If you currently own bitcoin, prepare yourself now for the upcoming potential “fork” on August 1st. Be sure that your bitcoins are in cold storage (such as in a paper wallet or a USB hardware wallet) so you can best protect your investment and potentially double your holdings.
First, what’s a bitcoin fork? Just like a fork in the road, a bitcoin fork is a change in direction from using the current bitcoin network software to a new version of the software. To make a bitcoin network software change, either a hard or a soft fork is required.
The difference is that soft forks have backward compatibility, typically representing simpler and less intrusive software changes. Hard forks are big changes.
A successful fork requires at least 51% of the bitcoin miners (the computers that operate the bitcoin network) to make the same change at approximately the same time – worldwide. Otherwise, some network instability may occur. Or, the fork may be rejected altogether and the current software may continue to operate.
What is even more interesting is that there are currently competing proposals regarding which changes should be made, with names like “SegWit” and “Bitcoin Unlimited”.
What Happens During a Fork
A fork results in the current cryptocurrency (crypto) to be effectively duplicated as the current software continues to run the current version of bitcoin while the new software effectively launches a new version of bitcoin. It is possible that both will continue on, perhaps resulting in bitcoin “classic” and “new” bitcoin. In this case, one would likely be much more valuable that the other (as in the case of Ethereum and Ethereum Classic).
For those who were around in the 1980s, Coca-Cola did a type of “fork” in the soda business, creating “new” Coke, and not long after, Coke Classic. What’s happening with bitcoin has some similarities.
The point is that no one knows these two things for sure (that is, not until they actually happen):
- Will 51% of the miners all agree on the same proposal?
- Will both (or multiple) forks survive, or just one of them? That is, will “new” bitcoin come out on top, or will bitcoin classic keep its value?
Why the Fork?
Some have asked about this bitcoin disruption. Isn’t there another way? The answer is no. In fact, this “is” the way that the bitcoin network (and hundreds of other cryptos) are designed to change. It’s all about consensus.
When a majority of the miners agree to a necessary change, then the change can take place. And, I believe this change is necessary, as the number of transactions occurring in the bitcoin network are growing. However, many transactions are being delayed and are becoming more expensive due to some early design decisions made in the original bitcoin code, back when few transactions occurred.
The current bitcoin software allows only a certain number of transactions to be encoded during every 10-minute interval (the block interval within bitcoin’s blockchain). Because of the large number of transactions, many don’t clear for hours or even days. This has caused the transaction cost to rise sharply (from a few cents to several dollars per transaction) as priority processing is given to transactions that pay higher fees.
What To Do Now
Even if you didn’t get all those details, what you need to know is this. If you hold your bitcoin in cold storage, then you are safe. If you don’t, you are taking a risk. Keeping your bitcoins at exchanges like Coinbase and others is not recommended. And, if both cryptos (new and classic) continue on, you will likely only hold one of the two, at the discretion of your exchange.
My students know that cold storage, either with paper wallets or USB hardware wallets, is the safest way to store your cryptos. This is true of bitcoin and other cryptos as well. As right now, there has never been a more important time to store your bitcoins safely and securely.
Most bitcoin exchanges have been informing their customers over the past several days that they will be freezing their customer’s accounts and halting trading sometime on Monday, July 31st. Depending on how smoothly the fork goes, trading could resume as soon as a few days after.
Now, I don’t expect Coinbase and other large exchanges to “lose” your bitcoins. Although, it’s best to keep them safe yourself. And, if both new and classic bitcoin become “a thing”, then you may miss out on one of the other.
The Early Days
These are the early days of bitcoin and cryptocurrencies. We are witnessing this new age of digital currencies and borderless transactions. Although still very young, governments and central banks are paying attention. Many of them know that their days of “printing money” and hiding the truth from the people is coming to an end, faster than they would like.
So, don’t worry. This will be the first of many forks over the coming years, in bitcoin and other cryptos. Consider them to be growing pains.
Personally, I expect bitcoin to become stronger, more resilient, and more valuable than ever. For me, that’s where my money is!