Bitcoin forks help improve the current bitcoin blockchain. You can think of forks as ways that enable the software to change, creating new rules and components that ultimately increase the ease-of-use. They create new tokens that investors can access, and will move considerably independent of their parent coin. When it comes to the type of forks, however, there is a bit of dispute within the Bitcoin community.
How do Forks Occur?
Essentially, forks improve upon the code that operates the entire blockchain. They are not conducted without considerable buy-in from the community of miners and users interacting with the blockchain. It requires an almost complete buy-in for a soft fork to occur. When there is a strong disagreement surrounding any blockchain changes, a hard fork occurs.
Soft forks are unlikely to create any significant hurdles for Bitcoin investors. Instead, since they require a close to unanimous agreement from Bitcoin participants, these forks are generally implemented to develop and improve the coin.
For example, when the Bitcoin community felt the need to alter the signature validation requirements during 2015, the need led to the creation of a soft fork. In other words, a new part of the chain came into being, inculcating the recommended tweak. Initially, only 95% of miners were good with the idea of creating a separate blockchain, but, eventually, all the remaining miners also came around. At this point, the entire blockchain that had existed before moved with this new coding, keeping Bitcoin intact.
Sometimes, when these forks occur and lead to the creation of a new chain, a large group of miners and community members do not agree with the changes. This leads to the creation of a hard fork, where they split from the original change becomes an entirely new entity, since it is not backward compatible. In these cases, a completely new and different token is created – which is what happened in the case of the Bitcoin cash. Its supporters increased the size of each individual block of transactions, which improved the transaction speed. Much of the Bitcoin community disagreed with the split, and therefore, a new coin came into existence.
When such forks occur, you typically receive one of the newly created Bitcoins for each coin that you currently own. Theoretically, in these cases, Bitcoin will fall in price by the amount in which the market values the new Bitcoin fork. So, with Bitcoin cash valued at $300 at the time of the fork, in theory, the Bitcoin price would fall by $300. Of course, cryptos do not always act based on the theory, since hype, exuberance, and speculations have been the driving forces behind numerous price increases over the years.
The Issue with Hard Forks:
One thing to think about as hard forks occur is whether they create a viable threat to Bitcoin itself. Since they are a legacy of moving bitcoin to bank account, only created to improve upon the code, there is a possibility that such a fork could lead to the loss of confidence in the mother coin. This, in turn, could compel investors and consumers to view the fork as a replacement for the original coin. So far, this has not become an actual problem, but it has the potential to, if there is ever a fork that truly provides the value that Bitcoin cannot offer.
To sum up, ‘forks’ is one of the most important Bitcoin aspects, but also one that is poorly understood. We hope that this brief guide will help you understand about Bitcoin forks and their two main types. If you want to learn more about the coin or start your Bitcoin trading journey.