“Free Coins?” The Bitcoin Cash Hard Fork and What it Means for You
These last few days, we have received a lot of questions about Bitcoin Cash and the impending "bitcoin hard fork" to the Bitcoin network. There is a lot of confusion around this topic and we hope to shed some light and guide you on what to do if you have some Bitcoin. The concepts described here are not simple, but bear with us, we will try to explain them as simply as possible.
Let's get started!
[If you don't want an explanation of what's going on with the technology and politics, you can skip to the end to see how to receive your Bitcoin Cash]
What is a Bitcoin "hard fork" - What does fork mean ?
Before we dive into what does fork mean, we suggest that you watch our explainer video on how Bitcoin works. It gives a very simple 2 minute overview on how transactions are transmitted through the Bitcoin network, how they are added to the blockchain by the miners, and how they are confirmed so the recipient gets their Bitcoin.
Bitcoin operates via a "blockchain," which is essentially a ledger of transactions, where chunks ("blocks") of transactions in the network are appended ("chained") one after another. Bitcoin is a "decentralized" network, meaning that there is no central authority who stores data or arbitrarily makes decisions about what should happen within the network or how it should work. Instead, all parties running the Bitcoin network must reach a consensus about what the blockchain looks like every time there are new transactions. But sometimes, there are disagreements, and when this happens, the blockchain can split into two divergent blockchains.
This event is called a "hard fork".
How does the Bitcoin network decide which blockchain to follow in a fork?
Forks can occur at any time (they happen more frequently than you'd imagine), and the entire Bitcoin network follows certain rules in order to choose a winner. It is actually quite simple, and this simplicity is one of Bitcoin's elegant features: the network agrees to follow the longest blockchain.
What does this mean? If two blockchains suddenly appear in the network, all parties will keep operating normally until one of the chains stores more blocks than the other. At this point, the network keeps the longer chain and discards the other. This works because a longer blockchain signifies that more computing power has been spent on its creation than the competing blockchain, and computing power is kind of like the measure of truth in cryptocurrency technologies.
So what is a "hard" bitcoin fork and why is it such a big deal?
Sometimes the Bitcoin network needs an update to its software. These updates contain changes that improve its stability or speed, or fix issues.
When changes cause a bitcoin fork and the network can still recognize the new generated blocks and resolve everything harmoniously, we call it a "soft-fork".
Most changes and improvements are done this way, but sometimes changes need to be made to the architecture of the blockchain or network such that the network cannot accept new blocks in the way it did before.
This requires the network to completely change over to new software. If a portion of the network decides to change over, but others decide not to, this causes a "bitcoin hard-fork", with two competing versions of software.
What is Bitcoin Cash Fork and how does it relate to forks?
We won't go deep into the technical details, but it's important to mention that the current hard fork is happening because the Bitcoin network is currently implementing a new technology called SegWit, which provides a more efficient way to store transactions in the Bitcoin blockchain, which translates into cheaper and faster transactions. This sounds great, right? Who could possibly be opposed to cheaper and faster transactions, you ask?
A small group in the network is against these changes, mostly influenced by big "mining" companies (the people who write transactions to the blockchain), who are not happy that they will receive less transaction fees. So, they have decided to "hard-fork" the blockchain, rejecting these changes, instead implementing an alternative improvement to the network that won't affect their fees (they will allow more space on each block of the blockchain). The new blockchain that will emerge is called Bitcoin Cash (BCC or BCH).
As Bitcoin Cash has significantly less support of developers and miners than Bitcoin, most people are speculating that Bitcoin Cash will have less value. While it seems logical, we do not advise or make any predictions. Everyone will see what the markets decides and how these technologies progress.
If I own Bitcoin, how does this Bitcoin fork affect me? Does it mean that I get free coins?
A blockchain fork considers all the transactions in the blockchain prior to the fork valid, which means that any Bitcoin address that has a Bitcoin balance before the fork will automatically be associated with coins on both the old and the new blockchains.
