Regardless of how long you’ve been interested in cryptocurrency for, you’ve inevitably heard of Bitcoin, the world’s very first virtual currency. However, what about its little brother, Bitcoin Cash? Bitcoin Cash is a top ten cryptocurrency in terms of market capitalisation, but do you know the similarities and differences between Bitcoin and Bitcoin Cash? In this guide, we tell you what exactly Bitcoin Cash is – from its history to how it works, as well as the pros and cons of investing in this cryptocurrency.
Before defining Bitcoin Cash as a currency, we first need to explore some more general definitions.
Let’s start at the very beginning: what is cryptocurrency in the first place? A cryptocurrency is a digital currency that is exchanged exclusively electronically (phwoar, educating alliteration). This currency is therefore not attached to anything physical, whether that be coins or banknotes. Ultimately, it is an alternative currency to more widely used fiat currencies (pounds, euros, dollars, etc).
Cryptocurrencies are traded peer-to-peer (P2P). Their value is not regulated by any central financial institution like the Bank of England, for example. Furthermore, their value is not pegged to another currency, or even gold for that matter. Instead, it is the law of supply and demand that regulates the price of cryptocurrencies. The creation of this digital money and its subsequent transactions are managed collectively on a fair computer network to which everyone has access.
Cryptocurrencies can be stored virtually in digital wallets and can be bought, sold and traded – most commonly through trading platforms such as Binance, Crypto.com or Swissborg. Just like with traditional currencies or stocks, it is possible to trade and speculate by investing in cryptocurrencies.
Although a form of cryptocurrency existed before, it is only since 2009 that the sector has really developed. This was the year that the developer only known by the pseudonym Satoshi Nakamoto launched Bitcoin to the world. Thanks to its popularity, a multitude of other cryptocurrencies emerged in the years that followed. The creation of new cryptos is arguably endless. However, to be successful over time, a cryptocurrency must rely on a solid technical infrastructure in order to gain the trust of the community.
This solid technical infrastructure is blockchain technology, which helps govern cryptocurrencies as they are not controlled by a central bank or government. Cryptocurrencies are governed by decentralised computer systems – these blockchains essentially act as the regulatory bodies of cryptocurrencies.
The blockchain is the history of a cryptocurrency
A blockchain is based on the principle of cryptography. Cryptography is the process of encoding information to ensure its confidentiality and authenticity. Each cryptocurrency transaction is encoded and added to other transactions to form a block. These blocks are linked, hence the word blockchain. The blockchain is therefore a register of all transactions relating to a specific electronic currency.
But who manages the blockchain? The users themselves. Any user can decide to get involved in the blockchain by becoming a ‘node’ on the network. They can then participate in the verification and validation of blocks. However, there are different forms of arriving at a consensus in order to validate a block. Bitcoin, for example, uses proof-of-work (PoW). Other cryptocurrencies have chosen proof-of-stake (PoS) instead. To understand the difference between these two protocols, click here. Regardless of the technology chosen, the validation of a block does not depend on a single actor, but on all the decentralised network of nodes. Data integrity can therefore be guaranteed. Each time a block is validated, it is added to the (public) blockchain ledger.
Beyond the world of cryptocurrency, blockchain technology can also be exploited to help out in many other areas. In particular, it can be used to deploy smart contracts, contracts that are executed automatically when predefined conditions have been met.
Bitcoin Cash was created on 1st August 2017 following a major split (known in the industry as a hard fork) that occurred in the Bitcoin blockchain. This means that Bitcoin Cash’s life actually started with the Bitcoin blockchain and thus benefits from the experience and reliability of Bitcoin. Bitcoin Cash and Bitcoin are now two very distinct blockchains and cryptocurrencies, having gone their separate ways.
While Bitcoin has remained the leading cryptocurrency in terms of market cap, Bitcoin Cash is still one of the largest cryptocurrencies at the time of writing. We can therefore see that after three years of existence, Bitcoin Cash has already managed to prove itself as a leading cryptocurrency. Despite a name that can be confusing, Bitcoin and Bitcoin Cash are separate entities. Vitalik Buterin, co-founder of Ethereum, doesn’t hesitate to regularly point out the distinctions between the two cryptocurrencies.
Let’s take a look back at the beginnings of the cryptocurrency, whose birth was marked by controversy.
As mentioned above, Bitcoin Cash was born from a Bitcoin hard fork. A fork occurs when an update of the blockchain code is executed, but only a part of the network’s nodes accept the change. Some nodes begin to follow the new rules while others persist in following the old ones. A split then occurs and two distinct blockchains are formed.
To understand the principle of a fork, we must remember that a blockchain’s very nature makes it immutable. Any change to the blockchain code must be approved by all the nodes of the network before being deployed. Therefore, the larger a cryptocurrency’s community, the more difficult it is to obtain a consensus to make any changes.
