All You Need to Know About Cryptocurrency Forks

The fork we are about to look at in this article has nothing to do with crockery and cutlery. Dozens of new digital coins appeared exactly due to this technology. In this article, we are taking a look at what a fork is and what impact it has on the cryptocurrency market.

Hard vs. Soft Fork

A cryptocurrency fork is the branching of a bitcoin chain into two independent entities. Once separated, these chains operate as two completely different currencies. Cryptocurrency forks can be hard or soft. A softfork is a branching that leaves the new chain compatible with the old software used to create and maintain the original coin. Hard splitting, on the other hand, updates the software in such a way that new rules come into play. Consequentially, hardforks are no longer compatible with the old software.

Forks usually are introduced as a result of technological development and improvement, which makes new coins more successful and technically convenient.

The Mother Lode of New Coins

Altcoins, or alternative cryptocurrencies, appeared in 2011. Many of them were formed from Bitcoin through forks. The source code of the main cryptocurrency was modified and new offshoots began to operate independently.

As a result of forking, the system’s blockchain validation rules change. That is, there are new conditions under which a block can be considered authentic. By downloading the new software, the network users accept and play by the new rules.

When a softfork is coined, there is no need to download new software. By gently modifying the original code, developers often improve the cryptocurrency. A hardfork, on the other hand, leads to a complete change in the entire mechanism. The network splits, the changes are irreversible, and the two new cryptocurrencies lose the ability to interact. One well-known case of a hardfork is the branching of ETH into two forks: Ethereum and Ethereum Classic.

Why Even Bother?

The need for forks arises as technology evolves. Sometimes there is a need to make changes to the rules of the protocol, and sometimes there is a need to improve the security of the cryptocurrency. For example, a cryptocurrency code update can speed up a transaction, which improves the currency flow abilities. Changes result in increased block size, higher bandwidth and lower fees.

It is not uncommon for a fork to be triggered by disagreements within the development team, as was the case with the Ethereum hardfork.

Consequently, crypto-developers resort to forking when:

1. There’s a need to increase the level of security.
2. The time has come to improve a technological component.
3. The conflict among the developers emerges, requiring a solution satisfactory for both sides.

Bitcoin Cash and Other Well-Known Forks

In 2017, a Bitcoin fork occurred, which led the chain to be split in two. This resulted in the formation of a new cryptocurrency – Bitcoin Cash. The major cryptocurrency, which at the time was traded approximately for $2,500 per coin, received a hardfork.

Bitcoin Cash developers initially wanted to make changes to the maximum block size of the main cryptocurrency, but the cryptocommunity did not support this idea for bitcoin, so a fork was made. Bitcoin Cash received a block size eight times higher than that of the parent. At the same time, the same limit on the number of coins – 21 million – was retained.

It takes ten minutes to form a block. The increase in block size allowed Bitcoin Cash to increase the number of transactions that can be processed per second. This indicator is called scalability. And while traditional Bitcoin allows for seven transactions, Bitcoin Cash has 61 transactions per second.

The fork of the Litecoin cryptocurrency resulted in a new digital coin, Dogecoin. Expanse emerged as a result of a fork in the Ethereum chain. In fact, new cryptocurrencies can be created by cloning forks. All of them, in one way or another, carry a part of the code of the original digital coin – Bitcoin.

Fork Mining Potential

Whether or not a new fork will take root depends on how it is perceived by miners. For example, Bitcoin Cash became successful owing to the miners who supported it with their computing power. Bitcoin Cash has a large block size, which requires miners to incur additional costs. If the coin is profitable for them, miners will continue to support it. However, there is still no final conclusion among them about the coin’s viability. As it often happens, the enthusiasts divided into believers and skeptics.

The success of each particular fork can be evaluated only after the tokens go on sale and their exchange value is formed in the market. There is no way to predict that in advance. Consequently, new traders tend to stay away from a newly minted fork coin, unless it branched from a well-known currency that stood the test of time.

Exchange Rate Influence

Before figuring out what happens to the cryptocurrency rate as a result of a fork, let’s take a look at what users get after the circuit is branched out.

Owners of the parent cryptocurrency get a number of new tokens equal to what they had before the forking. For example, those who owned five Bitcoins received additional five Bitcoin Cash tokens.Thus, their capital increased – turns out that for cryptocurrency holders, the emergence of forks is a profitable process.

Knowing this and keeping track of planned forks, investors start buying the underlying asset, which leads to an increase in the rate of this cryptocurrency. If we study the rate of Bitcoin chart before the fork, we’ll see the price went up. It was also rising in August, the month when the fork occurred.

After Bitcoin Cash was launched, its price dropped from its opening trading level. This is because users are selling some of the new coins to increase capital in their account. By paying attention to the rate of cryptocurrencies (BCH/USD chart) on the Coinbase exchange, we’ll also see that in the first weeks it dropped, and only then there were 14 days of upward correction. Now BCH/USD is much lower than in 2017. And the reason for this is not only the sale of tokens, but also the general decline of the market compared to that period.

Final Thoughts

It’s safe to say most of the new cryptocurrencies emerged as a result of forks. For the market, forks are an opportunity to create new, more technically advanced digital coins. For investors and cryptocurrency users, it is also an opportunity to choose from a variety of tokens that suit their goals.

Is it possible to make money from cryptocurrency forks? Yes, by tracking the timelines of such forks. In a fork, as we have already found out, the cryptocurrency holder gets new tokens in their account.

By selling them, they can increase their own capital. At the same time, the price of the fork may fall to its fair value after the start of trading, and the base cryptocurrency may correct slightly afterwards.