Hard Forks Explained - What They Mean for You as an Investor

Cryptocurrency by nature has a lot of complicated functions that many people don’t fully appreciate. Even people who are passionate about blockchain projects and are heavily invested in their ability to change the world may not fully understand all of their aspects.

For a cryptocurrency newbie, likely one of the most confusing aspects of this is called the hardfork. Recently, the world went hardfork crazy, and it seemed that every project was trying to jump on the bandwagon, which leads to much confusion for the many inexperienced people piling into the scene.

In many cases, investors will not need to worry about this at all, but if one of your assets does announce an upcoming hardfork, then you need to pay attention! There is a lot going on here that could greatly affect your investment, and in some cases, your current assets could become worthless if a swap takes place, but first let’s talk about what a hardfork is and what it does.

What is a hard fork?

In the world of cryptocurrencies, a hardfork occurs when the community of a particular project decides that the coin’s protocol must go in a new direction. The exact scenario behind these forks can vary greatly from project to project, but in all cases, it means users interested in participating in this update must upgrade to the future software, and transactions will go to a new chain.

In some cases, all of the assets simply transfer to the new chain. Others though may have more drastic results such as resulting in a totally new asset or even a coin swap. As an investor, it’s important to keep up to date with news regarding projects you are invested in so that you’ll know exactly what will happen to your investment in the event that a hardfork takes place.

In some cases, the nodes and people following the old chain will abandon it, but in others such as the Bitcoin and Bitcoin Cash forks, they will keep running independently of one another. While the process can be confusing to newbie investors initially, it’s an interesting and integral part of the cryptocurrency ecosystem that you should take a moment to understand.

The hardfork not only allows for updates that keep your currency constantly evolving to better serve its users, but it also allows for the community to democratically decide in what direction the project should go. Freedom is one of the core principles of the blockchain, and these forks help to establish that.

What kinds of event can happen during a hard fork?

What happens during a fork will vary between projects, but here’s a few possible scenarios. Some of these will require little input on your part, but others are major events which you may need to take part in.

If you’re not sure that you want to deal with all of this, then you can always sell your coins before the fork, and then possibly buy back in afterward. Here’s what you can expect from an announcement of this kind.

Software update

The most casual of forks will only require a software update. This usually happens because of a vulnerability, bug or issue that has been identified within the current protocol. In most cases, investors will simply need to update their wallet software, and then everything will carry over to the new chain.

However, you should be aware that not all wallets or exchanges will update to support the updated software right away, or maybe even ever. If you utilize a third party wallet, then you’ll need to check to see if they will support the fork. If not, you’ll likely need to move your coins over to an official version of the wallet before the update. Typically these updates happen at a specific block, and you simply move your coins before this block happens.

If you don’t update then you’ll likely not be able to connect to the network or make transactions, however, you’ll pretty much always be able to update after the fact with no loss to you. Before updating, be sure to backup your wallet file for safe keeping, just in case you experience any issues.

Make sure to download the official wallet file from the project’s website, and you can usually check that the version you’re using is correct by clicking on the about section under the help menu in most any desktop client wallet as most of them use a modified QT wallet program.

Coin swap

In some more extreme cases, the team may decide to do a coin swap. This can happen for many reasons, but in the case of older coins, they may need to do this in order to keep improving upon their code. If their original chain is lacking by way of features, then a swap can be a good way to breathe life back into the project and to allow them to adopt features that they were previously not able to accommodate.

For those who have invested in an ERC20 token such as EOS, these assets are often placeholders for crowdfunding, and when the project launches you’ll be swapped for a new asset on the project’s main net. While this isn’t exactly a hardfork, it will likely work much the same way as a coin swap for a chain update would function.

If you’ve found that your asset will be experiencing a coin swap, then you’ll need to stay tuned to their social media for instructions on how exactly to participate. Investors should keep in mind that there’s typically a time limit for swapping, and if you miss this time frame then your investment could become worthless!

Most coins will give you a long time to swap such as a year, but others may give you only a few weeks. For this reason it’s important to keep tabs on your investments to make sure you’re not missing important events.

What you’ll need to do will vary based on the project in question. In some cases, exchanges will support the swap, and if you leave your coins there then you will be credited. In others, the coin may be delisted, and then relisted.

If this is the case, then you’ll likely need to keep your assets in an official wallet, and then send them to a swap address that the developers specify. In other cases, there may be a block snapshot, and then coin holders will be issued an airdrop of the new token. Make sure to ask in your coin’s community how to participate in the event.

New asset issuance

In some cases, a hardfork results in a completely new asset being issued. The most famous of these was of course Bitcoin Cash, but there are many other examples. The reason for a fork of this type is that the some of the team wishes to go in another direction, and they may be split on how they think that things should progress.

Keep in mind, that these forks don’t even have to actually have anything to do with the original project. In fact, Litecoin Cash had nothing to do with Litecoin at all.

If you find out about an upcoming fork of a coin that you own and you’d like to participate, then you’ll need to turn to the asset’s social media profiles to find out how. In most cases, you’ll simply need to hold your original coins in a compatible wallet. There will be a date posted for the fork, and after the snapshot occurs, you’ll receive an airdrop of the new asset to your wallet.

Please keep in mind that most of the time, exchange wallets can’t participate. You’ll need to store your coins in a wallet to which you own the private key, or the exchange will receive these newly minted coins instead of you!

Be aware that this can be a common way for scams to happen, and if anyone asks you to give them the private key to your wallet in order for you to claim these assets, then they may be trying to steal from you. Be careful, and never give your sensitive information to anyone.

In closing, while hardforks can be intimidating, there’s no reason for inexperienced investors to fear them. In fact, they can even signal an exciting time for your asset by way of new innovations and movement in a positive direction by the developers. You can keep tabs on your investments via different social media channels such as Reddit, Twitter or Discord.

If a hardfork is scheduled to happen, then they will always post about it here to keep their investors informed. When participating in an update such as this, be sure to backup your wallet file in a safe place, and then follow all of the instructions provided to your by the team.

If anything is unclear, don’t be afraid to ask questions, as other community members will likely be happy to help you. Remember to always stay informed on your investments and be safe!