Hard Forks in Bitcoin, Ethereum, and Other Cryptocurrencies

In simple terms: A hard fork is when a single cryptocurrency splits in two. It occurs when a cryptocurrency’s existing code is changed, resulting in both an old and new version. Meanwhile, a soft fork is essentially the same thing, but the idea is that only one blockchain (and thus one coin) will remain valid as users adopt the update. So both fork types create a split, but a hard fork is meant to create two blockchain/coins, and a soft fork is meant to result in one. Segwit was a soft fork, Bitcoin Cash, Bitcoin Gold, and Segwit2x are all hard forks.[1][2]

To use the words of Coinbase when discussing a User Activated Soft Fork, and too add a few of our own notes, the result of a given fork would be:

  1. One blockchain becomes dominant, resulting in the other blockchain having low community adoption and value.
  2. Both blockchains are adopted, co-existing and operating independently of one another with roughly equal community adoption and value.
  3. Both blockchains are adopted, but one is favored. One of the two chains becomes or remains the dominate chain (but the other chain maintains a reasonable level of community support and value).

Any of the three cases can occur with a given fork, but the 3rd option is the most common and thus the expected outcome over time with hard forks.

If you want to get “free coins” from an upcoming fork, see how forks work and how to get “free coins” from forks.

TIP: A blockchain is a ledger of transactions (and is where the ownership of coins is recorded). Anyone who held coins before a fork, and during the fork, therefore will necessarily have coins on both forks after the fork has occurred. It is not necessary to hold the original coin after the fork has occurred. With forks, there is a snapshot date, where a snapshot of the ledger is captured. The snapshot happens at a block number, the block number is important with forks, the calendar date is only important in understanding when the block number occurred. Thus, in general, if one wants to “be in for the fork,” and thus get “free coins” they must have their transaction added to the ledger before the snapshot occurs.

In more technical terms: A hard fork is a term that describes a major change to blockchain protocol which makes previously invalid blocks or transactions valid (or vice-versa). This can be used to keep the same coin with major changes to the blockchain or to create a new coin. This requires all nodes (all computers that connect to the cryptocurrency’s network) to upgrade to the latest version of the protocol software if they want to use the new coin or blockchain (or to maintain the existing protocol if they want to use the old coin or blockchain).[3]

The result of a coin “forking off” to form its own blockchain or currency is that there are two of everything. Two different coins, with two different ledgers (from X block forward), with two different sets of code, both originating from the same platform and blockchain. In cases like Segwit, everyone ideally updates to the new software and uses the updated blockchain. In cases like Bitcoin Cash, two different coins and blockchains-from-x-block-forward run starting at a given block.

TIP: Segwit, Segwit2x, Bitcoin Cash, and Bitcoin Gold are all different hard forks in Bitcoin that happened or are happening in 2017. The Segwits change the blockchain but keep the Bitcoin name (although there is some conflict over how this will work with Segwit2x if that chain ever goes live). Meanwhile, Cash creates new coins (and Gold did the same). See a Segwit explainer.

TIP: For a visual of a hard fork, see Investopedia’s Hard Fork page.

TIP: When a cryptocurrency forks, you want to be holding that cryptocurrency in a digital wallet and not an exchange (so Coinbase, a third-party wallet, etc, but not active on an exchange). The reason for this is because, essentially, you get X amount of the new coin for holding the old coin when the fork happens (and this can only happen if you are holding your coins in a wallet or on an exchange that allows for it). For an example and explanation, see What the Bitcoin Cash fork means for Bitcoin holders. Also, see Bitcoin Fork FAQ and Update on Bitcoin Cash which explained this for the last Bitcoin fork in respect to Coinbase. See our page on Bitcoin Gold for that (this one, like SegWit2x, has a lot to consider).

TIP: Consider holding some Bitcoin on the Binance cryptocurrency exchange during a Bitcoin hard fork, they have thus far offered futures when a fork occurs or is going to occur.

