Understanding Cryptocurrency and Altcoin Forks
Most people that are familiar with crypto may already know some examples of forks such as Bitcoin Cash, but what they may not know is that a lot of altcoins were forked from the original bitcoin code. A bitcoin or altcoin fork is essentially where there is a disagreement on the way a particular coin should be moving forward and so instead of compromising, the coin essentially splits into two. The main coin is the coin that has the majority of the support (Bitcoin), while the forked coin has less support (Bitcoin Cash).
Another way of looking at it would be if you’re on a road trip with some friends, and when you stop the car for gas, one of your friends say that they’re going in a different direction. Because you and most of your friends are still wanting to go to the original destination, the friend that is choosing to go a different way, will have to find a different mode of transport. However, it is a lot easier to do for cryptocurrencies as it is just code that gets executed.
Bitcoin has forked many, many times and although some coins argue that their coin is superior, Bitcoin remains the largest and most supported coin. There are also numerous altcoins that have been forked and this is something traders use to their advantage.
So What About Soft Forks?
Strictly speaking, the above description of a fork is what’s known as a hard fork. A soft fork involves backward compatibility that allows recognition of old nodes by the new transactions on the new blockchain. Unlike in hard forks where you cannot see new transactions as valid, because you haven’t upgraded to new rules, old nodes will see new ones as being valid. However, they would need enough hash power to be successful since blocks mined by the non-upgraded transactions will be rejected by the upgraded nodes. If there is minimal hash power supporting the soft fork, it might be orphaned by the network.
Why do they occur?
Forks are planned for with the guidance of the development team of a project or if developers of a certain project are dissatisfied with how some elements in the project work. For forks to succeed, developers have to accept to use the new approach. Therefore, forks are democratic in nature which need people to accept and recognize as a key component of the cryptocurrency in order for them to work successfully.
How Do I Leverage This In Trading?
It’s not uncommon for altcoins to drop in value after a hyped up fork has hit the forking point. This is because lots of people are holding, (and not selling) coins until right after the fork has occurred. Traders are able to consider the anticipated drop in value to either sell the coins at the high before the drop, or by placing buy orders below the market price to pick up some cheap coins when most people sell.
Using our altcoin trading simulation, you’re able to test these strategies and learn to trade altcoins. With new crypto trading games regularly available, you can trade coins that are forking soon, or have recently forked and work out the best strategy to generate profits.