R. Sridhar writes;

The concept of sacrifice is woven into the Hindu way of life...But sacrifice as written in the scriptures is about the sacrifice of the ego. The concept of giving up and letting go was paramount. According to the Vedic Scriptures, the simplest sacrifice was to abstain from food once a week. This was not only seen as a sacrifice but was also meant to purify the body. Less food means less production of blood. An empty stomach also aids in meditation...Unfortunately, over a period of time, it came to be interpreted as 'sacrifice of blood' Man's ingenuity led him to find ways to sacrifice blood instead of him sacrificing a meal! This led to animal sacrifice and then unfortunately to human sacrifices as well...Adi Shankara, the spiritual guru par excellence was instrumental in ensuring that this undesirable practice was discontinued at many spiritual centres...the coconut was chosen as a suitable substitute by people who did not want to give up the practice of 'bali' or sacrifice of animals and humans...

Why was the coconut chosen?

The coconut resembles the human head in many ways. The coir outside resembles the human tuft of hair. The hard nut, the skull, the water inside the blood and the kernel is akin to the mental space. Another interpretation equated the outer shell to the human being’s gross physical body and the kernel to the subtle body… A coconut is quite like the human womb. The inner kernel is protected from outside influences and chances of getting polluted are very minimal...