What is Bitcoin Fork & Why did it happen?
Bitcoin Fork is a permanent bifurcation in the blockchain. The users have to implement a protocol upgrade proposal called BIP148. It is believed to boost the transaction capacity of Bitcoin by creating the new cryptocurrency Bitcoin Cash or BCC. Before the Bitcoin Fork, Bitcoin was able to process approximately seven transactions per second by creating one block every 10 minutes which had capability of 1 MB Bitcoin transaction storage capacity.As Bitcoin is outshining the traditional currencies and it has consistently increased its popularity and value more people are turning towards it . Bitcoin was essentially bursting at the seams to accommodate the huge demand. Bitcoin Cash will increase the transaction limit to 8 megabytes.
Two Schools of Thought : SegWit & Bitcoin Unlimited
The main aim of Bitcoin forking was to process more transaction in a time slot. SegWit & Bitcoin Unlimited are the two schools of thoughts that emerged.
SegWit is acronym for segregated witnesses. It counts serialised witness data as one unit and core block data is counted as four units. Hence it updates the 1MB block size into 4 million unit block weight limit. SegWit thereby introduces a new transaction format.
As Bitcoin Core Team said :
“As transactions that use SegWit features begin to be used, this change will allow more data to be included per block (with 100% of transactions using segwit features this is expected to be about 2MB of data per block, however in the worst case could be up to 4MB of data per block). In so far as it allows a greater transaction volume, it can be expected to increase the UTXO database more quickly (with 100% of transactions using SegWit features, the rate of increase might be expected to approximately double; however because SegWit is a soft fork, the worst case UTXO growth is unchanged).”
- Fixing Third-party Malleability Issue : Makes transaction identifier (txid) immutable and prevents scriptSig malleability.
- Sighash operations are linearly scaled : SigWit changes the transaction hash calculation for signatures in such a way that each byte of a transaction only needs to be hashed at most twice. Hence same functionality is provided more efficiently
- Explicitly Hashes Input Value : Ensures safe use of Bitcoin in hardware wallets.
- Multisig via pay-to-script-hash (P2SH) for enhanced security : Extra security is provided for scripts.
- Versioning of Script : Enables improved security and fucntionality and makes advanced scripting in Bitcoin easier.
- Reducing Unspent Transaction Output (UTXO) : SegWit is a soft forking change. Soft fork is a software update that allows integration of the network with new features which are implemented on the go.
Possible impact on Bitcoin : It may decrease hashpower and potentially reduce transaction fees by reducing block power.
This school of thought advocated bigger block size. It is viewed as a long term solution as block size is unlimited. This advantage comes with few shortcomings like it may put Bitcoin miners in more control. It would also involve an irreversible change i.e the software update will conflict with existing version and needs to be replaced (Hard Fork).
Emergence of Bitcoin Cash : The New Digital Token
Bitcoin Cash (BCC) is the new cryptocurrency which is coming into existence after Bitcoin Fork or splitting. It shares same financial history as Bitcoin but is more efficient in terms of clearing more transactions per second. Bitcoin Cash is proposed to be credited at a 1:1 rate to Bitcoin holders i.e each Bitcoin holder will own one Bitcoin and one Bitcoin Cash as long as they control their own private keys. However many users are keen on buying Bitcoin Cash and selling Bitcoin despite the fact that they will retain the balance before the split and the existing ledger will be preserved.
How some people are viewing this as a scam?
It is believed that Bitcoin cash would end up with Third Party Companies who control user’s private keys and can steal coins from Bitcoin users.
Here is how major Bitcoin players are dealing with the Bitcoin Fork :
- ANXPro and mobile wallets Electrum and GreenAddress – do not have technical resources to support a new cryptocurrency, hence won’t support it.
- Bitstamp, one of the world’s largest bitcoin exchanges – Is “not be in a position” to support the “altcoin.”
- Circle (peer-to-peer payments technology company) emailed customers -“We may never support the new version and any value on it could potentially be lost to you.”
Innovative Solution used by Bitrefil
Bitrefill (Prepaid phone startup) has planned to sell Bitcoin Cash in exchange of Bitcoin. It will then then proportionally divide the funds between users on the basis of amount the user holds in the company.
On the other hand some organizations like Shapeshift (Cryptocurrency Exchange) who aren’t sure about the best approach and have planned to stop trading for unspecified time duration and haven’t specified their take on listing Bitcoin Cash. Their idea is “Better Safe than Sorry”.
What Bitcoin Miners have to say?
Mining pools such as Bitmain will continue to support Bitcoin Cash and the original Bitcoin chain. Most mining pools have explicitly verified their support in favour of both the currencies.
How is the Cryptocurrency Market dealing with the split?
The cryptocurrency market is showing resilience against the much dreaded Bitcoin Fork. Bitcoin’s price was trading at $2860 on 1st August, up 7% from a low of $2680 only a day earlier!
How you as an investor can ensure safety of your Bitcoin?
Firstly you need to check with your Bitcoin exchange to see what their policy is towards the Bitcoin Fork. Will they support Bitcoin Cash or not? The must do thing would be to have control of your private keys. A good option would be moving the coins to hardware wallet like Ledger or Trezor. By doing so you will have access to all of your Bitcoin Cash. If you fail to do so, the exchange will be in control of your Bitcoin.
Investing in Bitcoin
Why invest in Bitcoin? What are the advantages?
Bitcoin is one of the most popular cryptocurrency as it can’t be stolen, no risk of “chargebacks” is involved in transactions and most importantly no third party seizure is possible. According to a research by Cambridge University in 2017, there are 2.9 to 5.8 million unique users using a cryptocurrency wallet, most of them using bitcoin. Bitcoin is a popular investment option in countries like Argentina where risk of confiscation by Government is high. Bitcoin purchases also rise in geographies where the risk of taxation or high inflation exists.
“Gold is a great way to preserve wealth, but it is hard to move around. You do need some kind of alternative and Bitcoin fits the bill.”
– Jim Rickards, American Lawyer, Economist and Investment Banker
Investment funds that offer cryptocurrency gains are very popular, Bitcoin Funds, Bitcoin Mutual Funds to name a few. Recently some mainstream investment companies like Hargreaves Lansdown have included the option of investing in Bitcoin to their investors giving them access to the decentralized currency.
Current Investing Trend in Bitcoin
The Bitcoin investment ecosystem has witnessed a tremendous rise of investments from Venture Capitalists like Peter Theil Founders Fund. The current trend is to invest in companies that provide Bitcoin Wallet Services, Bitcoin Payment Systems etc. Another area of interest is Bitcoin Mining where Bitcoin Miners use special software to generate Bitcoins by solving math problems.
Future of Bitcoin
“You can’t stop things like Bitcoin. It will be everywhere” – John McAfee, Founder of McAfee
Most likely Bitcoin Cash will pose no threat to Bitcoin. Investors with both cryptocurrencies may benefit from speculative gains.An ambiguity of preference between Bitcoin and Bitcoin Cash is prevalent in the cryptocurrency ecosystem hence it is difficult to predict the outcome of the fork at this point of time. Bitcoin Cash could lose in the saga of cryptocurrencies or may prove to be a tough competitor to other crypto currencies but Bitcoin is here to stay.