A bitcoin fork looms ahead of us in the next few weeks. Despite that, on Monday, I opened my first bitcoin wallet with Luno. I also bought a tiny fraction of a bitcoin using the Luno exchange (this was not investing – it was testing). Yesterday, I used that tiny fraction of a bitcoin to buy a fraction of an ether on Kraken (another exchange). It was all very easy.
It was also disconcerting. Because I know that you’re meant to have public and private keys for these cryptocurrencies. You’re also meant to have a wallet that can sometimes be a flash drive. These transactions are meant to take time to process. Somewhere in the Universe, blockchain miners were meant to have encoded that tiny bit of bitcoin with my public key and the public key of the seller and a timestamp and a record of the transaction, in a block that gets processed every 10 minutes. The same goes with the exchange of my bits of bitcoin for ethereum.
But even though I now have some bitcoin and some ether, I don’t have a private key (or I don’t know where it is). I may have a bitcoin wallet in theory – but in practice, I just have an online account with a company that holds a bunch of wallets on their users’ behalf.
Also, unless I was extremely lucky and caught the tail-end of a block both times (seems unlikely), something else was happening.
When Bitcoin is too easy
My question is: do people really know what they’re buying? Or are they just finding the quickest way to load up a bitcoin wallet with minimum verification requirements?
Because the whole thing feels like a live version of fantasy football.
This is concerning because of…
The bitcoin fork in the road ahead
On 1 August, Bitcoin is going to hit a fork (that may be either soft or hard, depending on who you’re reading). Here’s an illustration of part of the argument within the Bitcoin community of developers and miners:
It comes from a Reddit post titled “A simple breakdown – SegWit vs Bitcoin Unlimited“.
Here are other relevant names:
- Bitcoin Core
- Bitcoin XT
- Bitcoin Classic
None of this seems especially simple. But it is going to be playing out over the next few weeks.
What is the fork about?
Here is the problem (as I understand it):
- The original Bitcoin software had a 1mb limit on the size of transaction blocks.
- The network needs more than that to be sustainable (ie. at times, the limit has resulted in massive processing delays and/or massive spikes in transaction fees payable to miners).
- This has caused an argument. On the one side, there are bitcoin miners and developers that want to keep the cap (or a version of the cap) in place. On the other, there are people that want to do away with it altogether.
To illustrate this issue, here are some graphs from blockchain.info:
As you can see, the Bitcoin network has been approaching (and hitting!) the cap for some time now.
And this has caused transaction processing delays:
Interestingly, that queue peaked around mid-May of this year. Which is weird, right? It’s also around the time that Bitfinex started ramping up its processing of withdrawals – which is a whole other story that I covered here.
Anyway, because the network is decentralised, the only way to ‘vote’ for this particular system change is for bitcoin miners to either accept or reject a proposed software upgrade.
And side-note: the miners have a partially vested interest in maintaining the block size limit, because the smaller the block, the higher the transaction fees they can charge.
At this point, no one is really sure whether there will be consensus or not. We might end up with two versions of bitcoin out in the world. We may end up with one. No one knows.
But what’s important is what this means for the casual bitcoin investor
Here is a quote from and article in Bitcoin magazine about preparing yourself for a bitcoin fork:
Before the Coin-Split (That’s Now)
First of all, be aware that a coin-split is a high-risk situation. There is a real chance a sort of cyber-battle will break out between the two camps, perhaps even escalating to the point where bitcoin’s exchange rate(s) drops sharply, possibly to zero. Make absolutely sure you are not holding more value in bitcoin than what you are willing to lose.
If you do decide to hold on to your bitcoins, the single most important piece of advice is this: control your own private keys.
If you are storing your bitcoins on an exchange, in a custodial wallet like Coinbase, Circle or Xapo, or on any other service that holds your private keys for you, you may or may not eventually receive coins on both ends of the chain.
You should check out the rest of the article for what to do during and after. But this is the bit where I’m going to stop.
Because I have a Luno account and a Kraken account. But I don’t have my private key. I don’t even know how to go about getting my own private key.
General question to the bitcoin investors who trade with an app on their iPhones: do you control your own private key?
My guess is: probably not.
Just throwing that out there.