What is Bitcoin Cash? | A Beginner’s Guide
Bitcoin Cash (BCH) is a controversial modified copy of the original cryptocurrency, Bitcoin, created on August 1, 2017. The Bitcoin Cash “hard fork”, as it’s called, was created partly in response to scalability issues of the Bitcoin network. Transaction times and costs for Bitcoin skyrocketed throughout 2017 due to increased use and limitations of the technology, and Bitcoin Cash was meant to be a solution to these problems.
We’ll go over the implications of this and other aspects of Bitcoin Cash below, along with the following topics:
- What is Bitcoin Cash?
- What is the Technology Behind Bitcoin Cash?
- Mining Bitcoin Cash
- Bitcoin Cash vs. Bitcoin
- How to Buy and Store Bitcoin Cash
- Advantages of Bitcoin Cash
- Disadvantages of Bitcoin Cash
Bitcoin Cash is a type of digital currency called a cryptocurrency that relies on a cryptographically secured decentralized record of transactions called a blockchain, just as with Bitcoin and most other cryptocurrencies. As mentioned earlier, it originated from a hard fork (a split of the blockchain into two versions) that came from disagreements in the Bitcoin community. Interestingly, since Bitcoin’s blockchain was copied exactly, all holders of Bitcoin were given an equal amount of Bitcoin Cash as long as they were in possession of the private keys of their digital wallet that held their Bitcoins (i.e. they weren’t holding their coins on an exchange). This is the case when any cryptocurrency has a hard fork.
Controversy has surrounded Bitcoin Cash since its creation; the biggest of which is that some people in the crypto community claim that Bitcoin Cash more accurately reflects the original principles of Bitcoin than Bitcoin does, and should thus be considered the “real” Bitcoin. By and large, the community disagrees with this sentiment, which is reflected in Bitcoin’s vastly larger market cap.
Still, the debate between advocates of the two coins continues on Twitter, Bitcointalk.org and elsewhere. The original Bitcoin Twitter account was even taken over by Roger Ver, an original member of the Bitcoin community who now supports Bitcoin Cash. Ver regularly tweets about his convictions that Bitcoin Cash is the real Bitcoin, which is in turn regularly refuted by a stream of comments from the Bitcoin community.
Meanwhile, the Bitcoin community is openly hostile towards Bitcoin Cash, with many high-profile Twitter personalities regularly calling it at worst a money-making scam, and at best a useless fork that attempts to capitalize on the Bitcoin brand.
Others take a more balanced view, with the belief that there is room for both cryptocurrencies in the market. At present, there are potential advantages and disadvantages to both technologies, and as for whether or not one is better than the other — we’ll leave that up to you to decide after taking a look at some of the history and technological differences.
Bitcoin Cash is built on the aforementioned blockchain-based distributed ledger technology. As with other cryptocurrencies, its coins don’t actually exist, but are merely a record of transactions that dictate who has what amount of coins (government issued money is, of course, no more real, since it too has value only because groups of people agree that it does).
Computers that use the Bitcoin Cash software to store, add to, and validate this record of transactions in the network are called “nodes”, and without them, Bitcoin Cash would not exist.
As transactions happen in the network (as coins are sent between special “addresses” identified by a long string of numbers and letters), these nodes group the transactions together into what are called “blocks” that are then added to the blockchain. Bitcoin Cash adds a new block to the blockchain every 10 minutes, just like Bitcoin.
The blockchain is next to impossible to hack or modify in any way, since each block is encrypted and validated in a way that prevents the data from being changed unless a majority of nodes in the network are compromised. This is unlike traditional banking systems, where it is possible to rob just one person by hacking their lone account.
This process of grouping newly broadcast transactions into blocks and adding them to the blockchain is called “mining”, since it’s also the process by which new coins are created. These newly minted coins are a reward to “miners”, the nodes in the network that create valid “hashes” to secure each block in the blockchain. A hash is a long string of numbers that is generated through a cryptographic process based on the unique file size of each block, which serves as proof that a block contains valid, unmodified data before it’s added to the blockchain. This cryptographic process is called “Proof of Work” because each block contains the hash of the preceding block, and thus, each block is connected via a chain of blocks that together contain a large amount of work that is self-validating. Hashing is a one-way street in that there is no way to acquire the original data that a hash is generated from. They can only be used to validate that the data has not been modified.