This is exactly what happened to Bitcoin. In fact, the Bitcoin blockchain has seen several forks, but none have been as successful as Bitcoin Cash. In August 2017, part of the Bitcoin network declared its independence and created new rules for the Bitcoin Cash blockchain.
Now we understand what a hard fork is, what are the reasons why some of the nodes wanted to create Bitcoin Cash?
Why was Bitcoin Cash created?
To understand the cause, we must understand the reasons for the disagreement that had arisen in the Bitcoin community in 2017. At the root of this major conflict was the issue of block size on the Bitcoin blockchain.
Originally, Nakamoto designed Bitcoin to become a global payment network that anyone could easily use. His ambition was clearly to democratise Bitcoin payments. Nakamoto therefore expected the trading volume to increase to a point where a scalability issue could emerge. For this reason he decided to limit the size of the blocks to 1mb, while understanding that this restriction could change in the future if necessary.
Remember that a block is a group of transactions. The larger the size of a block, the more transactions it can accommodate, and the more transactions that can be executed every second. With a block size of one megabit, the Bitcoin blockchain is only capable of processing between two and seven transactions per second.
Up until 2014, the volume of Bitcoin transactions was not even large enough to fill each block to its maximum capacity (of one megabit). However, from 2015, the limit began to be regularly reached, even daily.
But what happens when the block limit is reached? When the number of transactions is too high to be integrated into the blocks during standard operation, the network becomes saturated. Then a traffic jam of blocks forms which need to be validated at the same time. In order to encourage miners to treat a block as a priority, a financial incentive is offered. The miners receive a better remuneration for processing these blocks more quickly. For the blockchain user, this translates into higher transaction fees. Network saturation therefore has a direct impact on the cost of transactions. Rising transaction costs weakens Bitcoin’s position as a viable alternative to credit/debit card networks like Visa or MasterCard.
The issue of the size of blocks is therefore fundamental. On the one hand, large blocks can unblock the network, process more transactions per second, avoid excessively high transaction fees and in turn encourage users to continue using the cryptocurrency in question. On the other hand, large blocks increase the rate of orphan blocks (these are blocks which are validated/verified but ultimately rejected), increase the technical requirements to validate a block and create the risk that the network will no longer manage to synchronise, since too few miners would have the computing power and bandwidth needed for the calculations – therefore potentially creating an obstacle to the ease of validation. In summary, increasing the size of blocks gives more power to the more powerful entities and reduces the number of full nodes in the network. This therefore poses a threat to the very principle of decentralisation, which is a founding value of Bitcoin and cryptocurrencies in general.
As you can imagine, this is a debate which has been discussed by the Bitcoin community for years. Due to this shortcoming, different protocols have been developed to improve the scalability of Bitcoin without increasing the size of the blocks. The best known are the SegWit (or Segregated Witness) and Lightning Network protocols. That being said, a section of the Bitcoin community has never given up on the belief that increasing the size of blocks is the best way to increase Bitcoin’s scalability. After years of procrastination and fruitless negotiations, it became clear that the two schools of thought could never come to a compromise. This is what led to Bitcoin’s 2017 hard fork and the subsequent birth of Bitcoin Cash.
How is Bitcoin Cash used?
When Bitcoin Cash was created, the maximum block size was set at eight megabits. Less than a year later, on 15th May 2018, the limit was increased further. Bitcoin Cash blocks can now be up to 32mb in size. This means a block can collect up to 25,000 transactions (according to a test conducted in September 2018). In comparison, there are only 1000 to 1500 transactions in a Bitcoin block.
Ironically, Bitcoin Cash itself has undergone a hard fork for much the same reasons. In November 2018, Bitcoin Cash introduced changes in its blockchain and became Bitcoin Cash ABC. Another new cryptocurrency then emerged: Bitcoin SV (Satoshi Vision). Bitcoin SV refused the incorporation of smart contracts. Today, the general term Bitcoin Cash actually refers to Bitcoin Cash ABC, not Bitcoin SV.
Apart from the well-known difference in block sizes, Bitcoin Cash shares many characteristics with its parent, Bitcoin.
The total number of bitcoin cash is capped at 21 million units (the same as Bitcoin). BCH tokens are divisible up to eight decimal places. The smallest unit of BCH is also called a satoshi and corresponds to 0.00000001 of a BCH. Bitcoin and Bitcoin Cash also share the same block validation consensus mechanism: PoW.
Additionally, Bitcoin Cash miners receive a reward every time they mine a transaction block. The reward was initially set at 12.5 BCH per mined block and just like with Bitcoin, these rewards are halved approximately every four years through the principle of halving. The first Bitcoin Cash halving took place in April 2020 and therefore the reward is now 6.25 BCH per mined block.
Bitcoin Cash can be bought or sold for various fiat currencies, and it can also be exchanged for other cryptocurrencies. It is possible for individuals to send and receive Bitcoin Cash directly to each other. This therefore allows you to transfer funds around the world without going through a centralised intermediary such as a bank, costing you less in fees and processing far quicker.
