Can forks influence the price of cryptocurrencies?
As most of the people interested in cryptocurrencies know, each update of cryptocurrency blockchain is known as a fork. These updates can have several functions:
- Fixing possible errors and loopholes
- Improving overall performance of current elements of that particular blockchain
- Changing functions related to the way cryptocurrency is mined
- Introducing new elements to the blockchain itself – usually in accordance with the cryptocurrency roadmap. The roadmap is nothing else but a plan on how to develop and upgrade the cryptocurrency to make it better.
What is worth remembering, the minor changes are known as soft forks, while the major changes in blockchain are known as hard forks. The second category of forks is introduced after the discussion within the community and often leads to splitting the price of cryptocurrency into two.
In a case of hard fork split, we usually observe the price to rise shortly before such split. Why? Because in case of splitting chain into two, you do not only hold the cryptocurrency you bought but as well you are eligible to get the same amount of coins in the newly created cryptocurrency (like Bitcoin Cash was to Bitcoin). In other words, you simply get free coins only because you own other coins.
This is why the demand for buying specific crypto before the split is sharply increasing pushing the price up. Of course, the value of that hard fork created is usually much lower than of the “original one” (due to usually much lower support and amount of owners) and usually declines since it becomes public as it is less interesting for users. The notable exemption here is Ethereum. In this case, ETH was created by the fork, while “old” Ethereum is known as Ethereum Classic. Solving old problems with a new fork had given the huge boost to the price of ETH, which crashed previously after DAO loophole hack.
In some cases, as well, people might start seeing some specific cryptocurrency becoming “dead” in their eyes because there are old drawbacks and lack of innovation. This happened to Litecoin cryptocurrency. For a long time, it has a reputation of “silver to the Bitcoin's gold”. Yet this was insufficient to keep the price of LTC up, it was seemed flawed. Yet since the end of January 2019, it is one of the best performing cryptocurrencies of 2019, because of the planned introduction of confidential cryptocurrency transactions.
Another thing as speaking of forks influencing cryptocurrency price is block reward given to miners. Most of the cryptocurrencies are invented in such a way, that there is an upper limit of how many coins/tokens can be mined. On the very beginning, mining is pretty easy, you get a huge amount of tokens for mining. But gradually, the reward is lower and lower – usually halved. This is for example what is planned to happen to Litecoin on 8th of August 2019.
As expected, the lower the prize, the more expensive a single coin is to be mined. This is another fork which is usually pushing the price of most popular cryptocurrencies up (with less popular ones, the effect may not be so visible). Same goes with the algorithms used for mining. Some of them are more costly (like Proof of Work algorithm requires more energy than Proof of Stake to operate with the same effect)
To sum up – forks, in general, are being introduced to make cryptocurrencies with their blockchain to perform better, what is supposed to make them more interesting to users and investors. As well, hard forks can give a temporary boost to the “mother” cryptocurrencies. Last but not least – making mining less rewarding and more expensive at the same time is another factor which can boost the price of cryptocurrency.