What is a Bitcoin Fork?

Reaching a Bitcoin fork is like a “kayaker without protective gear hitting different branches in a river”...

One branch, the soft fork, has calmer waters, so the kayaker can continue down it without protective gear. The other branch, the hard fork, has more turbulent waters, and only kayakers wearing specialized equipment can enter.

Imagine you’re playing an online game with many people from all over the world. Then an administrator decides to change the rules. For the game to function, everyone needs to agree on the rules changing. If there is consensus, then the changes occur, and everything continues as usual. But if there isn't a broad consensus about the change, then two versions of the game emerge – one with the old rules and another with the new ones. Thus, there will be a fork in the game.

Cryptocurrency such as Bitcoin have programming governing the rules, similar to games, so different versions can be made too. Coders can take the publicly available source code and modify it as they see fit. Thereby, new versions of Bitcoin can be made to suit the needs of different people. Bitcoin forks have caused cryptocurrencies with similar names to come into existence. Bitcoin Cash (BCH), Bitcoin Gold (BTG), and many others are examples of forks.

A good analogy for a soft fork is increasing the minimum driving age to 18 instead of 16. All the new people eligible to drive now that the driving age is 18 still qualified under the old rules.

Think of a soft fork as an update in the software which is backward compatible. Soft forks allow the new rules to play well with the old rules, so they don't create new cryptocurrency coins. In a soft fork, while past transactions are no longer valid, both the old nodes, “machines that mine cryptocurrency”, and new nodes recognize the new transactions. Successful soft forks require a majority consensus among nodes similar to a public vote.

Soft forks occur on Bitcoin by changes in its underlying blockchain governing code. They allow new use cases and are compatible with old versions.

Andreas Antonopoulos, a popular YouTuber on cryptocurrency, explains the difference between a hard and soft fork through the following analogy: If they decided to add vegan dishes, it would only be a soft fork — Anyone vegetarian could still eat vegan. However, if a vegetarian restaurant chose to add pork to the menu, it would be a hard fork because the place could no longer call itself vegetarian.

The main difference between a soft fork and a hard fork is that data for hard forks not compatible with the older version. Think PlayStation 3 and PlayStation 4. When new games come out, you need to buy the new PS4 console to play them; they won't work on your old PS3 system--this is an example of a hard fork.

In terms of blockchain technology, a hard fork is a profound change of the network rules. It makes previously valid blocks or transactions invalid or previously invalid transactions now valid. Every node or user is required to upgrade to the new version of the network software when a hard fork occurs. Technically, the prior version of the blockchain is permanently diverged in a hard fork. The newest version will not accept nodes running the previous network protocols.

A hard fork creates a new route in the blockchain. One path obeys protocols for the new, revised blockchain, while the other still follows old network protocols. After a while, people on the old chain will upgrade to the latest version because they realize their current version is irrelevant or outdated.

There are many reasons why cryptocurrencies fork.

The table shown below summarizes the main differences between popular Bitcoin forks and gives some reasons of why these forks were created in the first place.

Table 1: Popular bitcoin forks

Similar to Initial Coin Offerings (ICOs), Bitcoin forks are a great way to raise money. But, nowadays, developers can also decide to fork Bitcoin for more selfish reasons to make a quick profit at the expense of the cryptocurrency coin holders. Any knowledgeable blockchain programmer can fork Bitcoin, since its source code is freely available. Everyone wants to get free coins, so people are always looking for information on the latest Bitcoin fork. When one group forks Bitcoin, all the original Bitcoin holders are entitled to new coins from the new fork -- so they would likely have more money in their pocket after a fork if they held the original crypto asset that was being forked.

If you say you are forking Bitcoin, you will get a lot of free attention because many cryptocurrency media channels are seeking to promote the newest Bitcoin fork.

One example of an advertised Bitcoin fork that turned out to be disingenuous is Bitcoin Platinum. A Korean teenager admitted that Bitcoin Platinum was a false coin he created to earn $5M Korean won ( about $4K).

There are three reasons you might care about Bitcoin forks:

1. You may want to adopt the new rules and the new coin because you think it's better than the original Bitcoin. For example, the new rules might allow for more transactions per second or provide better security.
2. The fork might have an impact on the community, adoption, and even price. For example, a fork might lower transaction costs for the community or make mining new cryptocurrency easier.
3. Disclaimer: We are not providing financial advice but people can profit from the fork by selling the new coins. Let’s go back to the online gaming analogy: Imagine your online game has been running for a very long time, and players have accumulated a considerable amount of points. Now, someone wants to change the rules but doesn't want everybody to lose their scores. Thereby, a new game with revised rules is created that will begin with all the players having the same amount of points as they did before the rules changed.

For example, if you had 100 points in the original game, you could join the new game and start with 100 points. You could even play both games in parallel and have 100 points in each. In a Bitcoin fork, if you already had 100 bitcoins before the fork, then you would have 100 of the forked coin, too. You can then sell new cryptocurrency and then convert it back again to the old coin for a small profit.

Before, you claim new coins, please do a Google search on the most current checking sources for new Bitcoin forks! As a general guideline, if you expect free coins from an upcoming fork, be careful when claiming them. Never send Bitcoin to another Bitcoin wallet address or give away your private keys just because a newly forked cryptocurrency community has told you to. If the fork is legitimate, then the coins will be available based on your current holdings. Always research the fork yourself by not only visiting the new cryptocurrency website but also visiting reputable news organizations. Many new blockchains use the Bitcoin name to convince users they’re trustworthy, which isn't always the case.

Each new forked coin has a different claiming mechanism, but here are two general guidelines:

1. Familiarize yourself with the new forked coin

Read a bit about a project before you take any steps to claim its cryptocurrency. Find out who the developers are, what their track record is, and how far along they are in their road map. Also, what have other publications written about them, and is there anything that makes them credible?

1. Transfer your coins to a new wallet

If your coins are on a reputable cryptocurrency platform, you should automatically receive the new forked coins.

Once you claim your new coins, you can hold on to them or sell them through an exchange.

Since Bitcoin is open source, there have been many forks of its source code. Here is just a brief list of popular past Bitcoin forks.

Table 2: Popular past bitcoin forks

Here is a list of upcoming Bitcoin forks.

Table 3: Upcoming bitcoin forks

Disclosure: Purchasing digital assets (such cryptocurrencies and associated derivative products) come with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, digital asset markets and exchanges are generally not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing. These exchanges are also sometimes vulnerable to hacks in which digital assets are stolen.

Digital assets prices can change radically in a trading day and thus lead to significant and sudden financial losses. Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price.