Ever since the cryptocurrencies and the blockchain technology happened, there has been one phenomenon that accompanied them – forks (no, not the cutlery utensils).
And these forks have often been accompanied by a massive surge in the price of the original cryptocurrency being forked, only to be followed by a huge sell-off of the new currency after the fork. In this article, we’ll go into reasons why this happens.
What is a fork?
In simple terms, a fork is a moment of creation of a blockchain protocol version different from the main one. The reasons why forks happen are multiple. The aim could be fixing important security risks in older versions, adding new functionalities, or reversing transactions.
There are two types of fork: a soft fork and a hard fork. Soft work has backward compatibility since old nodes will recognize the new blocks as valid; whereas after a hard-fork, the previous version and the new one are completely split and there is no longer any communication or transaction options between them, requiring all nodes to upgrade and agree on the new version.
The new version often inherits all the transactions from the previous version, while each of the versions will continue on to have its own transaction history.
Price surge and sell-off
The price surge that happens right before a fork is an interesting pattern. Major digital assets like BTC and Ethereum have also tended to experience a surge in price just before the release of a fork because of the fact that the investors of the original chain are usually rewarded with the newly created cryptocurrency based on a 1:1 ratio if their wallet provider supports the fork.
The promise of such a lucrative opportunity is why some investors start buying more of the original currency. When large investors (or whales) buy huge amounts of the original currency knowing what will happen during the fork, they inevitably create the so-called buy wall that drives the original token’s price up.
Once the fork happens, these investors tend to sell off most or all the newly-created currency that they received in their wallets instead of using it productively.
Let’s take a look at some of the better-known examples of this happening.
Bitcoin (BTC) Hard Fork
Bitcoin had one of its many hard forks on August 1, 2017, when Bitcoin Cash (BCH) was created and became a new, separate currency.
Everyone who owned BTC prior to the hard fork received the same amount in Bitcoin Cash. Therefore, if you held 10 BTC prior to the fork, you would own 10 BTC and 10 BCH after the hard-fork. This is because the chains were identical before the fork happened.
This created a ripple effect for the future forks as now people knew they could get quick money out of hard forks if they just bought more of the original currency and sold off the new currency after the split.
Bitcoin Cash (BCH) Hard Fork
Bitcoin Cash itself went through a hard fork on November 15, 2018, when it split into two rival factions, Bitcoin ABC and Bitcoin SV, resulting in two distinct versions of the code.
Predictably, BCH had seen a bullish increase in the price as the hard fork was growing near. The price increase could also partially be attributed to the news on Bitcoin.com, Coinbase, and Binance’s support, but not entirely.
It was mostly propelled by the fact that holders of BCH knew from the previous experience that they would receive the same amount of Bitcoin SV tokens during the hard fork. So, just before the hard-fork, from Nov. 2-7, the price of Bitcoin Cash skyrocketed over 50% to reach an incredible two-month high of $646 USD.
The rise continued, only to peak on November 12, when it reached a staggering $1,419 USD. That said, a post-fork sell-off of BSV followed, with a significant drop in price which briefly recovered on November 17, but continued its decline until November 22.
From what we have seen historically, whales have such power that any big purchase or sell-off they make sends rippling waves across the entire crypto market, significantly affecting the prices of participating tokens. Therefore certain patterns are bound to be noticed in the case of hard forks as well.
Be that as it may, keep in mind that no matter how sure you are, the market will not always behave in the way you think it will. Digital currencies are still very volatile and regardless of all advice, reviews and ratings, you should be careful not to invest more capital than what you can afford to lose.
Check also a detailed description of the January 2019 Ethereum (ETH) Hard Fork in our recent article Here