What is Bitcoin Cash?

What is Bitcoin Cash?

What is Bitcoin Cash?

Bitcoin Cash (BCH) is a fork of Bitcoin (BTC). Structurally the two coins are quite similar. They both use Proof of Work mining, both have a supply limit of 21 million, and both use the same encryption scheme.

The one key difference between BCH and BTC is that Bitcoin Cash can scale. In fact, scaling is the entire reason that Bitcoin Cash exists in the first place…

    How Bitcoin Cash Solves Scaling

    Bitcoin (BTC) is one of the slowest cryptocurrencies around. Bitcoin is slow because it has small blocks. Block size dictates how many transactions a network can clear in a given amount of time, so having small blocks limits the scalability of Bitcoin.

    It is analogous to how a Mini Cooper is limited in how many people it can carry, while a large bus is not very limited.

    Bitcoin Cash (BCH) is the bus. Bitcoin Cash has large blocks and can clear significantly more transactions per second than Bitcoin can. The most recent estimates suggest that BTC can clear about 8 TPS (Transactions Per Second) while BCH can clear significantly more than that (it’s hard to estimate the true upper limit since the network is underused).

    Bitcoin as Digital Cash

    In the Bitcoin whitepaper, Satoshi Nakamoto postulates that Bitcoin can be used as digital cash. The obvious interpretation of this statement is that people should be able to spend Bitcoin at the grocery store or at Starbucks.

    The problem (aside from the inconvenience that most grocery stores still do not accept Bitcoin) is that you can’t pay for your groceries with Bitcoin if the transaction takes 10 minutes and costs $1 in fees.

    This is where Bitcoin Cash comes in. BCH is fast and cheap enough that it can be used to buy the proverbial cup of coffee. Back in 2017 this was still an important feature and it’s why the Bitcoin Cash hard fork was so contentious.

    The Bitcoin Cash community was arguing that bigger blocks were necessary to make Bitcoin function as digital cash. The Bitcoin community pushed back against bigger blocks, arguing that larger blocks would centralize the network.*

    In the next section we’ll look at how this contentious hard fork played out.

    *In order to run a Bitcoin full node you must download the entire transaction history of the Bitcoin network.

    • Small blocks = fewer transactions = less storage requirements to run a node so more people can do it
    • Big blocks = more transactions = more storage requirements to run a node so fewer people can do it

    The Hard Fork

    In August of 2017, when the Bitcoin Cash hard fork took place, it wasn’t clear which coin would dominate the crypto market. At the time there was still a widespread belief that everyone should be able to use Bitcoin to buy a coffee, so there was a lot of sympathy in the community for the Bitcoin Cash side.

    Since ASIC miners can mine on either the BCH or BTC network, miners were picking sides. Exchanges also picked sides and there was a lot of fighting in the community. It wasn’t clear whether BTC or BCH would win out in the long run.

    That was then, and this is now. Three years later it’s easy to see that Bitcoin (BTC) is the winner. All of the institutions that we hear about are buying Bitcoin, not Bitcoin Cash. Bitcoin has the largest network effect and the most attention. Bitcoin Cash on the other hand, has seen a slow exodus of developers since 2020.

    The clearest example of Bitcoin’s dominance is the BCH/BTC price chart. Rather than use dollars as the denominator, this chart shows how BCH has been losing market share to BTC since 2018.

    Caption: Since 2018 BCH has been steadily losing value versus BTC 

    What the Market is Telling Us

    These last three years of price action are effectively telling everyone that the values of BTC (decentralization and security) are more important than the values of BCH (scalability).

    At this point the cryptocurrency community has accepted that Bitcoin will probably never scale on the base layer. Bitcoin transactions will always be slow and expensive.

    However, that’s not to say we will never buy coffee with Bitcoin. There are all sorts of interesting second layer solutions that can scale Bitcoin. The lightning network has been gaining ground recently, and we wrote an entire article about how Bitcoin can scale via the Ethereum network.

    The Recent Bitcoin Cash Hardfork

    In November of 2020 the Bitcoin Cash network experienced another hard fork. Amaury Sechet, a Bitcoin Cash developer, had proposed a change to the protocol which would have diverted 8% of all mining profits to a developer fund.

    This proposed rule change was controversial. Since the community was unable to come to an agreement, the end result was a hard fork. Thankfully for the BCH community, the version of Bitcoin Cash with an 8% developer fund seems to have attracted almost no miners. That is to say, the “original” version of Bitcoin Cash has been largely unaffected.

    More information about this latest hard fork is available here.

    The Future Role of BCH

    In 2017 the cryptocurrency market was presented with two options,

    1. A Bitcoin that sacrifices decentralization in order to scale
    2. A Bitcoin that is slow and expensive, but which is as decentralized as possible

    At this point we can confidently say that choice #2 won the battle. The market voted for decentralization over scalability.

    Bitcoin isn’t about coffee and groceries, Bitcoin is about storing your wealth in an asset that cannot be manipulated or regulated to death. An asset with scarcity and an asset with great security granted by its decentralized network.

    Even though Bitcoin Cash remains in the top 10 crypto rankings, there doesn’t seem to be a lot of reason for it to stay there in the long term. The market has chosen Bitcoin and it seems unlikely that Bitcoin Cash will play a large role in the cryptocurrency ecosystem going forward.

    This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.

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