What are bitcoin forks and can you make money on them?

What is a Bitcoin fork?

A bitcoin fork is a change in the protocol and rules of operation of the bitcoin blockchain, as a result of which a new branch or “fork” (fork) of the block chain is created. Bitcoin forks can occur for a variety of reasons and have different characteristics.

There are two main types of Bitcoin forks:

• Hard fork: In this case, the blockchain is irreversibly split into two separate branches with different protocol rules. After the fork, each branch develops independently. An example of a hard fork of Bitcoin is the creation of Bitcoin Cash in 2017.
• Soft Fork: Unlike a hard fork, a soft fork does not split the blockchain into two independent branches. Instead, a soft fork is a protocol update that maintains compatibility with the previous version. An example of a Bitcoin soft fork is the introduction of SegWit (Segregated Witness), which was activated in 2017.

Bitcoin forks can give rise to new cryptocurrencies that may have their own unique features and independent value. Each fork can create different consensus rules, encryption algorithms, and other parameters that affect the functioning and use of the cryptocurrency.

Reasons for a cryptocurrency fork

There are several reasons why a cryptocurrency can fork:

• Disagreements in the community. Developers and members of the cryptocurrency community may have different views and interests. This can lead to conflicts and disagreements regarding the future development and direction of the cryptocurrency.
• Technical changes. Some forks may be driven by the need to make technical changes to the cryptocurrency protocol. This may be due to improvements in security, scalability, transaction speed, and other aspects of cryptocurrency functionality.
• Dividing opinions on protocol rules. There are situations when developers or community members have different ideas about the rules of the cryptocurrency protocol. Some may propose changes that are not supported by the rest of the community, and this may lead to a fork.
• Disagreement with policy or leadership. Members of the cryptocurrency community may not agree with the decisions or actions of a political or leadership group. In such cases, forks may occur in order to create a new cryptocurrency that will differ in its principles or guidelines.
• Economic forces. Economic factors, such as changes in the value of a cryptocurrency or the desire to create new opportunities for investment and speculation, can also be the reason for a cryptocurrency fork.

It is important to note that each fork has its own unique reasons and goals, and the decision to participate in a fork should be based on a thorough review of the information and an assessment of the risks and rewards.

Pros and cons of a Bitcoin fork

A Bitcoin fork is a process that splits the Bitcoin blockchain into two separate versions, each with its own set of rules and protocols. Here are some of the pros and cons of a Bitcoin fork:

Pros of a Bitcoin fork:

• Innovations and Improvements: A fork can bring new functionality, protocol improvements, or introduce innovations that can increase the efficiency and use of Bitcoin.
• Improved Scalability: The fork could aim to improve the scalability of Bitcoin, allowing the network to process more transactions per second and improve performance.
• Dividing Opinions and Conflicts: A fork can be the result of divisions and conflicts in the Bitcoin community, where different groups of participants have different views on the future development of the network. The fork empowers each party to pursue their own interests and vision for Bitcoin.

Cons of a Bitcoin fork:

• Resource dispersal: A fork can result in a dispersal of efforts, resources, and the community as participants must choose which version of Bitcoin they will migrate to. This can lead to a division of efforts and a decrease in the overall impact on the development of the network.
• Uncertainty and Risk: A Bitcoin fork brings with it uncertainty and risk. The new version of Bitcoin may not get widespread support and use, which may lead to its failure. There is also a risk of security issues or vulnerabilities in the new version.
• Dividing the community: A fork could lead to a division of the Bitcoin community into two camps with different interests and approaches to the development of the network. This can lead to conflicts and loss of coherence within the community.

10 famous bitcoin forks

Think of the original bitcoin chain as the center of a large family tree. From the original trunk of this tree, numerous branches of bitcoin grow, including hard forks, soft forks, and other innovations.

To understand why and how bitcoin forks occur, it is helpful to review the list of forks themselves, which lists some of the most notable forks in the history of bitcoin.

1. Litecoin

Litecoin (LTC) is a cryptocurrency created in 2011 by former Google engineer Charlie Lee. It became one of the first alternative cryptocurrencies, or “altcoins”. Although Litecoin is based on the Bitcoin source code, its main goal is to improve the functionality of Bitcoin, especially the speed of transactions.

Like Bitcoin, Litecoin uses a system Proof of Work (PoW) to confirm transactions on the blockchain, but with certain changes that make it "lighter" and faster than Bitcoin. The main difference between Litecoin and Bitcoin is that Litecoin uses a mining algorithm called scrypt, which allows faster transaction processing.

