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A Beginner's Guide to Bitcoin Cash

Vee Tardrew
10 November 2017

Disclaimer: This blog post is an opinion piece, informational in nature, and must not be construed as professional financial advice. Should you be in need of investment advice, we invite you to sign up for our registered market advisory service.

Bitcoin Cash entered the market on 1 August 2017. Despite its comparatively short lifespan, as a fork of Bitcoin, it has a number of go-to-market advantages over the plethora of altcoins available. Its creation came about at a tempestuous time in Bitcoin, as the community were locked in a heated debate about how to scale Bitcoin. Since then, Bitcoin Cash has shown resilience to ‘political’ issues and seems intent on focusing on its purpose, as opposed to being pulled into further blockchain battles.

As a newcomer to cryptocurrency, you may be confused about what Bitcoin Cash is and how it differs from Bitcoin. Perhaps even with a few years of experience in this industry, you are unsure of the ruckus around the Bitcoin Cash creation. As a firm committed to helping you secure and grow your cryptocurrency wealth, we think it only only fair to offer you a formal introduction to the ‘new’ kid on the block(chain).

Ready?

What is Bitcoin Cash?

Bitcoin Cash is a cryptocurrency derived from the Bitcoin blockchain. It operates in much the same way as Bitcoin, providing a token (BCH) to be used for transactions processed over the Bitcoin Cash network. On its website, it defines itself simply as:

“Peer-to-Peer Electronic Cash” - BitcoinCash.org

They elaborate further with this:

“Bitcoin Cash is peer-to-peer electronic cash for the Internet. It is fully decentralized, with no central bank and requires no trusted third parties to operate.” - BitcoinCash.org

What this essentially means is that it is a mechanism for direct payments, via the Internet, to any other individual or business, without the need for financial institutions or other trusted third parties to be involved. By using the term cash, they furthermore emphasise that these transactions are handled much like a face-to-face cash exchange, with little to no cost and without lengthy processing time. As a decentralised network, it operates without the need for a central body of control, and any enhancements or changes come about through a process of consensus.

You may be asking yourself - but isn’t that what Bitcoin is? The answer is a bit of a “yes” and “no” so stick with me.

How Bitcoin Cash Differs from Bitcoin

When the concept of Bitcoin was revealed in the now famous Satoshi Nakamoto white paper, it was positioned essentially the same as Bitcoin Cash describes itself.

“A purely peer-to-peer version of electronic cash [that] would allow online payments to be sent directly from one party to another…” - Satoshi Nakamoto white paper, 31 October 2008

While Nakamoto did not explicitly call for almost instant or little to no cost transactions in his original white paper, we can infer that because Bitcoin is intended to be electronic cash, the notion was for it to act the same as cash, which does not draw much in the way of cost or time.

This can also be deduced by the following extract:

“The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions… These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party.
What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.” - Satoshi Nakamoto white paper, 31 October 2008

And in its early years, Bitcoin fulfilled these promises. It offered quick, cost-effective transactions, irrespective of whether you wanted to send £0.10 or £1,000,000.00.

This utility, together with its qualities of being permissionless, borderless, durable as well as limited in supply, saw Bitcoin gain steady traction in the marketplace. Consumers and merchants alike were hungry to take their money out of environments of central control and demand for bitcoin transactions started climbing. Whether making an international payment or paying for a morning coffee, transacting in bitcoin was a breeze. While this greater adoption and acceptance was fantastic for Bitcoin enthusiasts,  it soon started to present as an issue for the network.

Bitcoin’s block size is set to 1MB.  

As the number of transactions surged, blocks started to reach capacity. The network could not process as many transactions per second as was demanded, and therefore the transaction processing time rose from a few minutes, to hours and - in the most drastic scenario - days. At the same time, as a means to ‘leapfrog’ the backlog of transactions, users started paying higher and higher fees to incentivise miners to add their transactions into the next available block. This merely convoluted the problem as those who wanted to transact with small amounts, and pay less in fees, saw their transactions sitting for ages for confirmation. In the case of a merchant and a buyer, bitcoin payments became less effective, and Bitcoin slowly became a more suitable store of value than an electronic version of cash.  

So, from an ideological perspective we can say that the key differences are that:
  • Bitcoin Cash acts as electronic cash, enabling quick, cost-effective and direct payments between two parties over the Internet
  • Bitcoin is now being viewed rather as store of value, for those not wanting to use it for simple everyday transactions that require speedy settlement

Bitcoin has also implemented an update called SegWit (Segregated Witness) which was essentially their chosen solution to the scaling problem. SegWit changed the way that transactional data was categorised and calculated in the blocks, providing more capacity to transactional data. Moreover, SegWit-based transactions are not vulnerable to transaction malleability. With transaction malleability resolved, it allows the Bitcoin blockchain to be compatible with the Lightning Network, which introduces the concept of payment agents who serve as middlemen to facilitate bi-directional payment channels.  

