Cryptocurrency Hard Forks: What are they?

A cryptocurrency fork occurs when two or more blocks share the same block height. The network protocol needs to be changed. Understanding how cryptocurrencies and blockchains work is the first step to understanding cryptocurrency forks.

Cryptocurrencies such as Bitcoin, Ethereum, and others can be forked. It produces two different coin variants by doing this or updates one coin variant by doing so. The purpose of cryptocurrency forks is to alter the current code and algorithms of blockchain transactions to create a new network, but with some alterations to the original. Forks typically supersede ancestors, but they can also exist on coextending records depending on the state.

Whenever there is a noticeable difference in the consensus between the users or when the rules guiding the protocol need to be altered, there is a fork. To modify a blockchain protocol, developers must modify the code rapidly, and this can harm the network. There is a continuing conflict about Bitcoin’s scalability today, which has led to Bitcoin Cash being created. In addition to the recommended solutions, prominent bitcoin developers, investors, and miners forked the protocol in order to provide another option.

Airdrops are sometimes used primarily to increase attention for new tokens or coins. A large number of airdrops are unannounced, surprising Bitcoin and Ethereum owners.

In the world of cryptocurrencies, forks will remain important. Since the current protocols are unable to solve the scalability and secrecy problems, cryptocurrency forks are inevitable. Cryptocurrencies can be adjusted as a result of forks. In the long run, they allow for the refreshment of protocols when necessary and enable sound concepts to prevail.

 Cryptocurrency Airdrops: What are they?

Alternatively, airdrops are the act of delivering cryptocurrencies to a select group of investors. By purchasing an ICO, developers can offer freebies as well. A token airdrop typically distributes tokens to holders of preexisting blockchain networks, such as Bitcoin and Ethereum.

Due to this last point, it becomes confusing between an airdrop and a hard fork. For each prior digital currency, holders are typically given new tokens equal to a portion of their current holdings. At the time of the BCH hard fork described above, the developers of the fork issued an equivalent number of BCH tokens to all Bitcoin holders.

There are also cases when airdrops are used primarily for promoting new tokens or coins. 

Many airdrops are incorporated into wallets without announcement (since they are usually not announced beforehand). Many in the cryptocurrency community view free giveaways of this sort as largely pointless, as the excess coins they create end up flooding the market.

Investors tend to sell free tokens after receiving them for free. If this happens, the token’s value will plummet. Some cryptocurrency projects haven’t gained traction due to this scenario. Airdrops are different from hard forks in that they do not produce two iterations of the same cryptocurrency. In this case, nobody is certain how successful a new cryptocurrency will be over the long term.

Exactly what is the purpose of Airdrop?

Creating awareness is the goal. When it comes to marketing, information is often one of the beginning steps in a buyer’s journey. As consumers are more likely to purchase a commodity they know than one they don’t, an airdrop’s characteristics are heavily influenced by human behavior. Token issuers see airdrops as a step towards distributing tokens to holders. Alternative advertising models (such as Google Ads) tend to be less effective when promoting coins than airdrops.

Example

In August 2017, Bitcoin Cash (BCH) separated from Bitcoin (BTC). This was the biggest hard fork to date. In exchange for one BTC coin, BCH coin holders gained one BTC coin. A token of BTC was approximately $2,800 at the time of the fork, while one token of BCH was approximately $340.2 using Rev. Rul as guidance. In the tax year 2019-24, if a taxpayer held one BTC at the time of the hard fork, an ordinary income tax credit would be recognized as $340 as long as the taxpayer exercised dominion and control over the BCH. Cryptocurrencies are considered to be taxpayer property if they can be transferred, sold, exchanged, or otherwise disposed of.

The taxpayer would establish his tax basis based on the fair market value of the cryptocurrency at the time he has constructively received the cryptocurrency if any one of these criteria is satisfied. If the taxpayer cannot control or exert dominion over the newly created cryptocurrency (which occurs frequently when virtual currency is held at a cryptocurrency exchange), then he is not required to recognize gross income until the cryptocurrency is constructively received.

Upon gaining control and dominion of the cryptocurrency, the taxpayer must recognize income based on its fair market value as of the date it was constructively received (usually when a cryptocurrency exchange credits your account with your new cryptocurrency). 

Accordingly, the taxpayer was able to recognize an income of $4,355 for that BTC coin that he owned on a crypto exchange that eventually credited his account. That compares to about $4,000 of difference in price from the date of the hard fork. As a point of reference, BCH traded around $215 at the beginning of December 2019.