We are nearing a big change in bitcoin, a so-called bitcoin “fork”. This is like driving up to a fork in the road, needing to decide whether to bear left or bear right. And, this will impact ALL the bitcoin you currently own!
What’s a bitcoin fork?
Simply put, a bitcoin fork is a decision point, whether to go in one direction or another. There are two main camps, each supporting one of the fork directions. And each claims to have the an answer to a big problem with bitcoin – it’s growing popularity. Even Satoshi Nakamoto, inventor of bitcoin, commented on this concept early in the days of bitcoin, realizing that for bitcoin to grow, that changes would be required. The big changes require a fork.
If you have been trading bitcoins lately, you may have noticed two remarkable things. First, the cost of a bitcoin transactions is going up. It used to be equivalent to a few cents per transaction and now is closer to 50 cents, and growing.
Secondly, it is taking longer to get the transaction into the blockchain. That’s because each of the blocks of transactions in the blockchain, the ledger that contains all bitcoin transactions, is filling up. Although the blockchain itself is unlimited, the blocks within it are limited in size to about 12,000 transactions. And bitcoin limits a new block creation to only once every 10 minutes. Due to bitcoin’s popularity, this limit is now being reached more frequently.
Just a few weeks ago, I transferred bitcoins from one of my wallets to another and it took over six hours for my transaction to be added to the blockchain. My transaction was in pool of unconfirmed transactions just waiting to be added to a block. But, there were so many transactions, only so many could be processed at a time due to the block limit.
BTC vs BTU
Everyone agrees that this is a problem. The problem is that not everyone agrees with the solution. By everyone, I mean the miners. Miners are, in fact, the network of computers that run the bitcoin network. They must choose, by consensus, whether to support the BTC or the BTU fork.
The BTC fork is supported by Bitcoin Core, the main group of developers responsible for improving the bitcoin network. They created an improvement called Segregated Witness, or Segwit for short. This change allows more transactions to be squeezed into the existing blocks, up to 3 times as many, and the change is easier to apply. This is considered the safe path, but one that will need to be revisiting in the next few years as the block limit will again be reached.
The other camp, BTU, is called Bitcoin Unlimited. This new development effort allows blocks to grow to whatever size needed to support all the transactions needing processing. This is a long-term solution that would grow indefinitely, allowing bitcoin to accept more and more transactions as its popularity grows. Unfortunately, this is a bigger change that creates an incompatibility with the previous way of managing the bitcoin blockchain. And, some argue that it has not yet been well tested.
So what happens next?
The camps are about equally split, with about 1/3rd supporting each initiative (and the other third not weighing in). In the meantime, bitcoin is slowing down and getting more expensive for users.
So, the BTU camp is proposing “springing” this change on the bitcoin network. This could occur tomorrow, next month, or next year. We won’t know until there are 51% of the miners that agree. The BTU camp is a bit ahead of BTC and approaching 40% by the last count.
What does this mean to you?
If you hold bitcoin during the fork, you can expect one of the following three scenarios to occur depending on where you hold your bitcoins:
- All your bitcoins will be held as BTC (and not BTU)
- All your bitcoins will be converted to BTU (and not BTC)
- Or, you will now hold an amount of BTU equal to your current BTC holdings, effectively holding bitcoins of both types
What happens to the price?
The price of bitcoins, both BTC or BTU, are likely to drop. One will likely be the victor, yet will probably suffer a short-term setback in price, perhaps dropping below $1,000 per bitcoin for a little while. The losing coin may continue as a type of altcoin, or it may go to zero. No one really knows, and it is unlikely that we will have any notice of the impending fork.
What should you do if you own bitcoins?
As taught in my bitcoin investing courses, I always recommend holding the private keys of your bitcoins in your own private wallet. This is known as “cold storage”, and it protects you no matter which bitcoin solution, BTC or BTU, is the winner.
Your options are simple:
- Do nothing and ride out the storm. If your bitcoins are in an online exchange or wallet provider, you may land up with BTCs or BTUs, but not both.
- Take control of your private keys, the codes that control the bitcoins that you own. You can do this by creating bitcoin paper wallets or using a hardware wallet.
- And optionally, sell some or all of your bitcoins prior to the fork and then buy back in after the projected drop in price; by then, the winning coin should be known.
In summary, a fork may not happen right now. But it may come tomorrow. At some point, however, a fork will be required for bitcoin to grow and survive. And, the fork may come with little, if any, notice.
It’s up to you to decide how to best protect your bitcoins, whether they become BTC’s, BTU’s, or both. In the end, there’s not much we can do to decide the winner. The market will decide. But, you can hedge your bets by taking full control of your bitcoins’ private keys. Cold storage is also the safest way to protect your bitcoins!
My students are protected. Be sure that you are too!
Marc Carignan is founder of The Bitcoin Tutor, a company dedicated to helping people learn about and profit from the future of money. To learn more, visit http://thebitcointutor.com.