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Ever since Ethereum Classic and Bitcoin Cash became buzzwords, people have started to ask about blockchain forks. A fork is a lot like a stock split in many ways—most obviously, that it allows two very similar currencies to evolve side by side.
Unlike stock splits, in which the same amount of value is ascribed to each split, a blockchain-style fork will involve the original currency maintaining its value while a second currency that's based on the original starts to take hold.
The secondary currency is just as decentralized but isn't worth as much as the original. The two blockchain currencies end up evolving totally independent of each other; the only thing they have in common is the majority of the coding.
For a lot of people, investing in forks like Bitcoin Cash seems risky. But, is it really?
(Note: We're only talking about hard forks in this article, not soft forks.)
To answer this, it's important to keep in mind the nature of cryptocurrency.
Blockchain currency, as a whole, is a risky thing.
There have been crazy ups and downs in pricing, as well as moments where Bitcoin wallet scams have pilfered thousands of dollars from unsuspecting people. Great benefits also have come, with some investors cashing in when Bitcoin spiked at $20,000 per coin.
High risk and high rewards are the name of the blockchain game. Asking if blockchain forks are safe is kind of silly, considering how risky the entire industry is.
The truth is, blockchain forks are slightly riskier than regular blockchain currency.
When a currency forks, it usually means that the developers of the code will end up cloning the original code, but not the blockchain. They then upgrade it with additional code, most often to improve upon the code already put in place.
This sounds great, but there's a possibility that there could be a problem. The truth is that not all code is equal—and certain glitches could potentially slow down transactions or raise fees.
The effects that blockchain forks can happen on wallets can also be pretty nightmarish.
When Bitcoin Cash was invented, they made the mistake of copying the blockchain too. This caused every user who owned Bitcoin to have Bitcoin cash alongside it. It sounds great, but not all wallets were good about handling it.
The amount of support that currency forks can offer, too, won't always match the size of the user base when this happens. The fact is that a lot of problems can occur, and when that happens, support will be needed.
Exchanges will not necessarily handle blockchain forks, either.
Coinbase, for example, vehemently refused to handle Bitcoin Cash for the longest time. This was due to the fact that the exchange would need updates and codes put into place for the fork—and it would have cost more. If you want to stick to a regular exchange, there's a good chance that the fork you want to invest in won't be accepted.
Fewer exchanges willing to work with the currency in question means that the price will stay lower. This can put a major damper on profitability, if you're an investor.
Certain software might also end up with a "replay" when a fork occurs.
Certain software won't be able to tell the difference between the original currency and the "branch off" currency. When this happens, it's possible that the software will transfer the same amount in both currencies whenever a transaction is made.
This often happened with Ethereum and Ethereum Classic.
Some hackers even notice the weakness it causes, and that has led to a number of exchanges being victimized by "replay" attacks. This could lead to major losses for investors—and has made serious problems for certain Ethereum coins.
Some cryptocurrency forks have started to incorporate code to help prevent replay attacks.
Not all cryptocurrency is equal, and this means that certain currencies are going to be more secure than others. Blockchain forks need to be taken on a "per case" basis if you're trying to figure out how safe they really are. It could very well be that a crypto fork could be the next currency to boom.
It's also worth pointing out that not all improvements on a cryptocurrency are really improvements.
One thing that has led to Bitcoin Cash's lagging price compared to Bitcoin is the slow transaction time, with many users claiming average block hours being as long as 1 hour per block. That kind of lag in transaction would make any investor think twice.
To make matters worse, most of the coins in Bitcoin Cash have already been mined and bought up. As a result, a lot of the flaws of Bitcoin have been exacerbated by this "solution."
Confusion from users can also mean serious losses.
That being said, another reason why you should be wary of blockchain forks is because of the risk of confusion for users. A lot of users have noticed that forks tend to have very similar symbols and similar trading styles when they first begin.
This can lead people to sending the wrong currency to the wrong address, or at times, both. In certain cases, it could be recovered. In others, though, this will incur a total loss.
Not all blockchains struggle with forking, but the fact is that some still do.
The Segwit2x fork was seriously chaotic for blockchain investors and sent a lot of people into an uproar as a result. (Even the most trustworthy Bitcoin apps were affected.) Ethereum's replay attacks have made investors feel pretty uneasy about everything.
However, there have been some relatively seamless transitions with hard forks—and the truth is that there are protocols that are beginning to be developed to help make forking easier for everyone involved.
All things considered, forks are going to continue be risky for a while.
Like with any kind of new technology, it'll take some time and some learning before handling it is easy enough for everyone involved.
So, while blockchain forks may be a bit riskier to deal with right now, that's not to say this will be true later on. In the world of blockchain, everything is changing—and that includes risk level.