Surviving a Bitcoin Fork
Hi,
If you've been keeping up with Bitcoin news recently you will be aware of the scaling issue and the New York Agreement solution - which is Segwit2x.
And just to clarify, Segwit2x is a scaling solution that involves two parts:
The activation of Segregated Witness (Segwit) via a soft fork on August 1, which essentially solves an issue within the Bitcoin protocol known as transaction malleability. But it also does a number of other things, including an effective block size increase plus making possible the introduction of second layer scaling solutions like the Lightning Network and others.
A block size increase to 2MB (currently 1MB) three months later, via a miner activated hard fork.
As a result of these events many people have questions and concerns as to how best manage their bitcoins when this happens.
So to clarify things I will answer the most common questions here:
Q: What should I do to keep my bitcoins safe if/when such a fork occurs.
A: First of all I should clarify that the "fork" being talked about here is the proposed hard fork which forms the second part of the NY Agreement. The activation of Segwit is a soft fork and does not require any action on the part of general Bitcoin users.
When it comes to the actual hard fork, the first thing to remember is that it can only be done with a majority of mining hash power and therefore should not cause any undue disruption. However, there are a few things Bitcoin users should do and be aware of.
In the case of a hard fork it’s important to keep your bitcoins in a wallet where you possess the private key. That means all third party custodial wallets, where you would have had to provide ID info, should be avoided.
Examples of custodial wallets include Coinbase and Xapo. The reason you do not want your coins in such services is that they possess the private key to those funds, not you.
If all goes well, simply holding your Bitcoin and not doing any transactions during the hard fork period will be sufficient.
However, some people fear a chain split which could result in two different "bitcoins". This would in effect give you the same amount of both coins - apparently doubling your holding.
Q: How do I access the resultant two coins if there is a chain split?
A: If this were to happen then wallets will upgrade their service in order that both coins can be displayed and transacted - at which point you could simply keep both coins and wait, or if you have strong indications of one being better, you could sell one of those coins to buy more of the other one, using an exchange like Poloniex.
Q: What happens if the wallet I use doesn't upgrade to make two coins viewable and able to be transacted?
A: In such a case you would need to find and use a wallet that does provide this service and functionality and import your private key to that. Keep in mind wallets per se do not "hold" your bitcoins, rather it's a case that your private key gives you ownership rights and access to coins that reside only on the Blockchain ledger.
Q: What will happen to the price of Bitcoin if a hard fork occurs?
A: If it goes smoothly I would expect a fall in price prior to such a fork, due to various fears and concerns generated by the usual FUD. However, once it was all over price would recover and I would expect it to rise further as a result of the scaling issue finally being resolved. However, if there is a chain split and two coins emerge, then I would expect the total value of both coins combined to be less than value of the original coin, and for market forces to determine which is the preferred one.
The main thing to be aware of is that you will not lose your coins as a result of a hard fork or possible chain split, as long as you possess the private key and do not send or receive bitcoins during the transition period.
My own strategy is to simply hold most of my Bitcoin in the hardware wallet Trezor and to sit out the process, waiting until the dust settles.
Having said all the above, my own view is the event won't be as dramatic as some believe, and personally I don't expect to see a chain split resulting in two coins. I also believe Bitcoin is stronger than some people give it credit for and surviving this scaling upgrade will only make it stronger - and more valuable going forward.
All the best
Dennis