Is Mining Bitcoin Cash Profitable?
There’s no getting around the fact that before making any substantial profits from mining Bitcoin Cash, you will need to make a substantial investment. It is therefore wise to create a budget based on the current difficulty of mining Bitcoin Cash, the electricity cost in your intended mining location, rental costs, the electricity needed to run your mining equipment (called mining rigs), and the combined hash rate of said mining equipment. The hash rate is the speed at which your rig can generate valid hashes. The higher the hash rate, the higher the chances of mining a block and being rewarded. Other considerations include the cost of electricity needed to cool the mining room or building, since mining rigs generate a lot of heat, and the current and projected selling price of Bitcoin Cash. Each valid hash that is generated is rewarded with 12.5 Bitcoin Cash.
How to Mine Bitcoin Cash
To start with, make sure you have a Bitcoin Cash wallet where your mining rewards will be placed (more on this below). You cannot have your mined coins sent to an exchange wallet (a cryptocurrency exchange is a website that sells cryptocurrencies).
Your next consideration is whether to join a group of miners, called a mining pool, to increase your odds of being rewarded if you have a relatively small number of rigs, or to go it alone. Going solo is not advised unless you have a relatively large number of rigs with a high likelihood of generating a valid hash (unlikely unless you have a lot of money to invest in a large mining operation).
Here are some of the necessary tools to get started mining Bitcoin Cash:
Mining hardware: Specialized computers are built for mining Bitcoin Cash called ASIC miners (the same hardware used to mine Bitcoins). Because the hardware is the same, miners often switch between mining Bitcoin Cash and Bitcoin, depending on which is more profitable to mine at a given time. You will need to calculate how many mining rigs you need to make a profit, source them, and then set them up in a properly cooled environment.
Mining software: CGminer and BFGminer are among the most popular programs used. A program called EasyMiner is one of the most user-friendly mining programs to get started.
Bitcoin Cash mining pools: The most successful and largest Bitcoin Cash mining pools are BTC.com, F2Pool, AntPool, ViaBTC, BitClub, BTC.top and Bitcoin.com.
Now that you have a better understanding of the technology behind Bitcoin Cash, let’s take a closer look at the differences between it and its predecessor, Bitcoin, and some of the potential pros and cons of these differences. The most noticeable difference really comes down to transaction times.
As of writing, Bitcoin can perform somewhere around 3 to 7 transactions per second due to its current block limit size of 1 MB (among other things). Compare this to the VISA and Mastercard networks, which can process thousands of transactions per second and you get the idea of how limited Bitcoin is.
Bitcoin transaction confirmation times (how long it takes to process a transaction) vary widely depending on fees used, but at the time of writing, lower Bitcoin usage has almost cleared the transaction backlog (called the “mempool”), so transactions may take as little as 10 minutes. However, for much of December and January, you’d have to wait hours or even days after sending a transaction for the network to catch up to a backlog of many thousands of transactions before yours would go through. For a transaction to be processed more quickly during high transaction times, you have to pay the miners a higher transaction fee as an incentive for your transaction to be prioritized.
The average transaction fee for Bitcoin at the time of writing is about $3 USD, which is significantly cheaper than prices were in December 2017 and January 2018, when they were about nine times higher. This is likely due to both lower usage of late and the fact that Coinbase, one of the most popular online market places for buying Bitcoin, has implemented an upgrade to Bitcoin transactions in their system called SegWit (more on this later).
Over time, two competing solutions to this scaling problem emerged. One was simply to increase the block size, which can be thought of as the “on-chain” approach. The “off-chain” approach seeks to shift much of the work away from the main blockchain onto “sidechains”: mini-blockchains that can process transactions more quickly before syncing with the main blockchain network. This is the approach of the Lightning Network, a proposed solution for handling a very high volume of off-chain transactions for Bitcoin, currently in its testing phase.
In short, on-chain supporters, including Bitcoin Cash supporters, believe their approach is closer to the original vision of Bitcoin, while off-chain supporters believe this view is limited and cannot scale effectively. Side-chains could also integrate smart contract functionality, they argue. With this backdrop in our minds, let’s take a look at the main ways Bitcoin Cash differs from Bitcoin:
Larger Block Size
Bitcoin Cash has a block size of 8 MB compared to Bitcoin’s 1 MB. This allows it to have faster transaction times and lower fees, since competition for transaction processing power is reduced. Bitcoin Cash has an average transaction time of 10 minutes or less (since a transaction queue typically doesn’t form), and an average fee of only $0.22. If Bitcoin Cash had to handle the same number of transactions that Bitcoin does right now, it would still be quite a bit faster given its larger block sizes.
