What is a cryptocurrency fork, and how to make money on it
Here’s what cryptocurrency fork are, where they come from, who needs them, and how to make money from them
A fork is a fork for a cryptocurrency project. It divides the blockchain into two independent chains of blocks with a common past but a different future. What that future will be depends on why the developers have created the split and how users feel about it.
Where do forks come from
Sometimes developers make major changes to a project. The new version is no longer fully compatible with the previous one, and if some users don’t update, they will lose contact with the network members who switched to the new version. This is how a fork occurs, that is, the blockchain is divided into two branches.
There are two main types of forks:
Softfork. If the developers make changes that allow partial compatibility between the two chains, the fork is considered softfork. This is a softfork. It is only possible if a majority of the network accepts the upgrade and is ready to move to the new version. In this case, the old one will gradually die out. Everyone gets off lightly.
Movement in old branch stops
Hardfork: If the developers make drastic changes that are completely incompatible with the old version, the fork is hardfork. This is a hardfork. In this case there are two completely isolated chains. Each begins to live its own life and their paths never cross again.
If a hardfork is planned and everyone agrees to the changes, nothing terrible happens and the old branch also quickly dies off because everyone migrates to the new one. Cardano had such a hardfork in August 2020. No one got hurt, everyone is happy.
The most dangerous is a controversial hardfork, that is, resulting from a conflict between developers. If some users do not want to change, they can stay on the old branch and it will continue to exist. Each branch will have its own coin.
The parties are unable to compromise, and each goes their own way
Next, it all depends on user support. If both chains manage to attract enough supporters, we will just get two projects instead of one. The history of the cryptocurrency industry is full of such examples. If one of them fails to gain popularity, it will soon perish. There are such cases too, for example, one of the Bitcoin forks Bitcoin Classic.
How to make money from a fork
There are two ways to make money from forks: get free tokens and profit from speculation.
Free tokens. Supporters of the new chain need to attract supporters, immediately create activity in the new network. To do this, they distribute new coins to all holders of the old koin.
The easiest way to get coins is through a cryptocurrency exchange or wallet that supports the fork. To do this, you need to transfer your money there and wait.
To get forks of this or that cryptocurrency, you need to possess the coins of the blockchain in which the hardfork is planned. If the hardfork is in the Bitcoin Cash network, you need to hold BCH, if in the Ethereum network, ETH tokens.
Popular platforms usually tell you in advance if they will support the fork. However, it’s worth understanding that forks are not retroactive. If you deposit tokens on an exchange after a hardfork, you are unlikely to receive additional coins. In addition, sometimes exchanges refuse to issue tokens. For example, in August 2020, users sued Coinbase because the exchange refused to give out tokens of the Bitcoin Gold hardforward.
Speculation. The price of the original coin often rises before the fork. People buy it in hopes of getting more free coins. However, the value then drops sharply as there is no longer any need to accumulate and hold the coin. Knowing this peculiarity, experienced traders can make money on this price trend.
