Bitcoin cash is a cryptocurrency that is very similar to bitcoin. However, it has one major difference in that the blocks in bitcoin cash’s blockchain allow far more space and therefore have the capacity to hold significantly more transactions.

While bitcoin’s blocks have traditionally had a maximum size of 1MB, bitcoin cash has a block size of 8MB.1)Retrieved 8 August 2017 http://www.telegraph.co.uk/technology/2017/08/01/bitcoin-cash-everything-need-know-bitcoins-hard-fork/

For traders to obtain a better sense of what bitcoin cash is and why they might take interest in this cryptocurrency, a brief explanation is needed. Armed with this information, they will have a better sense of what is going on and what opportunities bitcoin cash may hold for them.

How Was Bitcoin Cash Created?

Bitcoin cash was created on 1 August 2017, when a bitcoin mining pool named ViaBTC mined a new block that was not accepted by the traditional bitcoin network.2)Retrieved 8 August 2017 https://www.bitcoincash.org/ Because the creation of this block resulted in a completely new blockchain with rules that were separate and distinct from those of the original bitcoin chain, it represented a “hard fork.”

What Is A Hard Fork?

A hard fork is a change in the protocol, or rules, of a cryptocurrency that results in the new network refusing to recognise blocks mined using the old rules.3)Retrieved 8 August 2017 https://www.coindesk.com/short-guide-bitcoin-forks-explained/ Basically, when such a change takes place, the new network will reject all blocks created using the old protocol.

In some cases, a cryptocurrency could undergo a hard fork and maintain a single blockchain. In this case, bitcoin kept its blockchain, and ViaBTC decided to use the open-source code of the bitcoin protocol and create a separate and distinct blockchain.

While both bitcoin and bitcoin cash share a transaction history that lasts up until the hard fork, their transaction logs following that event are completely different.

Why Was Bitcoin Cash Created?

Bitcoin cash came into existence following an ongoing issue in the bitcoin world known as the scaling dilemma.4)Retrieved 8 August 2017 https://www.coindesk.com/2016-bitcoin-protocol-block-size-debate/ The blocks in bitcoin’s blockchain were originally designed to have a capacity of 1MB, which meant that they were created to hold a finite number of transcations.

This restriction became problematic as the bitcoin network drew greater attention over time, and it became strained as more users attempted to process transactions. As a result, the network came to suffer from the rising cost—and growing time—needed to process transactions for this cryptocurrency.5)Retrieved 8 August 2017 https://cointelegraph.com/news/retailers-turn-their-backs-on-booming-bitcoin-trade-magazine

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Scaling Proposals

Amid these ongoing challenges, developers created varying proposals to help the bitcoin network alleviate the problems resulting from its block size restrictions.6)Retrieved 8 August 2017 https://www.coindesk.com/2016-bitcoin-protocol-block-size-debate/ Some members of the bitcoin community backed a proposal called Segregated Witness (SegWit), which would allow blocks to hold more transactions.

This proposal, introduced by Blockstream co-founder Peter Wuille in December 2015, would make transactions appear smaller to nodes in the bitcoin network, therefore allowing the blocks in the currency’s blockchain to hold more of them.7)Retrieved 8 August 2017 https://www.coindesk.com/segregated-witness-bitcoin-block-size-debate/

While this proposed solution may have seemed promising, not everyone supported it.

Bitcoin Classic

In February 2016, developers released bitcoin classic, which would allow the size of bitcoin’s blocks to reach a maximum of 2MB.8)Retrieved 8 August 2017 https://www.coindesk.com/segregated-witness-bitcoin-block-size-debate/ Bitcoin classic was based on bitcoin core, which came from the original bitcoin software.9)Retrieved 8 August 2017 https://www.coindesk.com/bitcoin-classic-publish-code-block-size/

However, this proposal quickly encountered opposition, as its implementation would require a hard fork, and several members of the bitcoin community banded together, announcing that they would not support any initiative that required a hard fork.10)Retrieved 8 August 2017 https://www.coindesk.com/miners-exchanges-hard-fork-letter-bitcoin/

Segwit2x

Another potential solution that has been proposed is something called Segwit2x, which would seek to both implement SegWit and also increase the total capacity of bitcoin blocks to 2MB.11)Retrieved 8 August 2017 https://steemit.com/news/@steemthenews/what-is-segwit2x

