As people across the globe flock to Bitcoin, many end up exploring other cryptocurrencies along the way, including forks of Bitcoin. With names like Bitcoin Cash and Bitcoin Gold, it is easy to get confused about these forked coins.
What is a Fork?
Bitcoin is an open source, rules-based system where users are free to propose, implement, and adopt new rules. While new rules may be beneficial to the entire community, no single user can be forced to adopt a specific set of rule changes. If you do not like a change to the rules, you are free to continue along with the old rules. Because new changes cannot be forced upon users, there is sometimes a split within the community. These splits are called forks, and they come in two varieties: soft forks and hard forks.
A soft fork is a rule change that is backwards-compatible. In other words, the new rules can peacefully coexist with the old rules. For a non-Bitcoin example, consider vegetarianism. The main rule for vegetarians is to avoid eating meat. When a vegetarian switches to vegan, he/she is still behaving within the vegetarian rules. By switching to vegan, he/she has made a ‘soft fork’ in the rule set. Even though he/she is playing by a different set of rules, none of these new rules break any of the old rules.
A hard fork is a much more abrupt change that is not backwards-compatible. In the vegetarian example, switching to a carnivore diet would be considered a hard fork. By choosing to eat meat, the new rules are in violation of the old rules. While we can be both a vegan and a vegetarian, we cannot be both a carnivore and a vegetarian.
Because Bitcoin is a ledger, a hard fork leads to the ledger being split off into two: one ledger that continues with the old rules, and another ledger that adopts the new rules. Thus, if you had one Bitcoin the day before a hard fork, the day after the hard fork you would have one Bitcoin and one new coin. While receiving a new coin for free may sound like a good idea, a hard fork can lead to tension, arguments, and foul play within the community.
The Fork Wars: Bitcoin vs. Bitcoin Cash vs. Others
Bitcoin’s most infamous hard fork occurred in 2017, when the blockchain was split into two coins: Bitcoin (BTC) and Bitcoin Cash (BCH). The split was a result of a divide in the community regarding the block size. One side (big blockers) was in favor of increasing the block size in order to allow for faster, cheaper transactions. The other side (small blockers) argued that the tradeoff for faster, cheaper transactions was not worth it. By increasing the block size, small blockers concluded that it would become too expensive for everyday users to run a full node. Without everyday users running full nodes, Bitcoin would risk becoming more centrally controlled by wealthy people, corporations, organizations, or governments. Basically, the small blockers did not think that quicker transactions with lower fees was worth a potential loss of decentralization.
In the aftermath of the hard fork, users were left with two coins: Bitcoin and Bitcoin Cash. Many Bitcoin proponents, both individual and corporate, fully embraced Bitcoin Cash as the superior coin. However, over the next few years, the market rendered a decisive victory in favor of Bitcoin (and at the expense of Bitcoin Cash holders). Other lesser known Bitcoin hard forks have followed a similar fate. Below is a series of three charts showing the price of three different Bitcoin hard forks (denominated in Bitcoin). In order, the charts show Bitcoin Cash (BCH), Bitcoin Gold (BTG), and Bitcoin Diamond (BCD). As you can see, each hard fork has effectively been trending towards zero from the moment it forked off of Bitcoin.
Should you find yourself receiving a forked coin, there are three main options:
- Exchange the new coin for more Bitcoin. Historically, exchanging the forked coin for more Bitcoin has been the most profitable way to handle forks.
- Keep both coins. This ensures that you will hold whichever coin accrues more value over time.
- Ignore the new coin. This is the easiest option because claiming a forked coin can require a high level of technical expertise depending on your wallet.
Whether a new fork of Bitcoin, a previous fork like the ones discussed above, or similar concepts like airdrops, when you see someone (including previous Bitcoin advocates) touting a coin that sounds similar to Bitcoin but is not called ‘Bitcoin,’ beware. While some may mean well, others are simply looking to profit off of those who may not know any better. If history provides any indication, the intentions of the advocate are irrelevant. When priced in Bitcoin, hard forks trend downward while the real Bitcoin continues to gain mainstream global adoption and rise in value.