2. Bitcoin XT

Bitcoin XT, created by Mike Hearn, one of the original developers of Bitcoin, was introduced in 2014. It differed from the original version of Bitcoin by being able to process up to 24 transactions per second, compared to seven transactions per second of the original version. To achieve this performance, it was proposed to increase the block size from one megabyte to eight megabytes.

Although Bitcoin XT received some support at launch, it has faded in popularity over time and is no longer available.

3. Bitcoin Classic

Bitcoin Classic represented a similar situation to Bitcoin XT. However, instead of drastically increasing the block size from one megabyte to eight, they decided to create a two megabyte block. This project has gradually lost popularity, but still has several active nodes.

4. Segregated Witness

On August 23, 2017, the Bitcoin SegWit update took place, which brought changes to the way information is transmitted on the blockchain.

Peter Wille, a Bitcoin developer, originally proposed this upgrade back in 2015. He and other experts felt that transaction processing was taking too long and there were certain security issues.

The abbreviation "SegWit" stands for "Separated Witnesses" and was a milestone in the history of Bitcoin and cryptocurrency. SegWit's innovation allowed for larger blocks by removing signature (or witness) data from transactions.

This freed up more space for the transactions themselves, making them more efficient and increasing network throughput.

5. SegWit2x

SegWit2x was conceived as the second phase of SegWit: a hard fork that also planned to change the block size of the Bitcoin network. Unfortunately, SegWit2x did not receive as much support as the first phase of SegWit, and the hard fork did not take place. However, the failure of SegWit2x was the impetus for the Bitcoin Cash hard fork.

6. Bitcoin Cash (BCH)

The next Bitcoin hard fork took place in August 2017. The result is a new coin called Bitcoin Cash (BCH). BCH is similar to Bitcoin (BTC) but has several key differences.

The most significant difference that caused the split is that BCH has a larger block size. This allows each block on the blockchain to hold more transactions, allowing for higher throughput. As a result, more money transactions can be processed in less time.

7. Bitcoin Satoshi's Vision (BSV)

Bitcoin SV (BSV) is the next generation fork of Bitcoin; BSV originated from a fork of the Bitcoin Cash (BCH) protocol, which in turn evolved from the original Bitcoin (BTC) protocol.

As mentioned, BCH sought to increase the speed of transactions to improve the scalability of Bitcoin. Bitcoin SV split off to become a cryptocurrency in its own right, keeping the original Bitcoin protocol and aiming for more technological progress.

8. Bitcoin Gold

Bitcoin Gold (BTG) is a fork of Bitcoin that uses a mining algorithm capable of running smoothly without the use of specialized ASIC devices. This means that anyone can mine coins right at home, without the need to purchase expensive specialized equipment. GPU mining rewards are distributed to people around the world rather than being concentrated in the hands of ASIC farm owners, recreating the network effects present in the original version of Bitcoin.

9. Bitcoin Diamond (BCD)

Bitcoin Diamond was launched in 2017. It represents another fork of Bitcoin that aimed to make transactions faster and cheaper.

10. Bitcoin Private

Instead of being a regular fork of the blockchain, Bitcoin Private (BTCP) sought to create a unique fork merger that unified the ZClassic (ZCL) blockchain with a fork of the Bitcoin blockchain. The project was led by Rhett Creighton, also known as the founder of ZClassic, with the idea of ​​combining the privacy of ZClassic with the popularity and security of Bitcoin.

Bitcoin Private launched in March 2018 and was designed to conduct both public and secure or confidential transactions.

Earnings on forks: possible or not

There are two main options for earning on a cryptocurrency fork: getting tokens for free and making profitable speculations.

Getting tokens for free is one of the ways for like-minded people of the new chain to attract attention and activity in their network. To implement this, new coins are distributed to all owners of the old cryptocurrency. The easiest way to get these tokens is through a crypto exchange or wallet that supports the fork. Here you need to transfer your funds to such a platform and expect to receive free coins.

In order to get a fork of a particular cryptocurrency, you must be a holder of blockchain coins where the hard fork is planned. For example, to participate in a Bitcoin Cash fork, you need to have BCH, and to fork Ethereum, you need ETH. Well-known crypto platforms often announce their support for a fork in advance. It is important to remember that forks are not retroactive, so depositing coins on an exchange after a fork will usually not result in additional tokens. It is also worth noting that some exchanges may refuse to issue fork tokens.

The second option to make money on the fork is speculation. The initial price of a cryptocurrency often increases before a fork, as by buying it, people hope to get more free coins. One way or another, after a fork, the price usually drops sharply, as there is no need to accumulate and hold the original coin. Experienced traders can use this price action to make profitable trades.

It is important to remember that participating in cryptocurrency forks comes with risks, and it is necessary to carefully study and analyze each situation before making decisions.