Although it is a relatively young cryptocurrency, some online stores accept Bitcoin Cash as a payment method. Charities also collect donations in BCH. This is the case, for example, with EatBCH, a humanitarian project that has chosen Bitcoin Cash for its low fees and transaction speed.
Finally, Bitcoin Cash can be a profitable investment, however the price of BCH experiences large fluctuations over short periods of time. This is why many buyers choose Bitcoin Cash to invest in cryptocurrencies and try to make a profit through speculation.
What are Bitcoin Cash’s objectives?
In line with Satoshi Nakamoto’s original vision, Bitcoin Cash aims to become a standard payment method across the world. It is this goal which led its advocates to distance itself from Bitcoin. The increase in the block size was aimed at making possible the wider use of BCH as a means of daily payment, whether that was for food shopping, a spot of online shopping or just a coffee.
By improving its scalability, the Bitcoin Cash network intends to compete with multinationals such as the centralised networks of Visa and MasterCard. Unlike Visa, which charges particularly high fees when international transactions are made abroad, Bitcoin Cash would have the advantage of being an international system that maintains a low transaction fees.
Unlike some emerging or little-known cryptocurrencies, Bitcoin Cash is well-known across the board, therefore, Bitcoin Cash is available on most crypto trading and buying platforms. Check out the ultimate guide to buy BCH here.
Bitcoin Cash can be seen as an excellent complementary investment to Bitcoin. It allows you to diversify your portfolio with a crypto that is backed by one of the most robust blockchains in the world. In addition, in some aspects, Bitcoin Cash is more advanced than its older brother and is therefore better equipped for the challenges of tomorrow.
A robust blockchain
Bitcoin Cash is catching up with the Bitcoin blockchain. It should give you plenty of confidence to know that Bitcoin has the highest market cap of any cryptocurrency in the world. Bitcoin Cash is not just some small, obscure cryptocurrency that has recently emerged into the crypto space. Bitcoin Cash can be easily sent and received via satellite links or radio waves and can be used even in countries that do not have a banking system.
A certain notoriety
Although less well known than Bitcoin, Bitcoin Cash ranks, at the time of writing, sixth in the global cryptocurrency rankings for market cap. It benefits from the notoriety of Bitcoin, meaning BCH is already widely used as a means of payment. It can, for example, be used for small daily transactions or to leave a tip, not to mention the fact that it’s very easy to buy it. Most platforms will offer to buy BCH with a wide range of payment methods.
In some aspects, Bitcoin Cash has more advanced technology than Bitcoin. Its technology gives it a clear advantage over the competition, which means it should establish a lasting foothold in the crypto space. Bitcoin Cash’s larger blocks give it better scalability than Bitcoin. Equally, its security, reliability and speed of transactions are also better.
After three years of existence, the price of Bitcoin Cash has not really taken off. When it was launched in 2017, one BCH was trading at around £275, today that figure is around £180. Therefore, you can say BCH is following a downwards trend. In comparison, however, the price of Bitcoin has increased by around four times. If we were measuring success in this way, we can comfortably say that BCH has a long way to go before it can succeed in toppling the king of crypto.
The risk is that Bitcoin Cash will never be able to shake off its status as a Bitcoin subordinate, or its image as an illegitimate copy of Bitcoin. The fact that Bitcoin Cash retains a very similar name to Bitcoin is sometimes interpreted as an attempt to fool novice investors.
In addition, when the difficulty of mining Bitcoin Cash was reviewed back in March 2020, it was found that many BCH miners had to rely on mining BTC to stay more profitable.
A major setback with the development of Bitcoin Cash, as with Bitcoin, is the difficulty of uniting its community around one true agenda. Successive hard forks on the Bitcoin blockchain and then on the Bitcoin Cash blockchain have demonstrated the difficulty of obtaining a consensus from an entire community. These internal struggles only weaken Bitcoin Cash, as well as the trust that users and investors place in the cryptocurrency.
Giving the impression that it is Bitcoin, Bitcoin Cash sometimes creates confusion in the minds of investors, but Bitcoin Cash is indeed the result of a hard fork from the Bitcoin blockchain and, therefore, has different characteristics. In particular, it has a larger block size, which gives it better scalability. Currently, Bitcoin Cash is the sixth largest cryptocurrency in the world. Its development will depend mainly on its ability to differentiate itself from Bitcoin and make itself stand out better in the highly competitive world of cryptocurrencies. With all said and done, there are still some internet users who consider Bitcoin Cash to be the same as Bitcoin, while others are clear that they are two separate cryptocurrencies.
Just your average global millennial embracing, and interested in, the future of money and finance. Excited by blockchain tech as well as fintech but have a special passion for DeFi and Yield Farming, what will this technological disruption bring next?
The views, thoughts, and opinions expressed in this article belong solely to the author, and should not be taken as investment advice. Do your own research before taking any investment decisions.
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