Arguments Against Larger Block Sizes
Transaction fees will decrease, creating disincentives for miners: The argument is that a decline in the transaction fees will act as a disincentive to the miners, who will opt to find greener mining pastures. When miner numbers fall, network hashing power decreases. Fewer miners would also make the network easier to attack and control.
Centralization of the system may escalate: Some people fear that the increase in network size will also raise necessary processing power for mining. This would give large-scale mining pools more power at the expense of small mining pools.
Increased blockchain size: With larger block sizes comes a larger blockchain. Bitcoin’s 1 MB blocks have already created a blockchain that is 157 GB — more than many people can even fit on their hard drives. Bitcoin Cash’s 8 MB blocks will massively compound the blockchain size problem.
Increased security costs: Some argue that as block sizes increase, high fees will be required to pay for enough hashing to secure the network against a 51% attacker.
Arguments for Larger Block Sizes
More usable: With larger block sizes and faster transactions, it is thought that more people could use Bitcoin Cash as an actual currency, and there would be a much higher chance of mainstream adoption.
More users will make up for lower fees: With the rise in users, there would of course be a rise in transaction numbers. This increased volume could mean that miners make more money overall, even though fees per transaction may not be as high.
Assurance contracts can pay for security: In response to arguments about increased security costs, proponents of larger block sizes argue that an “assurance contract” can be used to allow participants in the network to contribute funds to a contract that would pay for enough hashing power to meet security demands.
These are just a few of the main arguments for and against larger block sizes, and the debate is still very much alive. Let’s take a look at some of the other differences between the two currencies now.
No SegWit and No Lightning Network
Another difference is that Bitcoin Cash did not integrate SegWit, a change in the transaction format of Bitcoin designed to solve malleability issues and to mitigate the problem of Bitcoin’s limited block size. SegWit splits each transaction into two segments, removing the unlocking signature (“witness” data) and appending it separately to the end of the transaction record. This creates smaller transaction data record sizes, meaning more transactions fit into each block, and thus, transactions are confirmed by the network and added to the blockchain more quickly.
SegWit also paves the way for off-chain transactions, which means that Bitcoin Cash will not be able to use the Lightning Network, an in-development technology for Bitcoin that uses smart contracts (digital contracts) to make instant payments off-chain.
SegWit should not be confused with the yet to be implemented SegWit2x (SegWit2Mb) Bitcoin development proposal, which sought to first activate SegWit and then perform a 2 MB hard fork of Bitcoin within six months.
No “Replace by Fee” Feature
In order to address the underlying transaction backlog challenge, a replace-by-fee system was introduced to Bitcoin that does not exist in Bitcoin Cash. This feature allows Bitcoin users to essentially re-send a transaction to overwrite a previous transaction if it has a larger fee and has not yet been confirmed by the network. This can be used to entice miners to process a slow-going transaction more quickly.
While miners may find the replace-by-fee system profitable, it does nothing to bring down the cost for actual users of the currency and potentially makes sending transactions more complicated. These high fees are what inspired the original suggestion to increase Bitcoin’s block size from 1 to 2 MB, and what ultimately led to Bitcoin Cash forking and adopting 8 MB blocks.
Difficulty Adjustment Algorithm (DAA)
Bitcoin Cash offers a way to adjust the proof-of-work hash difficulty faster than the original Bitcoin difficulty-adjustment interval of every 2,016 blocks. When more miners are on the network, difficulty goes up, and when there are less, the difficulty automatically goes down.
Bitcoin Cash or Bitcoin?
Although Bitcoin Cash may currently have an edge over Bitcoin in terms of transaction price and speed, it’s possible that Bitcoin will surpass Bitcoin Cash if/when the Lightning Network is implemented. As mentioned, Bitcoin transaction prices already seem to be going down due to ongoing SegWit implementation. In short, although there are arguments that one or the other technology is superior or more secure, nothing is certain, and for now at least, there is room in the cryptocurrency world for both.
