Alexandra Perry, a writer for investment publication Wealth Daily has advised readers in an opinion piece that an impending fork in bitcoin’s network could bring a “blood bath” to bitcoin. Perry wanted to educate investors on the difference between the two possible forks – hard and soft – and advise on what protective measures investors can take.
Recognizing that bitcoin’s value has increased by 350% this year, Perry noted that a fork will have an impact on the currency’s value and its long-term potential. She also noted that a fork is needed for bitcoin to survive as a currency, and it will affect investors.
A fork in web development refers to replicating and modifying code. A soft fork is a minor adjustment to the code. The user can continue to use the program without complications for a short period. A hard fork requires an update to continue to use the program.
A fork is needed for bitcoin to address the need to scale the network. As more users join the network, transaction speed slows, creating various problems.
The problem can be addressed by deploying larger blocks to the bitcoin blockchain. This requires a code modification.
A soft fork modifies the code without splitting it. A hard fork splits the code. Either a soft or hard fork will likely cause bitcoin to lose value. Bitcoin’s code is currently maintained by a staff of 100, of which 25 are committed to code maintenance and web development. Those developers are evenly divided over executing a hard or soft fork.
Many staffers favor a soft fork called SegWit that will not split the code. The staffers who don’t favor SegWit want a hard fork that will significantly increase the block size. This is referred to as Bitcoin Ultimate.
One of the major issues standing between bitcoin and world domination, Perry noted, is its transaction speed. If bitcoin cannot overcome this issue, it may not survive as a digital currency.
Hence, a fork, hard or soft, is inevitable.
A similar situation occurred for Ethereum in its early years. Its core team opted to fork the code to restore funds lost in a big hack. Ethereum split into two currencies – Ethereum and Ethereum Classic. Investors saw their holdings split into the two currencies.
Bitcoin’s situation is more complex. Investors hold bitcoin in various exchanges and wallets, which have rules concerning a fork.
Coinbase, for instance, has said it will only recognize Bitcoin Core in the event of a fork. Wallets such as Trezor and Ledger have said they will recognize both codes.
Some investors have removed their funds from the exchanges and transferred their them to offline wallets, ensuring their money will exist in both codes. They will be able to sell the version of bitcoin that they consider the loser.
Following the fork, there will likely be a big drop in bitcoin’s value. There could be two tokens, one of which will rise in value, similar to what happened to Ethereum and Ethereum Classic.
Investors will have three ways to respond:
1. They may choose to sell their holdings before the fork, evading the risk if a more dangerous fork is attempted and bitcoin’s value falls significantly.
2. They can move their funds to offline wallets so they can decide to buy or sell rather than the exchange.
3. They can leave their funds in exchanges and hope for the best.
The individual investor has to decide what choice to make. It is important to be aware of these choices before the fork. It is also not certain when the fork will occur.