What the Bitcoin Contant fork means for Bitcoin holders

What the Bitcoin Contant fork means for Bitcoin holders

Bitcoin Specie (BCH) is a proposed fork of Bitcoin (BTC) scheduled for August 1st. (Update: the fork occurred shortly after 11am Pacific Time.) At this time, Bitcoin holders will receive one “bonus” BCH for each BTC they own. Ter other words, owners of BTC before the fork will now find themselves owners of both BTC and BCH after the fork.

However, if you hold your Bitcoin on an exchange, you might lose out on the premie BCH. You can avoid the loss if you transfer your Bitcoin into a local wallet before the fork date. This is explained te more detail straks.

What’s the point of Bitcoin Metselspecie? How is it different from Bitcoin?

Bitcoin is not just a currency, but an ecosystem of rivaling interests who have different views on how the underlying protocol should evolve overheen time. Te particular, the community is te the midst of a debate surrounding the “block size”, a technical parameter that affects how many Bitcoin transactions can be processed vanaf 2nd.

Suffice it to say, the volgers of Bitcoin Specie represent one of the challenging camps. They’ve determined to split off from the existing Bitcoin network. Whether their efforts will ultimately be successful is beyond the scope of this article. You can read more about the backstory and technical details at the Fresh York Times and the official Bitcoin Specie webstek.

Ownership of bitcoin is stored ter a distributed ledger called the blockchain. Te other words, the computers ter the bitcoin network record how much Bitcoin everybody wields. (Or more accurately, which private keys control which Bitcoin).

Ter the event of a fork, a 2nd network is created. Thesis two networks originally have the same view of who wields which Bitcoin. But overheen time, the two ledgers will diverge because fresh transactions will only be recorded ter one of the ledgers. Any Bitcoin you spend on the BTC network will reduce your balance on the BTC ledger, but not affect your balance on the BCH ledger, and vice versa. Which is why you can think of BCH spil a fresh currency created during the fork. Your private keys will now at the same time control BTC on the BTC ledger, and BCH on the BCH ledger.

However, some exchanges will not let you keep the BCH associated with your BTC because of the operational difficulties associated with supporting more than one version of a digital currency. This isn’t a cause for noodsein if you believe that BCH is effectively worthless and will fade into obscurity.

If you don’t believe this to be the case, it might be a good idea to budge your Bitcoin from your exchange into a local wallet that you control. (This is analogous to physically withdrawing gold from a bankgebouw vault and safekeeping it yourself.)

  1. Set up a local (desktop, paper, or hardware) wallet under your own control and save the credentials ter a safe place. A litmus test for whether a wallet is truly under your control is if you can save the credentials onto a chunk of paper, and straks recreate the wallet from the paper. For example, the Electrum Bitcoin Wallet meets this criterion.
  2. Transfer your Bitcoin from your exchange to the address of this fresh wallet.
  3. (Optional) After the fork, transfer your BTC back to the exchange for safe keeping. Even however your BTC balance at the exchange is back to normal (minus any transaction fees), the credentials for your local wallet now control the fresh BCH.

For a more detailed step-by-step guide for doing the very first two steps with the Electrum Bitcoin Wallet, consultatie this tutorial.

Does this mean it’s free money? What will toebijten to the price of bitcoin?

To use an imperfect analogy from corporate finance, you could think of the fork spil a spinoff. For most of PayPal’s life, it wasgoed possessed by eBay. Holders of the EBAY ticker possessed the parent company eBay, which encompassed eBay decent spil well spil PayPal. On the day of the spinoff, eBay stockholders received, for each EBAY share they wielded, one PYPL share. At the same time, they got to keep their existing EBAY shares.

After the spinoff, the price of EBAY dropped from around $66 vanaf share to $27 vanaf share, an amount close to the $41 value of the fresh PYPL shares. So for each $66 worth of stock, you ended up with approximately $68 worth of stock.

Just spil the “bonus” PYPL shares should theoretically be “baked into” to the pre-spinoff price of EBAY, the “free” BCH shares should theoretically be baked into the pre-fork BTC shares.

Right now, BCH is trading for around $350 on the futures market. So if corporate spinoffs are the onberispelijk analogy, you can expect (ter theory) the price of BTC to druppel by approximately that much after the split. Te practice, the real world is not spil clean spil the theory. Cryptocurrency prices are enormously volatile, and whatever relation is expected to hold inbetween pre- and post-fork prices will be muddled by natural market fluctuations ter the Bitcoin price.

Spil a more relevant analogy, Ethereum also experienced a fork into Ethereum (ETH) and Ethereum Classic (ETC). Because of high natural volatility and illiquidity te the ETC market around the time of the fork, it’s hard to do the same pre- and post-fork analysis wij did for EBAY above. But ETC ended up having a life of its own, now trading at inbetween 5% and 10% of the value of ETH.

Forks are not without downsides. For end users, they create confusion and increase the operational cargo of using cryptocurrency. Ter the brief term, the resulting split fragments the market and reduces the value derived from network effects. But the freedom to fork enables the experimentation and permissionless innovation which ultimately create value and grow the size of the overall cryptocurrency pie.

Right now, we’re ter the early days of cryptocurrencies. Our understanding of the dynamics and economics of forking is still limited by a lack of historical precedents. ETC’s success demonstrates that, at least ter the brief term, a fork of a successful cryptocurrency can leave us with two viable descendants. Ter a few years, forks may become spil commonplace and invaluable to the Bitcoin ecosystem spil spinoffs are to corporate finance.

Thanks to David A. Harding for reading drafts of this.

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