Blockchain

Cryptocurrency Hard Fork: What Are the Effects?

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Cryptocurrency Hard Fork

Cryptocurrency hard fork occurs when a cryptocurrency blockchain protocol splits into two. The new protocol is distinct and doesn’t interact with the original protocol from which it originates.

Cointelegraph explains the concept further. It says:

After a hard fork, the previous version and the new one are completely split, there is no communication or transaction option between the two. Usually, the new version inherits all the historical transactions and, from now on, each version will have its transaction history.

Several factors may be responsible for a digital currency to undergo hard fork as evident in the events that led to both Bitcoin and Ethereum hard forks in the past. However, that’s beyond the scope of this article.

This article focuses on the potential impact of the hard fork on the Cryptocurrency industry.

Over the years, there have been different cases of cryptocurrency hard forks. Bitcoin and Ethereum are two digital currencies with the highest number of hard forks experience.

Some Ethereum hard forks are:

  • Frontier Thawing
  • DAO Fork

These are some Bitcoin hard forks:

  • Bitcoin XT
  • Bitcoin Cash

What are the implications of cryptocurrency hard forks?

There are several implications of cryptocurrency hard fork. We shall quickly take a look at a few of them.

Whales can Influence the Market

Whales are large organizations or individuals with a massive investment in cryptocurrency. Due to the amount of money invested in digital currency, they are always on the lookout for opportunities to increase their digital wealth.

According to a report, once a Cryptocurrency undergoes hard fork, each digital currency owner will own the same amount of the coin on the new fork. For instance, if you have 50 Bitcoin, you will have 50 pieces of the forked coin, say Bitcoin Cash.

What Whales do is increase their investment in the coin a day before the expected hard fork day. By increasing the number of Bitcoin they have, they automatically increase the number of Bitcoin Cash they will have after the hard fork.

Their substantial investment allows them to manipulate the market. They can thus, influence the price of the particular coin they invest in. The report says:

Investors may have stockpiled Bitcoin anticipating an equal amount of altcoin and then sold off a significant amount of both Bitcoin and altcoin – in our example Bitcoin Cash – to reap the massive capital gains available to them.

Faster Network

Hard fork also improves network speed. Explaining the rationale behind this impact, Forbes wrote:

The hard fork, which usually means a cryptocurrency splits in two, will see Ethereum miner rewards fall from three ether to two and decrease the block time, making the network faster.

Although Ethereum is the case study here, by implication, this extends to all other digital currencies as well. Thus, whenever a cryptocurrency experiences hard fork, its network will receive a massive speed boost.

It is a windfall for investors

Investors are offered the opportunity to increase their Cryptocurrency asset without spending a dime on the new currency. Imagine if you already have 500 coins of a particular digital currency and receive another 500 coins of its fork. This boosts your asset at zero cost to you.

That’s on a small scale. Some investors have thousands of some coins. Forbes talks about “some 17,000 Bitcoin addresses containing more than $1 million worth of Bitcoin”. People with such a huge amount of digital currencies are the major beneficiaries of cryptocurrency hard fork. They earn thousands of dollars worth of the forked coin.

Two parallel coins are produced

The need for the hard fork lays the foundation for two parallel coins. While the original currency remains, the forked coin is also operational simultaneously. Some miners will support the new coin while others root for the existing coin. The initial coin won’t be bothered by the existence of another coin.

However, one of the coins plays the dominant role while the other remains active. Ethereum Cash and Bitcoin Cash exist parallel to the more dominant Bitcoin and Ethereum coins.

Their coexistence notwithstanding, the two coins don’t share similar attributes. They are different in prices and other qualities.

It affects cryptocurrency prices

Hard forks have a reputation for altering the value of cryptocurrency. One notable experience is the expected Constantinople upgrade, a planned Ethereum hard fork that failed to materialize.

The failure of the planned hard fork had a negative impact on Ethereum, as reported by Forbes. It wrote:

Ethereum, the world’s third-largest cryptocurrency by market capitalization, has fallen today as investors and traders nervously look towards the delayed Constantinople upgrade—which was expected to help solve the cryptocurrency‘s scalability issues.

Things would have turned out differently if the hard fork had been successful. Ethereum would have probably experienced a massive increase in demand. The increasing quest for the digital currency may have boosted Ethereum’s value, triggering price increase.

In a report on Litecoin, CNBC explained the impact on a hard fork on the fifth most valuable digital currency by market capitalization, according to the trusted Cryptocurrency exchange, CoinMarketCap.

CNBC reported:

Litecoin spiked as much as 10 percent on Tuesday after a so-called ‘hard fork‘ resulted in the creation of a new cryptocurrency. The altcoin, or alternative cryptocurrency, has risen 55 percent in the past seven days as a result of a recent rally.

This was the result of a Litecoin hard fork that led to the creation of Litecoin Cash. Thus, a hard fork can influence the price of digital currencies significantly. The impact may be positive or negative, depending on some other factors that are mentioned in this article and elsewhere.

A hard fork may be a blessing or curse to cryptocurrency, depending on its impact at a particular time. As noted, it may enrich some people and bring out the manipulative tendencies in others.

Whatever the effect on cryptocurrency, hard fork is one of the concepts associated with cryptocurrency that both investors and digital currency enthusiasts must come to terms with.

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