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Storage of bitcoins and other cryptocurrencies on exchanges is now riskier than ever!

bitcoin fork
Bitcoin Fork

A lot is going on in the Bitcoin environment at the moment. Hackers are more active than ever because of recent gains and different forks will possible be activated in the months to come. Both are very risky for the ones that store their bitcoins on exchanges. In case a fork happens, there is the risk that your exchange doesn’t support one of the chains. Furthermore transactions done after the fork can disappear when the blockchain disappears. The general advise is:

KEEP YOUR PRIVATE KEYS BY YOURSELF, SO STORE YOUR BITCOINS ON A RESPECTED WALLET THAT IS OWNED BY YOURSELF!

Bitcoin scaling issue
Most likely scenario
How to react
Compare the best hardware wallets

Bitcoin scaling issue

For a few years the Bitcoin community is divided by a different vision how the network should be scaled. Simply said one part of the community thinks the blocks that are created every ten minutes should contain more (than one MB) data, while others think the network can be improved by Segwit.

Segwit is an update that will double the capacity of one block and create the possibility to build 2nd layers on the Bitcoin network like Lightning Network and Rootstock (RSK). These 2nd layers will scale up the network too, because the majority of the transactions will happen off chain.

To implement a certain solution the network need to be ‘forked’. A fork is a copy of the current software with some changes. When the full network agrees with this change, everyone will implement it and the network will be updated. However, when a part doesn’t run the update, the network will split and 2 different cryptocurrencies will exist. There are a few different forks that could be triggered in the months to come:

Segwit X2

Segwit X2 is a compromis between the two rivals, whereby Segwit will be implemented in August followed by a doubling of the block size after 3 months. At het moment 100% of the miners is signaling that they will implement Segwit, so this is almost sure, but it’s only 100% sure when the network is really updated (they could play a dirty game).

The Segwit X2 deal describes that 3 months after the update of Segwit the size of the blocks will double via a hard fork, but miners can drop this by using other software before this event takes place. There is a chance that this fork will never happen when the community don’t see the need for it anymore.

UASF = User Activated Soft Fork

The fork era started with the UASF. Because miners didn’t want to upgrade to Segwit but the users did, the UASF came in existence. The UASF will cause all the UASF nodes to reject non Segwit blocks on and after the 1st of August 2017. This will cause a chain split that creates a bitcoin with Segwit and a bitcoin without.

The idea is that the Segwit chain will become more valuable because the economic majority wants Segwit. This creates a situation where miners shift to the Segwit chain to be able to earn bigger returns. Probably the Segwit 2X was successful because fear of the UASF under the miners. It looks like Segwit will be signaled by all miners before the 1st of August, so the UASF will not be activated.

Bitcoin ABC

Bitcoin ABC was an answer to the UASF in the first instance, but last saturday they announced that they are planning to fork anyway (also when the UASF never happens). Bitcoin ABC is a fork of Bitcoin planned on the 1st of August to create BCC or Bitcoin Cash, a clone of Bitcoin without Segwit and with 8 MB blocks.

This fork is quite sure to happen, but will probably not get so much support. Also BCC will not compete with Bitcoin as a 2nd Bitcoin, but it will be an altcoin. Because of this the damage will be limited.

Most likely scenario

Already 100% of the miners is signaling for Segwit, so it is almost sure that the update will take place via Segwit X2. This means the UASF will not get activated. The only likely fork in short term is the ABC fork. This will take place on the 1st of August and will create BTC and BCC. Keep in mind that the persons that will create BCC brought many surprises in the past, so maybe finally nothing will happen.

The support for BCC will probably be mostly in China, because the miners that support it are located here and the most important Chinese exchanges will support BCC. Most of the exchanges in the rest of the world will not support BCC or register it as an altcoin. When this fork happens it will probably become an altcoin.

3 months later the 2X hard fork is planned. But wether it will really happen is depending on Bitcoin ABC and the state of the Bitcoin network at that moment. Maybe Segwit will have a positive effect that make people decide that a hard fork is not needed anymore.

How to react?

As said in the beginning of this post it’s important to keep your keys yourself. This can be done by storing your bitcoins on a respected desktop wallet, hardware wallet or paper wallet. Storing your bitcoins on exchanges is very dangerous.

Firstly they get hacked regularly and secondly you never know if they support both coins after a split. When they don’t you will loose the unsupported coin. This happened in the real world when Ethereum experienced the split recently. Further it is important to not make any transactions during the split until the situation is under control.

Only use trusted wallets!

In case of a split you private key will give access to your coins on both of the blockchains. In case of an ABC fork, you will have the same amount of coins that you had before the fork on the BTC blockchain and on the BCC blockchain as well. After the fork, existing wallets will proceed to implement support for BCC and new wallets purely for BCC will be created.

BE CAREFUL! YOUR PRIVATE KEY ON THE BCC BLOCKCHAIN WILL GIVE ACCESS TO YOUR BTC TOO. WHEN YOU USE A WALLET CREATED BY SCAMMERS OR HACKERS TO STEAL YOUR PRIVATE KEY, YOU WILL NOT ONLY LOOSE YOUR BCC BUT ALSO YOUR BTC! USE ONLY TRUSTED WALLETS!

The best way to store your bitcoins securely is with a hardware wallet. A hardware wallet protect your bitcoins against hackers and by a split as well. Ledger and Trezor announced to create a BCC wallet when a split happens. They also advice to not make transactions till the network is settled again!