 2140.

How does it work?

In simple terms, bitcoin is created by a process called “mining.” Without getting too technical, miners are responsible for processing transactions. They are rewarded with bitcoins for doing so.

Miners produce a “block” of transactions every 10 minutes. In return, they get 12.5 bitcoins.

This is how bitcoins enter circulation.

1,800 Bitcoins Are Created Every Day (For Now…)

If a block takes 10 minutes to process and miners get 12.5 BTC per block, that means 1,800 bitcoins enter circulation every day.

However, that number is set to get smaller and smaller over the next century due to a process called “halving.”

Bitcoin Creation Is Halved Every Four Years

When bitcoin was first created, miners were rewarded 50 bitcoins (BTC) for every block,

That reward is halved roughly every four years (after every 210,000 blocks mined).

It was first halved in 2012 (to 25 BTC) and then again in 2016 (to 12.5 BTC).

In other words, the supply of bitcoins will become increasingly limited.

After 64 halvings, we’ll hit the 21 million BTC cap. At this point, no more bitcoins will be created.

bitcoin supply and halving chart
Chart source: bitcoin.it/wiki

81% of Bitcoins Already Exist

Because of the halving system, the vast majority of bitcoins have already been created.

There are only 3.7 million bitcoins left to be mined, but it will take over 100 years to get create them.

What Happens When All Bitcoins Are Mined?

When we hit the 21 million cap, miners will no longer be rewarded directly for processing the blocks. Instead, they’ll be paid a transaction fee for each block they process.

In other words, miners will still receive a payment or incentive to maintain the blockchain.

How Does Bitcoin Supply Compare to Ethereum and Ripple (XRP)?

Coin creation and supply is one thing that separates bitcoin from other cryptocurrencies like ethereum and ripple XRP.

While the bitcoin supply is capped at 21 million, ethereum has no cap. There are already more than 100 million ethereum tokens in circulation. Having said, ether supply is capped at 18 million per year.

Ripple XRP, the third largest cryptocurrency, does have a hard cap of 100 billion, but they already exist. Every XRP token was created at once at inception, so they aren’t mined like bitcoin.

Conclusion: Bitcoin Supply Is Incredibly Limited

Bitcoin is scarce. Only 21 million will ever exist – a considerably smaller number than rival coins. Not only that, but millions are already lost, stolen, or hodled away by early investors.

Couple that with an ever-diminishing supply and there is simply not that much bitcoin left on the open market.