It was for this reason that the Bitcoin Cash group were particularly against the implementation of SegWit. They believed, inter alia, that this would ‘break’ the principle of peer-to-peer transactions. Some miners also expressed concern over potential losses in fees should transactions be handled ‘off-chain’. These were some of the driving forces behind Bitcoin Cash hard-forking from the Bitcoin blockchain prior to the introduction of SegWit; to create a coin that was technically (and philosophically) in line with the original vision of Bitcoin.

From a technical perspective, Bitcoin Cash differs from Bitcoin in that it:
  • Does not support SegWit
  • Has a 8MB block size (with room to grow)
  • Has an emergency difficulty adjustment algorithm (EDA) that kicks in should the hash power drop too low

This EDA, while necessary for the survival of the chain during periods of low mining activity, has unfortunately caused wild fluctuations in the network stability and coin issuance. In an announcement fortnight ago, Bitcoin Cash revealed that they would be tweaking their difficulty adjustment algorithm to ease these economic swings, by way of a hard-fork on 13 November 2017. All miners, exchanges and wallets have been notified of the availability of the updated software and they are not anticipating any setbacks on the network. (Note: This hard-fork is purely a technical upgrade, and no duplicate coins will be issued to Bitcoin Cash addresses.)

What is Bitcoin Cash Worth?

As we know, the price of a cryptocurrency is determined by the market. Its value, however, is not always factored into that price, and today, there are still a number of cryptocurrencies trading way below what their inherent value would put their price at. Bitcoin Cash is no different.

But let us look at the price.

When Bitcoin Cash launched, all Bitcoin addresses holding bitcoin at the time of the split, were credited with an equal number of Bitcoin Cash tokens on the new blockchain. For example, if you were holding 3 BTC at the time of the hard-fork, you would now have a total balance of 3 BTC and 3 BCH (the ticker for Bitcoin Cash).

Entering the market at £580, the price tumbled down to a low of £158 within 72 hours. This sudden ‘crash’ can be expected for any new coin ‘given away’ as a result of a hard-fork. Many are happy to receive the ‘free money’, trade it on their exchange and put it into their preferred cryptocurrency.

Bar another spike and drop in late August, and a few blips through September and October 2017, the following months were relatively uneventful with marginal price swings from day to day. In the last few weeks, however, we have seen a slower, steadier climb.  

For many people within the cryptocurrency community, this has not come as a surprise. Adam Norrie, Cryptocurrency Portfolio Advisor at Bitstocks expresses our sentiment at the BCH market movement of late:

“The last few weeks’ Bitcoin Cash rally has largely been a delayed reaction to an influx of positive news about developments in the Bitcoin Cash arena. Additionally, Korean Bitcoin Cash trades have surged, further impacting the price.”- Adam Norrie, Bitstocks

The value of Bitcoin Cash, though, lies within its future potential.

The Future Potential and Value of Bitcoin Cash

There are a few reasons we are of the opinion that there is great future potential for Bitcoin Cash.

Firstly, our own interactions with the network have been smooth, and we believe that the imminent update to the difficulty adjustment algorithm will only improve user experience. The increase in block size, allowing for faster transactions of even minimal payments at next to not cost is certainly an appealing feature, and may lure those who abandoned Bitcoin back to the space.

Secondly, they have a growing community. At first, it seemed as though they would not be able to gain much traction, but they have managed to turn this around in a short space of time. At the time of writing, there are a host of nodes, wallets, exchanges, services and projects supporting Bitcoin Cash, which adds to credibility as well as wider accessibility.

Thirdly, their aggressive roadmap for massive ‘on-chain’ scaling will create profitable opportunities for miners. If ‘off-chain’ applications are not being used, combined with bigger block sizes for more transactions and thus more transaction fees, it is reasonable to expect they will continue to see growing support from the mining community.

And lastly. From the wings it does appear that Bitcoin Cash are making good on their promise to run a truly decentralised network, with numerous groups of independent developers dedicated to proposing enhancements to build a stable system, with unlimited use cases. They ‘promote’ competition and want to see the ‘best version’ built, irrespective of who came up with the idea.  

In Conclusion

We are not fortune tellers who can look into a crystal ball and predict what is going to happen in the future. We have to go on what we know about the industry, our extensive research and our experiences.  Because, as a firm, we promote cryptocurrency not only as an investment asset, but as a vehicle of financial transformation too, we have to say that Bitcoin Cash certainly holds the potential to check these boxes. In fact, it is our opinion, that they are already firmly on their way to doing so.

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