Just like other proposals aimed at addressing the scaling debate, Segwit2x has not been without controversy. Some members of the bitcoin community have voiced their opposition to the phase of Segwit2x that would double bitcoin’s block size, a problem that could potentially result in a split of the traditional bitcoin network.12)Retrieved 8 August 2017 https://news.bitcoin.com/segwit2x-and-the-tale-of-three-bitcoins/

Now that bitcoin cash has come into existence, the aforementioned split would result in the creation of three bitcoin networks:

  • Bitcoin cash, which has 8MB blocks
  • A version of bitcoin that has SegWit and 1MB blocks
  • A version of bitcoin that has both SegWit and 2MB blocks13)Retrieved 8 August 2017 https://news.bitcoin.com/segwit2x-and-the-tale-of-three-bitcoins/

An Ongoing Battle

The scaling dilemma has been a focus of the bitcoin network for years.14)Retrieved 8 August 2017 https://www.cryptocoinsnews.com/will-bitcoin-scalability-debate-ever-end/ Given all the different viewpoints, it is easy to understand why this is the case.

The network’s problems were exacerbated in 2017. The broader cryptocurrency market drew widespread interest, a development that saw the total market capitalisation of these assets surge to more than £90 billion (or US$120 billion) during 2017.15)Retrieved 8 August 2017 https://coinmarketcap.com/ At the start of the year, this market was worth far less with a market capitalisation of less than £15 billion (or roughly US$17.7 billion).

As the interest in these currencies surged, the desire for bitcoin transactions also rose, helping increase the strain on the bitcoin network.16)Retrieved 8 August 2017 http://www.telegraph.co.uk/technology/2017/08/01/bitcoin-cash-everything-need-know-bitcoins-hard-fork/

Bitcoin Cash’s Early Moments

As a result, ViaBTC opted to back bitcoin cash, a move that provided a new blockchain with far less onerous block capacity restrictions. It took this mining pool several hours to create the first bitcoin cash block.17)Retrieved 8 August 2017 https://www.thestreet.com/story/14251693/1/miners-add-first-blocks-to-bitcoin-cash-making-its-split-from-bitcoin-official.html The length of time needed to mine a single block provided evidence that the new cryptocurrency lacked widespread support.

Some market observers voiced their criticism. Fran Strajnar, co-founder and CEO of Brave New Coin, warned that “There’s no infrastructure available out of the box, to support [bitcoin cash].”18)Retrieved 8 August 2017 https://www.cnbc.com/2017/08/02/bitcoin-cash-rallies-blockchain-split-digital-currency.html “The network needs further support and infrastructure needs to be as easy as bitcoin; otherwise it’s over for BCC,” he added.

Marc Van der Chijs, an investor and entrepreneur, also offered pointed remarks on the matter. “It looks like a huge failure,” he said in response to the news that hours after its release, bitcoin cash was garnering only a fraction of the processing power commanded by the more traditional bitcoin.19)Retrieved 8 August 2017 https://www.thestreet.com/story/14251693/2/miners-add-first-blocks-to-bitcoin-cash-making-its-split-from-bitcoin-official.html

Van der Chijs said that the situation made bitcoin cash look like a “small altcoin,” while the developers did not intend for the cryptocurrency to end up being a “small alternative.”

What Happened To Traders’ Bitcoins?

One question that many traders may be wondering is what happened to their bitcoins as a result of the hard fork that created bitcoin cash. The answer to this question depended largely on how traders stored their bitcoins.20)Retrieved 8 August 2017 http://www.telegraph.co.uk/technology/2017/08/01/bitcoin-cash-everything-need-know-bitcoins-hard-fork/ Traders who stored their bitcoin on hard drives benefited from ending up with both bitcoin and the newly created bitcoin cash.

For those who had their bitcoin stored elsewhere when the split took place, the answer may be a bit more complicated.21)Retrieved 8 August 2017 http://www.telegraph.co.uk/technology/2017/08/01/bitcoin-cash-everything-need-know-bitcoins-hard-fork/ Several bitcoin wallet providers and exchange operators previously stated that they did not plan on supporting bitcoin cash, such as CoinBase.22)Retrieved 8 August 2017 https://www.thestreet.com/story/14261684/1/here-s-why-bitcoin-cash-prices-are-likely-to-slump-again.html

However, following intense criticism from customers and a sharp increase in their withdrawals ahead of the fork, CoinBase announced that it planned to support the new cryptocurrency starting in January 2018.23)Retrieved 8 August 2017 https://blog.coinbase.com/update-on-bitcoin-cash-8a67a7e8dbdf The exchange revealed that once this support was in place, users would be able to withdraw bitcoin cash.

