What Is Bitcoin Fork and How to Benefit from It?
If you want to understand a Bitcoin fork, imagine a dinner fork.
A straight line diversifies into multiple ones.
Similarly, a Bitcoin fork is a software change in this cryptocurrency.
A single blockchain gets divided into two.
For a certain period, these both operate simultaneously.
So, you have two versions with a shared history.
These forks can sometimes be temporary.
In an infrequent situation, the split can be so deep-rooted that it is permanent.
As you can imagine, a split in the blockchain also results in the creation of two currencies.
As a result of this separation, the blockchain ledger will list two chains for a while.
While a group will believe in one block, the other half will believe in the other one.
The only positive in the entire problem is most times these get resolved quickly.
The probability of two block forks is relatively rare.
However, these single forks emerge every once in a while.
The problem is generally resolved by the network that spots it first.
One of the blocks becomes redundant, and the entire network adopts the other one.
The redundant is then stored in pool as an orphan one.
The block time is the key determinant in this.
The shorter the time, the higher is the probability of the problem resolving on its own.
Different blockchains have the different operational matrix.
These factors define the efficiency and as a result, speed up or reduce forking prospect.
So in many ways, you can look at forks at protocol changes.
It is, in many ways, a protocol upgrade as well.
In this, a new set of rules is adopted while another set is made redundant.
Types of Forks
There are two types of Bitcoin forks.
The differentiation is on the basis of time duration for the forks.
The final time duration also decides the longevity of the forks.
In many ways, this creates the relative extent of risk in the fork as well.
As you can understand from the name, the Hard Fork is a relatively long-standing change.
This change makes the previous one redundant.
Every node and user in the blockchain has to adopt this upgraded version.
So, you can even look at this as a relatively permanent alteration in the blockchain.
So, if you have any node running on the previous blockchain, they will be redundant.
These won’t be accepted any further.
To maintain the continuity, the old blockchain quickly adapts to the changed protocol.
Often this is a convenient way to introduce newer features in the blockchain.
If there are any security risks in the older blockchain, the hard fork can resolve these.
At other times, the hard fork can introduce functional elements.
So, in many ways, this is the best way to introduce long-term innovation.
It helps the blockchain to reinstate a new protocol.
In comparison, the soft fork is a temporary change.
This necessitates backward compatibility of the various nodes.
In this case, only a majority of users have to upgrade.
A complete adoption is not necessary.
New transactions can be easily added with the sender and receiver’s consent.
So in this case, only the concerned participants have to understand the protocol.
A soft fork can be due to non-compliance with upgrades as well.
This is predominantly a temporary divergence.
But remember, you need a hard fork to reverse a soft fork.
Key Bitcoin Fork Thus Far
There are some key splits in the Bitcoin world thus far.
These splits can be divided into soft forks and hard forks.
Some of the most striking Soft Forks include:
This was created in mid-2015.
This is after a proposal to increase the block size to 8 megabytes.
The Bitcoin Core is the parent blockchain here.
However, it did not manage the requisite support.
The protocol is on the decline since 2016.
This is another noteworthy fork of the Bitcoin Core.
Its aim was to increase the transaction processing.
Just like the Bitcoin XT, it was a move to decentralize the governance.
It aimed to enhance the scalability of the Bitcoin,
Several governance initiatives were included.
But this too failed to garner the supermajority.
As a result, it became an orphan block.
By the end of 2016, it went out of circulation.
The aim of its creation was to address scalability issues.
The aim was to empower users with preference power.
The ultimate target was to increase the transaction limit of the Bitcoin node.
There is a variation of this in the Bitcoin Cash network.
It operates as the BU cash.
However, the developers of Bitcoin Core are not too keen to increase the size.
The Hard Fork Thus Far
There have been some hark forks in the Bitcoin world as well.
These are primarily with the objective to create greater transparency.
Here is a list of some of the most striking ones.
– Bitcoin Cash
This is perhaps the most important hard forks.
