Should Bitcoin investors look forward to Bitcoin forks?
Though it is true that a Bitcoin fork can be quite profitable for investors, this isn’t always the case.
Moreover, it is essential for everyone investing in virtual currencies to understand the opportunity a Bitcoin fork offers
With time everything evolves and changes. It was very difficult to foresee how virtual currencies would be used like they are today.
The first real-world transaction through Bitcoin took place on 22nd May 2010 to buy a Pizza.
Today, however, it is possible to even buy an automobile through AutoCoin which is a cryptocurrency that works on the AutoBlock’s payment card.
Similarly, the rules that a cryptocurrency follows may also change. Sometimes, this change in rules may result in the creation of a Bitcoin fork.
What are Bitcoin Forks?
A Bitcoin fork is a change to the software of the virtual currency that creates two separate version of the blockchain.
Since Bitcoin is a decentralized network, the key stakeholders need to agree on a single set of rules for the cryptocurrency to function. This is also known as ‘consensus’.
Sometimes there are technical disagreements between groups in the Bitcoin community.
These disagreements may be related to how Bitcoin should have a different block size or how exactly scalability should be improved.
When different developers pursue different goals, a chain split may occur. A change in protocol rules could lead to the same result. This essentially results in the creation of a new cryptocurrency.
There are different types of forks.
- Hard forks:
When a hard fork happens, new rules are created. Previously invalid blocks will now be considered valid and flexibility will increase. An example of a hard fork would be when the block size is doubled from 1MB to 2MB to achieve greater scalability. A previous block that had been mined would still be valid after the hard fork.
- Soft forks: When a soft fork happens, rules are restricted. A block considered valid before a soft fork may be considered invalid if it does not adhere to the more restricted rules. This means there will be more rigidity. An example of a soft fork would be when the block size is halved from 1MB to 500kB. In this case, a previously mined block of 1MB would now become invalid.
If someone is holding a cryptocurrency that forked, they can either keep the existing cryptocurrency or exchange it for the newly created cryptocurrency or even keep both cryptocurrencies.
If someone wants to claim a newly created cryptocurrency they should be careful as there are a number of online scams that rob existing virtual currency by gaining access to the private key.
Advantages of a Bitcoin Fork
Claiming value from Bitcoin forks can be risky but it is also rewarding for the Bitcoin community at large.
- Enhanced Scalability
With the increasing number of Bitcoin users, scalability has become a source of concern. Some developers are of the opinion that hard forks are the best way to enhance scalability. With more flexibility and greater block size, a hard fork can be considered ‘good news’.
- The Network Benefits
With a more efficient and scalable system in place, transaction costs would reduce. This means that it would cost customers lesser and take lesser time for a transaction to occur. A Bitcoin fork could lead to an even more global phase of the cryptocurrency.
- A Greater Reward
When an investor bears a higher risk, he may also earn greater rewards. Though people may consider original cryptocurrencies to be ‘safer’, it is the forked cryptocurrency that offers a higher reward to risk ratio.
Bitcoin forks offer an interesting and rewarding opportunity for the entire Bitcoin community at large.
However, it is important to claim the newly created cryptocurrency cautiously as online scams are prevalent online.