A fork is a cryptocurrency term that refers to a division of one cryptocurrency format into two or more successor cryptocurrency formats, where one of the successor formats may or may not remain the same as the original.
Forks in a cryptocurrency occur when there is a disagreement within the largely decentralized governance of a cryptocurrency, and one or more groups decide to alter how the cryptocurrency is programmed or managed.
The splinter groups then effectively exchange their units of the original cryptocurrency for units of the new cryptocurrency.
By far the most famous cryptocurrency fork was that between the original Bitcoin and Bitcoin Cash in 2017.
Cryptocurrencies & Decentralized Governance
One of the defining features of most cryptocurrencies is their decentralized governance. Instead of being a traditional currency that is created and managed by a state authority, cryptocurrencies are a peer-to-peer form of exchange that is loosely governed by interested stakeholders and users.
While this form of governance has many advantages, it can also cause significant difficulties when there are even minor disagreements over how the cryptocurrency should be formatted and managed.
In these situations, some interested parties may choose to simply operate the original cryptocurrency in the new way that they see fit. This splinter group creates a split or ‘fork’ in how the cryptocurrency is run, which results in a new and incompatible cryptocurrency.
Those interested parties who choose to use the new format are essentially using a new cryptocurrency, and have exchanged their original cryptocurrency units for new ones.
Trading A Cryptocurrency Fork
Cryptocurrency forks are a highly volatile event for both the original cryptocurrency and any successor cryptocurrencies.
Cryptocurrency forks rarely occur over trivial issues, so it is likely in the event of a fork that one or more of the cryptocurrencies involved will see a significant price increase or decrease. In addition to forecasting these significant price movements, a fork also represents an excellent opportunity to use technical analysis patterns focused on high volatility events.
Forks in cryptocurrencies are a natural product of their defining decentralized governance.
Forks represent an excellent opportunity to profit from substantial price action, either from forecasting the outcome of the fork or employing technical analysis techniques to trade on the high volatility event.