This Bitcoin fork was undertaken at Block 478558
The fork came into operation on August 1, 2017.
Again it was a 1:1 fork.
By this I mean, users get 1 Bitcoin Cash against 1 Bitcoin.
This started operation from October 24, 2017.
In this case, the Bitcoin was forked at Block 491407
This fork was also envisaged with a 1:1 ratio.
You get 1 Bitcoin Gold for every Bitcoin.
It was primarily to address the scalability concern.
Increasing the block size capability was the primary motive.
Soon after its inception, it was yielding 30% more returns.
– Bitcoin Diamond
This is perhaps the most recent one.
This started operation on December 12, 2017.
The Bitcoin Fork was created at Block 495866.
You get 1 Bitcoin Diamond for every 1 Bitcoin.
Two mining pools, Team EVEY and Team 007 created this one.
Information about the long-term sustainability is crucial.
In many ways, these hard forks are created intentionally as well.
Wave of Bitcoin Forks
So you can sure that there has been a wave of Bitcoin Fork.
In 2017 alone, there have been three forks.
So it is quite evident that this trend is here to stay.
The question is what’s the next step for Bitcoin investors?
Quite evidently, it becomes important to identify how to gain from it.
In fact, there are quite a few that have yielded better returns than the parent.
So you saw a phenomenon similar to a stock split in the Bitcoin world.
So if you held one Bitcoin earlier, you now held 1 Bitcoin Cash.
Now consider how it impacted the Bitcoin value.
From August 2017 to date, the Bitcoin Cash in circulation is worth $20 billion.
By sheer networth, The Bitcoin Cash is now the third most important cryptocurrency.
It ranks just after Bitcoin and Ethereum in absolute terms.
But the fact is the parent Bitcoin did not experience that kind of value depreciation.
The current Bitcoin value is close to $150 billion.
But with that amount of money at stake, this fork is inevitable.
For example, the more current fork Bitcoin Gold yielded 30% more return.
As a result, the Bitcoin Gold is worth $270 per Bitcoin.
But the Bitcoin Gold saga does not end right there.
They mined close to 100,000 Bitcoins themselves before making it public.
Bitcoin Gold network is now worth $4.5 billion.
This is the sixth most valuable cryptocurrency currently.
It is even slightly ahead of Litecoin, another Bitcoin fork.
As any astute investor than it is important to play these carefully.
Think about a conventional stock split.
You have to take a well-calibrated call to gain most from it.
This is how you can make a meaningful impact.
Prospects of Bitcoin Fork Failure
The problem with a Bitcoin Fork is there is no guarantee of sustenance.
You can never be quite sure whether this will create sustainable value.
Moreover, how do you decide which one is a serious play?
For example, if you see Bitcoin Uranium, it does not seem believable.
Many similar options are there.
There isn’t anything more than the mere mention of these Forks.
There is actually a huge potential for free money.
This is what also creates a considerable blip in the overall scheme of things.
Just look at the Bitcoin Gold for that matter.
In just a few months, this yielded a turnaround of $27 million.
But at the same time, you have some plays like Uranium.
Moreover, for many Bitcoin Forks, they try cashing on the Bitcoin name.
Obviously, these forks involve a lot less work than any new currency.
People often pay attention because of the Bitcoin mention.
Perhaps the authentication issue is the primary cause for concern.
In case of a Bitcoin fork, the exchange controls the private key.
As a result, the exchange has the capability of underlying cash.
This means the investor is pretty much at the exchange’s mercy.
So theoretically, the exchanges can simply pocket this money and be done.
They can pocket a huge amount of cash on their own accord.
But, this can also impact the credibility of an exchange in the long-term.
It can cost them precious customers.
That means even the sustainability is at stake.
So for any new Bitcoin fork to sustain, you need the support of multiple exchanges.
So only when a collection of exchanges offer support, you can create a meaningful lobby.
They should at least offer the capability to withdraw.
You can well imagine without withdrawal power, a Bitcoin is not sustainable.
