Just like a business that is first to market with an innovative new product or service, bitcoin has enjoyed its first-mover status in the cryptocurrency arena, becoming a household name amongst its peers. However, its acclaim is coming under pressure as newer alternatives make their way into the spotlight. Key among its competition for the hearts and minds of cryptocurrency aficionados is its close cousin bitcoin cash, an offshoot of the initial chain that could pose a threat to bitcoin’s hegemony.
Even though the initial framework for bitcoin was very successful, it was not without its limitations and drawbacks. One of the main concerns raised by participants, and specifically miners, was one of the core tenets that separated currencies from investable assets: fungibility. While bitcoin has been hailed as a revolutionary development, its status as a currency was challenged by its actual form.
The differences in opinion from within the community led to the rise of bitcoin cash, which was first introduced following the near unanimous vote of bitcoin miners in favor of the Bitcoin Improvement Proposal (BIP) 91. The hard fork that ensued on August 1st marked the inception of bitcoin cash, a development on a separate chain its creators argued will increase the transactability of the initial bitcoin concept.
While bitcoin has been the crypto community’s predominant favorite because of its status and market capitalization, one look at the bitcoin cash chart shows that the new currency is on the upswing as the battle for this digital throne heats up.
Bitcoin Cash’s Potential
Bitcoin cash may be a newer entrant to the cryptocurrency field, but it has already shown potential for functionality. Whether it is the larger block sizes or Emergency Difficulty Adjustment tool, bitcoin cash proponents claim it will fix many of bitcoin’s perceived issues. The reality, however, remains unclear.
Immediate Block Size Increase
One of the main reasons behind SegWit was the differing opinions on how to make bitcoin more accessible and applicable. Many participants were concerned that bitcoin would increasingly be viewed and approached as an asset, leading to hoarding, instead of used as a currency. The bitcoin community supported the principle of smaller blocks adhering to a 1MB limit, believing that larger blocks create bigger blockchains that require more bandwidth to run, ultimately raising the costs for individual nodes. Accordingly, enlarging the blocks was viewed as undermining the idea of decentralization that underpins bitcoin. As a result, this group proposed the use of second layer technologies like the Lightning Network to help bitcoin broaden its cryptocurrency appeal.
By comparison, the bitcoin cash community decided that enlarging the blocks to 8MB would support greater transaction scalability directly on the blockchain itself without needing a mediator. The idea behind the larger blocks is increasing transaction speeds and lowering costs. Proponents posit that larger blocks will also support the type of scaling needed to make bitcoin cash a true payment solution as opposed to a speculative tool.
While it is true that bitcoin has recently experienced issues with larger numbers of transactions and delayed processing times, the larger block sizes have worried some industry observers, as they seem to go against some of the core principles of bitcoin. For one, larger block sizes mean that the blockchain will grow significantly faster, making hosting a node a real issue for the majority of participants. With bitcoin’s chain size already around 100GB, most normal users have some difficulty setting up nodes for mining. With an 8MB block size, this problem would be compounded exponentially. Only major nodes would be able to handle such a blockchain size, leading to centralization of processing and mining, and losing one of bitcoin’s most attractive features. Centralization also reduces transparency on the blockchain, and could open bitcoin cash to security vulnerabilities in the future as the number of nodes falls.
Transaction Fees and Processing
One of the most touted benefits of cryptocurrency is its ability to reduce transaction fees though this is not necessarily always the case. Bitcoin cash theoretically offers a significant improvement over its more established peer thanks to its bigger blocks. This community’s use of scaling means all transactions happen within the blockchain, and that block space should not be considered a scarce commodity. By comparison, bitcoin community members thought that only important transactions should take place on the blockchain and block size should be kept small, potentially resulting in higher costs for participants. Bitcoin cash’s approach makes its business model more beneficial and user friendly. Additionally, due to its coding qualities, bitcoin cash is more successful when it comes to reducing transaction processing speed, helping further it improve its application as a currency.
Emergency Difficulty Adjustment Tool—Pro or Con?
Another major advantage over the traditional bitcoin is bitcoin cash’s Emergency Difficulty Adjustment (EDA), a tool which checks the mining times of the last 6 blocks after each block. If the process took longer than 12 hours, EDA is designed to decrease the mining difficulty by 20%. Bitcoin’s system checks and adjusts its difficulty level only once after every 2016 blocks. In theory, EDA expedites transaction processing and helps with scaling, allowing the chain to automatically adjust to growing transaction numbers, or account for lulls by retaining miners even during low periods.
While this addition to bitcoin cash’s infrastructure was originally intended to encourage miners to migrate onto BCH’s blockchain, there are signs that it could backfire and lead to dishonesty among miners. Because BCH is still in its relative infancy and there are still significantly fewer miners compared to the BTC chain, EDA has been overly active recently. Currently, there have been large fluctuations in the amount of transactions processed daily. There are large periods with few or no blocks added, followed by bursts of transaction processing, leading some to claim duplicity. This potential gaming of EDA may distort BCH’s price, and as mining becomes more centralized, create less transparency on the chain, ultimately hurting participants who aren’t part of the mining operation.
Bitcoin Cash’s Recent Gains
Though bitcoin cash did not step into the market until August, its value has appreciated rapidly since its introduction. Analysts have pinned the latest leg of the rally on bitcoin developers who decided to forgo the SegWit2x update. The latter software was designed with the intention to improve bitcoin’s transaction processing speed. Being the only asset capable of benefiting from the project’s cancellation, bitcoin cash managed to capitalize on the development, with analysts crediting the event as the highlight for the new digital coin’s 3-month-old career. Furthermore, it illustrated an interesting inverse relationship, whereby decreases in bitcoin’s valuation saw a rise in bitcoin cash’s capitalization.
Bitcoin may still be maintaining its place on the cryptocurrency throne, but the days of its hegemony might be numbered. While bitcoin cash still has major issues to address before becoming a serious contender for the crypto crown, it has shown potential for big things. If it can deliver on its promise of speeding up transactions and reducing costs while remaining scalable, it can become a true payment processing solution. However, it must first address some of the lingering concerns about its growing trend towards centralization and prove it has staying power, both amongst miners and participants. Slowly but surely, bitcoin cash could emerge as bitcoin’s number one threat, possible spurring a new race between the developers, participants, and cryptocurrency’s backers to capitalize on the growing pace of adoption.
Mati Greenspan, The Senior Market Analyst at the social investment network eToro adds: “The innovation of bitcoin cash is proving to be a very useful experiment indeed. This controversy has provided us a unique opportunity to see the economic and ethical incentives of all the different players in real time. From the miners, to the exchanges, to the users each has different motives to adopt or not adopt a new version of the original bitcoin. The longer this plays out, the more data we can collect and analyze in order to improve future iterations as the internet community strives to find consensus on the future of money. For now, short-term traders are enjoying the extreme volatility in BCH while long-term investors prefer to add this new option as a hedge inside a well-balanced crypto portfolio.”