However, not everyone has warmed up to the idea of supporting this new currency. Aaron Lasher, co-founder and chief marketing officer of wallet service provider Breadwallet, estimated two days after the hard fork that the 95% of bitcoin cash holders who held this cryptocurrency in a private wallet would be unable to move it elsewhere.24)Retrieved 8 August 2017 http://www.businessinsider.com/bitcoin-cash-price-may-be-house-of-cards-close-to-collapsing-2017-8

Bitcoin Cash’s Market

Trader can benefit from knowing about the market for bitcoin cash. The cryptocurrency certainly had a high-profile entry to the market, quickly becoming one of the top three cryptos by market capitalisation.25)Retrieved 8 August 2017 https://www.forbes.com/sites/cbovaird/2017/08/02/bitcoin-cash-becomes-a-top-3-cryptocurrency/#5274295a154d Bitcoin cash’s market capitalisation topped out at nearly US$12.5 billion.26)Retrieved 8 August 2017 https://coinmarketcap.com/currencies/bitcoin-cash/

However, the cryptocurrency has also experienced sharp volatility. During the week since it began trading, bitcoin cash’s price has fluctuated significantly, rising to a high of US$756.93 on 2 August 2017 and then falling to nearly US$200 three days later.27)Retrieved 8 August 2017 https://coinmarketcap.com/currencies/bitcoin-cash/

Before the hard fork, futures based on the cryptocurrency were trading for roughly a week.28)Retrieved 8 August 2017 https://coinmarketcap.com/currencies/bitcoin-cash/ During this time, these futures contracts rose to more than US$575 and declined to roughly US$217.

Challenging Market Dynamics

In addition to suffering sharp volatility, bitcoin cash’s market is highly illiquid, resulting in the cryptocurrency not having enough buyers to match up with would-be sellers, Samson Mow, CEO of video game company Pixelmatic, told Business Insider.29)Retrieved 8 August 2017 http://www.businessinsider.com/bitcoin-cash-price-may-be-house-of-cards-close-to-collapsing-2017-8 “The market for [bitcoin cash] is so illiquid and fragmented that the price, and by extension the market cap, mean almost nothing,” he said.

Another way of putting this is that while bitcoin cash has generated a significant market capitalisation shortly after its launch, it has only done so because those who hold it are not in a position to sell. Lasher has predicted that when investors do have the opportunity to trade bitcoin cash on exchanges, the number of people looking to sell this cryptocurrency will probably rise.

Given this situation, “It’s unlikely that [bitcoin cash] will survive at prices above $100 in the long term,” Mow said.30)Retrieved 8 August 2017 http://www.businessinsider.com/bitcoin-cash-price-may-be-house-of-cards-close-to-collapsing-2017-8

Summary

Bitcoin cash is very similar to bitcoin in terms of its underlying technology, as bitcoin cash is in and of itself a hard fork of gitcoin. However, the two are quite different from the perspective of interested traders.

Bitcoin cash has come under fire for having an illiquid market that fails to provide adequate opportunities for buyers and sellers. Bitcoin, on the other hand, is the world’s largest cryptocurrency by market capitalisation, and it has the greatest liquidity as measured by weekly trading volume.

Of course, bitcoin has been around for more than eight years at the time of report (August 2017). Since then, it has benefited from rising adoption and a sharp increase in its price. Bitcoin cash has only been around for roughly a week at the time of report, making it more difficult to predict how its price will fare over time. Further, no one knows for certain if and when the new currency will catch on as a method of payment or store of value.

Given all of this information, it’s difficult to know or predict how bitcoin cash will fare as a medium of exchange, tradable asset or store of value.

Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

FXCM does not endorse Bitcoin. The information provided herein is for educational purposes only. This is not a solicitation or an offer to buy/sell. Site users should conduct their own due diligence before deciding to make an investment.

References   [ + ]

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