What is Bitcoin Cash?
Bitcoin Cash is a form of digital money, based on Bitcoin (BTC), that came into existence on 1 August 2017 through what’s known as a fork. Whilst there are many digital currencies based on Bitcoin, what makes Bitcoin Cash different is that it goes the extra step of also using the record of all Bitcoin transactions, known as the ledger. What this means is that anyone who was in control of certain Bitcoins at the point of Bitcoin Cash being created would have the same number of Bitcoin Cash under their control.
Why does Bitcoin Cash exist?
The major difference between Bitcoin and Bitcoin Cash is the block size. The block size refers to the amount of space allocated for transactions to be entered in the ledger. Thus, because Bitcoin Cash has an 8MB block size it can, hypothetically, fit 8 times more transactions in a single block, to Bitcoin’s 1MB block. (This is not quite true as Bitcoin has implemented SegWit which allows for slightly larger blocks, but for our purpose right now this is a distinction without a difference)
It is useful to consider why a block size limitation exists at all. If no block size limit exists, the number of transactions that could be sent to the network could be so large as to bring the network to a halt. This is known as spamming the network.
The cost of having this limit appears when there are very high volumes on the Bitcoin network. In this case we will see a backlog of transactions waiting to be included in the confirmation process, which takes approximately 10 minutes, to be added to the ledger. As the number of transactions increases, so the backlog grows. Since the Bitcoin community could not come to a consensus to increase the block size to mitigate this risk, the team behind Bitcoin Cash decided to create a fork of Bitcoin where the rules were changed to allow for a larger block size.
This has led to some acrimonious interactions between the Bitcoin and Bitcoin Cash communities as each lays claim to Bitcoin’s legitimacy.
Why is this important?
Whilst it may seem like an obvious fix to increase the block size, this does not tell us the full story. Block size is but one way to increase transaction throughput in the ledger; it also has some drawbacks. By increasing the block size, the ledger, which is already over 140GB, will potentially grow a great deal faster. Thus, downloading a full copy of the blockchain will require more resources, increasing the risk of centralization of the public ledger and therefore centralization of influence over the future path of Bitcoin’s development. Further to this, miners would rationally prefer a larger block size as this would enable them to earn more fees.
There was supposed to be an implementation of a 2MB block size change to the Bitcoin protocol on the 16th of November 2017 (known as SegWit2X). This was called off in the week prior due to lack of support. In the run up to the planned change, the Bitcoin price increased to over $7500. The price spiked to $7900 on the announcement of the news on the 8th of November, before dropping very quickly as traders moved out of Bitcoin and into alt coins or fiat to lock in their profits. With the Bitcoin price under pressure, there was an unexpected and rapid growth in demand for Bitcoin Cash. After trading at as low as 0.089 BTC on the 10th of November, the price of Bitcoin Cash peaked at 0.4 on the 12th of November (moving from 0.175 to 0.4 BTC in under 24 hours). Trade volume also spiked with over $5.5bn worth of Bitcoin Cash changing hands in this period, across the largest exchanges and trading pairs.
Simultaneously, miners moved hashing power to the Bitcoin Cash ledger as it was more profitable to confirm transactions here. Additionally, many low fee transactions were sent to the Bitcoin blockchain. Low fee transactions typically take longer to clear as miners are incentivized to include transactions which provide greater earnings, first.
This resulted in a perfect storm for Bitcoin: transaction volume increasing, miners moving their hashing power elsewhere, a competitor coin’s price spiking and the Bitcoin price already under pressure.
People in the Bitcoin Cash camp have said that it was natural after the planned 2MB change was abandoned that Bitcoin Cash’s larger block size would be the preferred solution. Whilst people in the Bitcoin camp pointed to what they perceived to be an attempt to manipulate the markets to reposition Bitcoin Cash as the de facto crypto base currency.
By the 12th of November, the Bitcoin Cash price was back to trading in the 0.23BTC range, declining to 0.11BTC over the following 5 days.
At the time of publishing, Bitcoin Cash is at 0.084BTC (and $1376 USD), while Bitcoin has attained dizzying gains, trading at over $16000.