Moving on from the either/or debate, if you do decide to invest in Bitcoin Cash, here’s how you do it:
There are now over 130 cryptocurrency exchanges where you can buy Bitcoin Cash (depending on your country), but only a few trusted and secure ones where you can buy with fiat (e.g. USD). These include Coinbase (a very simple purchasing platform), GDAX (Coinbase-owned fully functional exchange), and Kraken. Note that using a bank transfer is usually a cheaper way to get your money into exchanges compared to using a credit card or other methods, though it does take longer.
The first step is to sign up for one or more of these exchanges and to become a verified user by submitting the required KYC (know your customer) documentation. Coinbase’s system is largely automated, whereas other exchanges can take longer to verify your account. You can learn more about each exchange’s purchasing specifics on our exchange comparison page.
Once you’ve purchased from an exchange, we recommend transferring your BCH to a secure off-exchange wallet. A wallet is simply the program that accesses your private keys, which are what give you access to use a specific public address. We recommend storing all cryptocurrencies in either software, hardware, or cold storage (paper) wallets. Our general recommendation is to invest in a hardware wallet as they are both convenient and secure. Trezor and Ledger are both good options. You can learn more about the different types of wallets in our wallet comparison page.
- Faster than Bitcoin: As mentioned, Bitcoin Cash is presently faster than Bitcoin for sending transactions due to its larger block sizes.
- Safer than Fiat: Bitcoin Cash and other cryptocurrencies are extremely secure when stored and used properly. Since they are not connected directly to one’s identity, it is harder to hack into one’s “account” without direct access to a private key or password.
- International and Local Transfers are Fast and Cheap: Compared to international wire transfers, or even local electronic money transfers, sending Bitcoin Cash is very fast and cheap — costing less than a quarter per transaction and transferring in minutes. Bitcoin Cash is also widely available on most exchanges, making it possible to easily, quickly, and cheaply convert to and from fiat.
- Regulation Challenges: In recent months countries around the world have begun to regulate cryptocurrencies, and the legal ramifications of this are still unclear. Some countries such as China are outright hostile towards cryptocurrency, while the United States seems to be taking a more balanced and optimistic approach.
- Superiority of other Cryptocurrencies: Being mostly based on the code of the first ever cryptocurrency, Bitcoin Cash may seem like outdated tech compared to up and coming cryptocurrencies which offer capabilities such as smart contracts and decentralized applications (dapps).
- Lack of Scaling: Despite the fact that Bitcoin Cash was originally created to help with scalability, other cryptocurrencies such as Steem and Steller still offer significantly faster transaction speeds. Steller, for one, can perform 1,000 transactions per second, while Bitcoin Cash can process only about 60 per second. Newer cryptocurrency technologies are also hitting the scene that don’t use blockchains at all, but instead use something called directed acyclic graph (DAG). DAG chains do away with mining altogether, and instead use peer-to-peer transaction confirmations, wherein each device on the network that makes a transaction also confirms other transactions. Therefore DAG chains could theoretically scale infinitely while also being more decentralized than blockchains. Examples of cryptocurrencies using DAG include Byteball, Iota and Nano.
- Low Acceptance Levels: Cryptocurrencies in general are not widely accepted as payment methods, and therefore they are not very useful as currency. However, payment card services that automatically convert cryptocurrency to local fiat are gaining in popularity, making it possible to buy goods and services wherever a credit card is accepted. Although this kind of defeats the purpose of using cryptocurrency to begin with, it’s a step in the right direction.
- Volatility of Price: Besides “stable coins” that are designed to maintain their value relative to fiat via various mechanisms, other cryptocurrencies have very volatile prices. This makes it hard to use Bitcoin Cash and other cryptocurrencies as a method of storing value, since they are still connected to the fiat-based economy and can quickly become worth much less than one paid for them.
Bitcoin Cash is still a relatively new cryptocurrency that may offer some short or midterm benefits over Bitcoin in terms of transaction speeds and costs. But whether it will evolve quickly enough to remain on the cutting edge of the cryptocurrency market remains to be seen. There is no clear answer as to whether it’s superior to even Bitcoin, let alone the many other cryptocurrencies that are currently challenging market leaders for a piece of the action. Are on-chain solutions the the best option for scaling issues faced by Bitcoin and its ilk? Or are off-chain solutions that can incorporate new technologies such as smart contracts the way to go? Investors and crypto enthusiasts alike will have to wait for the markets to decide.
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