Place potatoes in a large pot and add water to cover by at least 1 to 2 inches; bring to a boil. Cook until potatoes are easily pierced with a fork, about 10 minutes. Drain, and set aside to cool.

Place bacon in a large, deep skillet over medium-high heat. Fry until browned and crisp, 10 to 12 minutes, turning as needed. Transfer bacon to a paper towel-lined plate and crumble when cool enough to handle. Leave bacon grease in the skillet.

Cook onion in the bacon grease over medium heat until browned, 6 to 8 minutes. Add vinegar, sugar, water, salt, and pepper to the pan and bring to a boil.

Once boiling, add potatoes, and 1/2 of the crumbled bacon. Cook until heated through, 3 to 4 minutes.