What is a cryptocurrency hard fork and how does it work?
As a new investor, learning the ins and outs of cryptocurrency can be daunting. There are many terms to familiarize yourself with and so many things to get used to. This includes learning to be more protective of your investments. That’s why one of the key things you should learn about is the hard fork.
There are many steps you need to take to protect your investment at this time, and it would be wise to learn about them before you need to figure all of it out in a hurry. In this article, we’ll be going over what cryptocurrency hard forks are and how they impact your investments.
What is a cryptocurrency hard fork?
Cryptocurrencies feature systems which are allowed to evolve when something is not working. This could be due to a flaw or even just a change in the community’s stance on the current state of the network.
When this happens a hard fork can occur to migrate transactions to a new version of the blockchain. Everyone involved must agree for this to happen, and since it’s a huge event, opinions will, of course, be varied.
How does it work?
A crypto hard fork can occur for many reasons. The most famous type, of course, is one that generates a new asset, however, that doesn’t always need to be the case. Sometimes hard fork happens and the old chain just stops working. If this happens to a coin you hold then you’ll need to upgrade your wallet software by the specified date to continue transacting on the new chain.
Unless you’re a miner, you won’t need to do much except make sure that your wallet is updated and supporting the fork. Keep in mind that not all third-party wallets or exchanges will be participating.
Hard fork example
Jimmy has invested in a community-based coin project. Everything had been running smoothly, but eventually, a problem was discovered that would cause complications for the asset’s future. The community decides that a hard fork would be the best choice of action.
Jimmy makes sure to update his wallet so that it will be following the new blockchain, and waits for the date to occur. The old blockchain is abandoned, and the new improved version solves whatever problem the community was having, saving the project and everyone’s investment.
Why do crypto hard forks happen?
The reasons for a fork could be many. Sometimes blockchains fork due to a disagreement and a new asset is created. When this happens, both chains and their coins can continue to function, or one may even be abandoned.
Sometimes there is no other asset and the old blockchain is discarded as it is now obsolete. Some legacy projects may even fork in order to upgrade and allow their project to add new and useful features for the future.
What happens after a hard fork?
This depends on the type of cryptocurrency fork that is happening. If the asset in question is abandoning their old blockchain, then you’ll need to make sure you’re using a wallet client that will support the fork and is updated or you may have difficulties fixing the issue later.
After the fork, everything should go back to normal with the changes in place. With a fork that creates a new asset, it can be hard to tell. They could thrive or flop depending on many factors.
How can hard forks affect a coin’s price?
In many cases, the announcement of a fork could drive up the price of the asset, regardless of whether new assets are being produced. This normally brings a lot of activity, and there could be abnormal trading volume at this time. Be aware that this may not be long lived and you should prepare for a sudden drop after the fork.
What risks do hark forks present?
Hard forks are not without risk, the greatest of which is dividing the community. This can sometimes make or break a project depending on how things are split. Many cryptocurrency enthusiasts are opponents of forks for this reason.
There is also the risk that the new or old chain could be abandoned, even if there are no plans for this to happen. In most cases, one project will be superior and at the time you may have trouble identifying the winner.
How to get profit from a cryptocurrency hard fork?
Many people have made a profit simply by holding a cryptocurrency that forks because in some cases they are given new coins for it. You can hold on to these or immediately sell them for profit.
However, it’s also possible to try to make money off the growing volume that exists when people start talking about the fork. Once the date grows near it’s likely you’ll see higher trading volume and volatility which you can profit from.
Is hard fork good or bad?
The ability to hard fork is good, but the intentions are not always good. In many cases though, the fork is made in order to better the coin based on the community’s input. This ability to evolve and survive is what makes the blockchain unique, and it’s a key feature of cryptocurrencies.
Hard fork and soft fork
A soft fork is a less aggressive change in protocol. It’s less intrusive, and it gives users more of a chance to catch up than a hard fork. It provides backwards compatibility that allows nodes running the old software to still be recognized. A soft fork also only requires a majority vote to pass and not a unanimous vote as with a hard fork.
Hard fork vs chain split
When a hard fork occurs, all of the miners have agreed to the decision. This is a planned event based on what the community wants. A chain split is what happens when things are more turbulent. Not everyone has to agree and miners with a certain amount of power can decide to not follow these rules. In most cases, one chain will become dominant and the other will die.