So effectively, yes, you will have the original amount of regular Bitcoins and also Bitcoin Cash.
e.g., if you own 3 Bitcoins before the bitcoin cash hard fork, you will have 3 Bitcoins + 3 Bitcoin Cash after the fork.
Doesn't this mean that I should buy lots of Bitcoin now because I will get free money?
This "free money" mentality is probably the greatest misconception out there about the fork, and is leading many to a strategy of buying Bitcoin now and hoping to then sell the new Bitcoin Cash immediately after the hard fork. It's easy to see why. After all, if I have 3 Bitcoin now, then 3 Bitcoins + 3 Bitcoin Cash after the Bitcoin Cash fork, I have more than I started with. Simple math, right?
Well, it all depends on how the markets react. Remember that the price of Bitcoin is completely governed by market forces, i.e., how it is being traded on exchanges around the planet. It is possible that the value of Bitcoin + Bitcoin Cash will be greater than pre-fork Bitcoin. It is also possible that the market adjusts quickly to make Bitcoin + Bitcoin Cash roughly equal to the pre-fork Bitcoin value. In a vacuum with no money going into or out of the Bitcoin markets, this is the kind of equilibrium that would be expected. It is also not beyond reason that - with so many people using the same short term trading strategy - we see a huge amount of people trying to sell both Bitcoin (now that they have their 'free' coins) and Bitcoin Cash at the same time, leading to a massive movement downwards in Bitcoin price.
Nobody knows which of these scenarios will occur, but it is important to be prepared for potentially high levels of volatility in the price of both Bitcoin and Bitcoin Cash surrounding the fork.
However, if you already own Bitcoin, or plan to own Bitcoin by the hard fork, there is little reason for you to not collect your Bitcoin Cash. They are 'free' coins, just not 'free' value.
How do I get my Bitcoin Cash?
There is a longer technical answer here about what cryptocurrency accounts actually are and why you need to "split" your Bitcoin and Bitcoin Cash accounts to guarantee that you get both coins, but we'll just give you the practical steps that you need to take.
There are essentially two actions you can take to get your Bitcoin Cash:
(a) Trust an exchange to do it for you. If you're reading this article, this is likely your best option. Some exchanges have already announced that they will automatically credit their customers' accounts with an equivalent amount of Bitcoin Cash as they have in Bitcoin at the time of the fork. Kraken and Bittrex are two exchanges that have already announced this. Kraken has also announced that it will be possible to trade Bitcoin Cash for USD and EUR on their platform.
If your Bitcoin is already on such an exchange, just leave your Bitcoin as-is.
If you have your Bitcoin in an exchange that won't give you Bitcoin Cash (e.g., Coinbase) - or if you maintain Bitcoin in a personal wallet - you can transfer your Bitcoin to one of these exchanges prior to the fork and receive the Bitcoin Cash.
So long as the exchanges follow through with their promise and don't encounter technical problems, this is the easiest and lowest stress solution.
(b) Keep your Bitcoins in a personal wallet (where you control the private key) and then dissociate your Bitcoin and Bitcoin Cash accounts after the fork. This is for intermediate users, so we will not go into the details in this article. You can read more about the process here.
Or, if you fell like this is all too much and you don't care about Bitcoin Cash, you can:
(c) Just keep your Bitcoins wherever they are now and not worry about any of this. Your Bitcoins aren't going anywhere.
When is the Bitcoin Cash hard fork going to happen?
The hard fork will occur on August 1st at 12:20PM UTC. You can use a tool like World Time Buddy to see when that is in your local time.
Bitcoin Hard Fork & Bitcoin Cash Fork
We hope that this helps you understand the Bitcoin Cash hard fork a bit better. As always, you can ask us any questions you might have about cryptocurrency investing.
DISCLAIMER: Cryptocurrencies like Bitcoin and Ethereum are highly volatile and risky. We cannot give you advice about what to invest in or how much to invest. You should take the information we provide in our courses and blog posts, do your own additional research on specific cryptocurrencies, and plan to decide what kind of investments work for you. We highly recommend talking to a financial advisor to understand the level of risk that you are comfortable with.
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