How are Hard Forks and Other Forks Created?

In general, any update to a coin’s software (at least those that are democratically controlled like Bitcoin) requires some form of consensus. This is also true for implementing a soft fork or hard fork.

Creating a fork that updates the existing software that everyone is currently using requires majority support (consensus) from coin holders (more technically “nodes”) connected to the coin’s network. Those nodes have to agree to the update and update their software accordingly. This consensus can in-practice come first and foremost from miners and mining pools rather than a general population of users, because they tend to control a range of nodes. See Consensus rules on Bitcoin.org for more details.[4]

With the above noted, forks only really require consensus in terms of an update being adopted. In terms of just creating a hard fork or soft fork (not adopting it), anyone can take a coin’s code and change it, and thus create a hard fork or soft fork to potentially be adopted.

In other words, any developer with the necessary skills could decide to fork Bitcoin or create a unique copy of Bitcoin (hence all the actual and potential Bitcoin forks). That is the “easy,” part. The hard part is getting support from miners, users (who have to not only download and configure a wallet but use and trade the coin), and exchanges.

Without support from miners and users, there is no functioning blockchain. Without support from exchanges, there is likely little to no value.

Thus, a single cryptocurrency with a single blockchain (like Bitcoin) experiences a proper “hard fork” (like Bitcoin Cash or Bitcoin Gold) when the code is 1. changed to create a new coin, but also 2. embraced by enough miners, users, and exchanges for there to be a viable, functioning, alternative.

A fork such as this can occur for any reason, either to innovate (as is the case with Bitcoin Cash), to repair the damage done by a hack (as is the case with Ether), or simply because consensus could not be built for a soft fork (as was a bit the case with Bitcoin Cash and was almost the case with SegWit2x).

Can anyone fork a coin? Anyone can go to GitHub, grab the code of a coin (for example Bitcoin), and then do the development work needed to update the software. However, not anyone can get enough miners to mine the new coin, enough users to update their software or download wallets for the coin, and/or enough exchanges to list it. Then, even if they can, getting anything close to the same valuation as the original coin is an uphill battle. So “yes, anyone can fork a coin in-theory… but there are a lot of barriers in-practice.” There have been very few successful forked coins in the history of cryptocurrency. In practice, forks of all sorts require some form of consensus building to be effective. Even ones that are effective tend to have a lower valuation than the original coin. One of the only exceptions I can think of is Ether vs. Ethereum classic (where Ether, the hard fork, has a higher valuation and more users / miners).

FACT: Not every fork will result in owners of a cryptocurrency getting “free coins,” however when a legit hard fork occurs that creates a new cryptocurrency, this is the case. For example, Bitcoin holders received one “free” BCH (Bitcoin Cash) for each BTC (Bitcoin) they owned. That is obviously an absurdly good deal (although one risks the original asset’s price dropping in “split” events like this). Technically one can create a new version of a coin and choose another distribution method, for example, they can do an airdrop or sell the new coin on the open market. [5]

TIP: Read about The Birth of BCH: The First Crazy Days of “Bitcoin Cash” or Ethereum’s Byzantium Hard Fork to get a better idea of the different types of hard forks and their implications.

TIP: There are other types of forks as well (forks in general, soft forks as noted above, software forks, git forks, [insert Bubba Gump reference]). Any divergence in the blockchain is a fork; the qualifying terms describe the details of the divergence regarding both code and the intent behind the fork.

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Citations

  1. Cryptocurrency: What is a fork? Posted March 11, 2014
  2. A Short Guide to Bitcoin Forks Mar 27, 2017, at 14:00 UTC by Amy Castor
  3. Hard Fork
  4. Hard Fork, Hard-Forking Change
  5. What the Bitcoin Cash fork means for Bitcoin holders


"Understanding Hard Forks in Cryptocurrency" contains information about the following Cryptocurrencies:

Bitcoin (BTC), Bitcoin Cash (BCH), Ethereum (ETH)