What Is Fork?
A fork occurs when changes to a blockchain's protocol cause the chain to diverge into different versions. Soft forks are backward-compatible changes — nodes that don't upgrade can still participate. Hard forks are not backward-compatible — the chain permanently splits into two separate blockchains, each with its own rules and potentially its own token.
How Fork Works
Famous hard forks include: Bitcoin Cash (forking from Bitcoin in 2017 over block size debates), Ethereum Classic (forking from Ethereum after the DAO hack in 2016), and numerous planned hard forks for protocol upgrades (Ethereum's merge from PoW to PoS was technically a hard fork). Some forks create new tokens that holders of the original receive for free (an "airdrop").
Why It Matters for Traders
Forks create trading opportunities and risks. Contentious hard forks (like Bitcoin/Bitcoin Cash) create intense speculation in the weeks leading up to the fork. Holders of the original chain receive tokens on both chains, creating a "free money" incentive to hold before the fork. However, post-fork selling pressure on the minority chain often leads to rapid price declines. Non-contentious planned upgrades (like Ethereum's regular hard forks) typically have less dramatic but still notable market effects.