Key Advantages of Bitcoin Fork
If you want to extract value from a bitcoin fork, you have to know the pros and cons.
There is a reasonable motive behind the creation of every bitcoin fork.
If you want to draw benefit from that, you have to understand it.
The cardinal element in this is the intrinsic concept.
The final value is based on the overall potential of the concept.
For example, when you look at Bitcoin Cash, the technological potential of it is the driving force.
Similarly, the core concept is the most important factor.
It helps you to derive long-term value from it.
1.Scalability of Transaction
This is perhaps the most important advantage of Bitcoin fork.
If you see, most hard forks are an outcome of this core consideration.
The ever-increasing volume of Bitcoin users is a matter of huge concern.
This volume of users has a significant impact on the transaction efficiencies too.
The limited amount of transactions in the current block is the biggest restraining factor.
It has resulted in easy replication.
This is one of the biggest concerns that led to the formulation of forks.
Often the thinking is that hard forks are the best option to enhance scalability.
2.Increasing the Blocksize
Talks about increasing the Bitcoin block has been underway for a while.
Though there have been some temporary soft forks, most have been terminated.
Perhaps the Bitcoin Cash is the first notable hard fork that yielded value.
The idea is to increase the blocksize to 2MB or more.
But increasing the blocksize is never an individual decision.
The entire community has to be considered.
At least a few exchanges need to come together.
But if done, it can significantly enhance the value.
This is because a blocksize with higher capability will return more value.
This can directly boost the overall return on the Bitcoin investment.
Lets’ assume you took a stake in a Bitcoin fork like Bitcoin Cash.
In a matter of few months, you got $270/Bitcoin.
This is because you got Bitcoin Cash for every Bitcoin.
Now even without any well-charted investment strategy, you could extract value.
So this can be one of the best triggers for choosing a fork.
But you have to carefully study the concept before taking a call.
The downside is if you end up with something like Bitcoin Uranium.
It can yield little or no value at all.
But if you can invest in sustainable options, it will generate good value.
4.Benefit for the Network
The bitcoin fork can provide reasonable value to the network.
At the current 1 MB size, you can process a maximum of 4 transactions per second.
Now if the size is doubled to 2 MB, the transaction volume can also increase.
Imagine if the transaction value is doubled, the volume of the transaction will also increase.
This is a big positive for regular users.
Because the higher number of transactions will reduce the charges involved.
This is because the volume of transactions will increase relatively.
This will result in a significant drop in the transaction rate.
It will definitely be at a much lower level than now.
So the broad user base will gain significantly from it.
On the other hand, also watch out on the earnings of effective bitcoin miners.
Moreover, it is a crucial step to enhance global payment network.
If you refer to the original white paper by Satoshi, he targeted 100 million transactions daily.
Bandwidth usage was expected to reach 100 GB.
As a result, volume is expected to rule over value.
But really small miners may lose out some bit of margins.
5.Higher Risk Reward Ratio
This is perhaps the oldest truth of investment.
If you want greater rewards, you need to take up higher risk.
Needless to mention that Bitcoin fork represents significant risk.
The only solace is the higher reward that it represents.
The fork opens up significantly larger opportunities to make money.
Look at the simple statistics of the hard fork in August 2017.
In a matter of 6 months, investors have almost realized 3x the value.
Now this means the next fork could raise the relative value.
Investors will go into the fork with the expectation of higher returns.
However, you need to balance between perception and reality.
Bitcoin Fork Can Be Hugely Rewarding Exercise
This is true that Bitcoin Fork can be so profitable.
However, you have to be careful in avoiding potential scams.
This is because when a new fork is undertaken, the private keys are held by exchanges.
So there is 100% chance of anyone tricking investors into revealing their private information.
The private keys are the only way to get access to the fund.
One of the safety options could be creating new addresses.
Before you try out cash from a new Bitcoin, better to shift your investment to the new address.
However, given the increasing number of transactions, Bitcoin forks are here to stay.
Decide carefully about investing in a Bitcoin Fork.
Look at all elements before committing your money in these.