While the full impact of the Aug. 1 Bitcoin hard fork is clouded by uncertainty, we know enough to make some reasonable predictions about how all this will play out.
Scheduled to occur on Aug. 1 at 12:20 a.m. UTC (that's 8:20 a.m. EDT), this Bitcoin hard fork will create two distinct types of Bitcoin.
The hard fork will create a variant called Bitcoin Cash in addition to the existing version of Bitcoin. Stranger still, anyone who owns Bitcoin prior to the hard fork will own an equal number of both variants after the hard fork.
Needless to say, this is a confusing and stressful turn of events for most Bitcoin users.
As a Bitcoin user myself, I've been following these developments very closely. Let me explain what's happening and what I think Bitcoin owners should do as events unfold:
It's a result of the two-year Bitcoin civil war over how best to scale the network to accommodate the rising number of transactions.
Over the past year or so, the digital "blocks" that contain and verify all Bitcoin transactions have reached capacity. That's had some bad side effects, such as delayed transaction confirmations and rising transaction fees.
Everyone agreed that a solution was needed, but disagreed on what that solution should be. One side advocated a change to the Bitcoin code, called SegWit, which would squeeze more transactions into each one-megabyte block. Another group argued for raising the size limit on the blocks from one megabyte to two, four, or eight megabytes.
In February, a compromise solution was proposed and agreed to by many in the Bitcoin community, including many of the biggest Bitcoin miners. Dubbed "SegWit2x," the idea was to adopt SegWit first and raise the block size to two megabytes about three months later.
Last week the miners approved the first half of SegWit2x.
But a segment of the "big blocker" contingent wasn't happy. Most don't think SegWit2x's block size increase will occur. And in any case, they think two megabytes is too small an increase.
So they created a new version of the Bitcoin software called Bitcoin ABC (standing for "adjustable blocksize cap"). This version strips out the SegWit code while dramatically increasing the block size to eight megabytes. The Bitcoin created on this blockchain will be called Bitcoin Cash.
The two blockchains will share a common transaction history that diverges at the Aug. 1 hard fork. Transactions that occur after the hard fork will exist on one or the other blockchain, but not both.
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This is what defines a cryptocurrency hard fork. But it also creates a curiosity.
Because of the shared history, people who own any Bitcoin before the fork will continue to own that Bitcoin after the fork - but they'll also own an equal amount of Bitcoin Cash.
That depends on who you ask.
The Bitcoin Cash contingent fervently believes the path they've chosen - to increase the block size - is what Bitcoin creator Satoshi Nakamoto intended. They will tell you that Bitcoin Cash is the "real" Bitcoin and that it eventually will supplant the original "Bitcoin Core" version.
But Bitcoin Core supporters view Bitcoin Cash as a doomed experiment. Most believe the price of Bitcoin Cash will crash quickly and that it will become an also-ran altcoin at best - and vanish at worst.
The reality will fall somewhere in between. Bitcoin Cash appears to have enough support, particularly in Asia, that it will survive. But it's unlikely to overtake Bitcoin Core anytime soon as the dominant version of Bitcoin.
The level of support for each will boil down to the Bitcoin miners. In public statements, most Bitcoin miners have said they'll allow mining on the Bitcoin Cash blockchain but won't drop support for Bitcoin Core.
Most miners seem reluctant to take sides and can be expected to follow the money. In other words, they'll mine the version of Bitcoin that earns them the fattest profits. That means the version with the highest price will get the lion's share of the hash power.
The Bitcoin price today is about $2,800 (this will translate to the Bitcoin Core price after the fork).
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We can estimate the post-fork price of Bitcoin Cash from futures trading that Chinese Bitcoin exchange ViaBTC launched last week. After starting off at about $500, Bitcoin Cash futures have dropped to just below $300.
That suggests Bitcoin Cash will get somewhere between 5% and 15% of the total Bitcoin hash power in the wake of the hard fork. That should be enough to keep it going for at least until November, when we'll find out whether SegWit2x will indeed adopt the bigger, two-megabyte blocks.
There was already some confusion over the Bitcoin ticker symbol before the hard fork.
People have commonly used "BTC," but that's not an official currency code. That's why the Bitcoin ticker symbol "XBT" was created.
Bitcoin Cash will add to the confusion. Some are using "BCC," but that ticker symbol is already in use by another cryptocurrency, something called BitConnect.
Some Bitcoin exchanges say they plan to use "BCH" as the Bitcoin Cash ticker symbol.
I expect volatility in the days following the fork. Advocates of both sides have vowed to dump the version of Bitcoin they oppose as soon as they can.
The turmoil will likely cause at least some drop in the price of Bitcoin, at least to the $2,500 level and maybe more.
Any losses will be more than offset by gains following the block increase phase of SegWit2x in November. Assuming it occurs, it will reassure the less fanatical big blockers. This will further marginalize Bitcoin Cash, and the relief over having a consensus solution will draw a fresh wave of investment into Bitcoin.
What will happen with Bitcoin Cash is harder to predict, other than an initial price in the neighborhood of $300. But the dumping by Bitcoin Core supporters will take a heavy toll. The Bitcoin Cash price may fall steeply before gaining its footing.
Beyond market turmoil, many Bitcoin owners also are worried about the safety of their cryptocurrency while the hard fork is taking place...
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No one will lose Bitcoin directly because of the hard fork. However, people should avoid trading or even moving Bitcoin during the fork and in the days following. The best strategy is to wait until the situation stabilizes before taking any action.
That includes resisting the urge to dump one or the other versions of Bitcoin. Most of the exchanges are likely to be overwhelmed. And a disruptive event of this magnitude probably will attract hackers and other bad actors hoping to capitalize on the chaos.
If you own Bitcoin and don't care about the bonus Bitcoin Cash, you can sit tight and wait until the storm blows over.
Those who want to access their Bitcoin Cash will need to make sure they have their existing Bitcoin in an exchange or wallet that has announced support for both versions post-fork. A few sites, most notably Coinbase, have said that they will not support Bitcoin Cash.
Other exchanges, like Kraken, have said they will automatically credit customers with Bitcoin Cash equal to the amount of Bitcoin they hold in their account.
Surprisingly, yes. If you own 10 bitcoins before the hard fork, you'll own 10 bitcoins after the hard fork - plus 10 Bitcoin Cash tokens.
The ability to "cash in" on these free tokens will depend on the Bitcoin exchanges. But Kraken has already announced it will add three trading pairs - the new and old versions of Bitcoin, Bitcoin Cash against U.S. dollars, and Bitcoin Cash against euros.
That means Kraken customers will be able to convert their new Bitcoin Cash to Bitcoin Core bitcoins, or cash them out for fiat money. If Bitcoin Cash is worth $250, a person with 10 Bitcoin Cash tokens could walk away with $2,500 of "free" money.
Be advised, however, that the IRS will want its share of your free money. And it's unclear whether you'll be able to include any of what you originally paid for your bitcoins as the cost basis.
Watch for an IRS ruling on this. But if you cash out, don't try to hide it from Uncle Sam.
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