What is bitcoin cash? Explained for beginners

Discover Bitcoin Cash simplified for beginners. Learn its basics and benefits with easy-to-understand explanations.

Mar 16, 2024 - 11:57
Mar 17, 2024 - 12:33
What is bitcoin cash? Explained for beginners
Bitcoin cash

Bitcoin (BTC) is still the most widely used cryptocurrency, yet it has shortcomings. Notably, it has a low transaction throughput, hampering its usefulness for payments. Bitcoin Cash (BCH) emerged in 2017 to tackle this problem, providing a more cost-effective and quicker method for transaction processing. Since then, Bitcoin Cash has become one of the top 15 cryptocurrencies in circulation.

What exactly is Bitcoin Cash?

Bitcoin Cash, a cryptocurrency operating on the same blockchain as Bitcoin, was introduced on August 1, 2017, through a process known as a "hard fork" of the Bitcoin blockchain.

The proposal to modify Bitcoin's rules for accommodating a larger volume of transactions was rejected by most participants in the Bitcoin blockchain. This rejection led to the hard fork, resulting in the creation of two separate blockchain paths stemming from the same origin: Bitcoin and Bitcoin Cash.

Henrik Gebbing, co-founder and co-CEO of Finoa, a digital asset custodian, likened the event to a religious fracture, where miners had to choose which blockchain to support, exchanges had to decide whether to facilitate trading of the newly forked currency, and market participants had to determine their interest in the new currency and its fair valuation.

How Bitcoin Cash operates?

Bitcoin Cash employs a larger block size compared to Bitcoin. Blocks, which are collections of transactions added to the blockchain simultaneously, are processed differently.

While Bitcoin restricts blocks to 1 megabyte (MB), accommodating approximately seven transactions per second, Bitcoin Cash initially increased the block size to 8 MB, and later to 32 MB. This enhancement allows Bitcoin Cash to handle over 100 transactions per second.

Aside from block size and transaction speed, Bitcoin Cash operates similarly to Bitcoin. It functions as an open-source, decentralized digital ledger that relies on proof of work.

Miners validate and append transactions to the blockchain by employing cryptography to solve equations, earning Bitcoin Cash tokens as compensation for their efforts. These tokens can then be exchanged with others. Similar to Bitcoin, Bitcoin Cash will only issue a total of 21 million coins.

Benefits of Bitcoin Cash

  • Decentralized currency: Bitcoin Cash serves as decentralized money, offering an alternative to individuals concerned about excessive centralized control within the financial system by banks and central governments. It operates as a currency-like system free from control by any single entity.
  • Swifter, cost-effective transactions: With transaction fees amounting to less than one penny and the potential to process over 100 transactions per second, Bitcoin Cash presents itself as a feasible payment platform. Nonetheless, it still falls short compared to the Visa network, which processes 2,000 transactions per second.
  • Accessibility: Among the myriad of cryptocurrencies available, Bitcoin Cash stands out as one of the more widely recognized options and can be acquired through most major exchanges, unlike its lesser-known counterparts. Moreover, with a BCH/USD price hovering around $370 per coin, it presents a more affordable alternative to purchasing a single Bitcoin.
  • Enhanced scalability: Bitcoin Cash's utilization of larger blocks enables a more scalable blockchain, leading to reduced fees for users and consequently enhancing its transactional capabilities.

Drawbacks of Bitcoin Cash

  • Branding issues: Following the fork, there ensued a struggle to determine which coin would attain greater popularity. Bitcoin emerged as the clear victor, posing challenges for Bitcoin Cash in setting itself apart, especially given their closely resembling names.
  • Limited adoption rate: According to Russell Star, head of capital markets at DeFi Technologies, adoption plays a crucial role in the success of emerging technologies. With fewer users compared to Bitcoin, Bitcoin Cash may face difficulties in gaining traction as a recognized investment or medium of exchange.
  • Environmental concerns: Bitcoin Cash still operates on a blockchain proof-of-work system, necessitating miners to utilize computing power for solving cryptographic equations to process transactions. Despite using less electricity than Bitcoin, this system still exacts a significant environmental toll.
  • Decreased security: Bitcoin Cash processes transactions swiftly and at a lower expense than Bitcoin due to requiring less mining power for verifying new blocks. However, this results in a less secure system compared to Bitcoin.

Purchasing Bitcoin Cash

Acquiring Bitcoin Cash is easily accessible through major cryptocurrency exchanges such as Coinbase and Kraken. After creating an account and depositing funds, users can proceed to purchase Bitcoin Cash. Additionally, platforms like PayPal also facilitate the purchase of Bitcoin Cash.

Once acquired, Bitcoin Cash can be held as an investment in a cryptocurrency wallet, exchanged for other digital assets, or utilized for transactions.

It's important to acknowledge that Bitcoin Cash has encountered challenges related to branding. For instance, in early 2021, the cryptocurrency exchange OKCoin removed Bitcoin Cash from its listings due to concerns that offering both Bitcoin Cash and Bitcoin on the same platform might cause confusion among investors.

Comparison Between Bitcoin and Bitcoin Cash?

As highlighted, the primary distinction between Bitcoin and Bitcoin Cash lies in their block sizes. This adjustment allows Bitcoin Cash to facilitate quicker and more cost-effective transactions. While the average Bitcoin transaction costs around $59, transactions with Bitcoin Cash are priced at less than a penny.

However, the potential drawback of expediting transactions is the potential compromise in security compared to Bitcoin. With fewer miners required to process and validate transactions, there's a possibility of increased vulnerability in the security of Bitcoin Cash.

According to Daniel R. Hill, president of Hill Wealth Strategies in Virginia, Bitcoin Cash might be more suitable for smaller purchases like a cup of coffee, whereas larger transactions such as buying a car or house might necessitate the use of a slower but more secure cryptocurrency like Bitcoin.

Additionally, there's a disparity in market size between the two. As of the latest data, Bitcoin Cash boasts a total market capitalization of approximately $7.1 billion, significantly lower than Bitcoin's market cap of $881 billion.

Is Bitcoin Cash or Bitcoin the Better Investment?

Determining whether to invest in Bitcoin Cash or Bitcoin hinges on your investment goals and intended use.

According to Gebbing, the historical trend of Bitcoin Cash's price, measured against Bitcoin, has been declining steadily since its inception. Consequently, Bitcoin may represent a safer investment choice.

However, Gebbing emphasizes that for transactional purposes, Bitcoin Cash is widely accepted in similar venues as Bitcoin and boasts near-zero fees due to its larger block size and relatively lower usage.

Star advises caution to potential investors, highlighting the inherent volatility of the cryptocurrency asset class. He suggests considering one's risk tolerance before investing in either Bitcoin or Bitcoin Cash. Moreover, Star recommends exploring a broader range of cryptocurrencies beyond the most popular options like Bitcoin and Ethereum, especially for those interested in learning about emerging technologies.

While Bitcoin Cash holds promise, it has yet to fulfill its ambitious goal of replacing the original Bitcoin. However, should it gain traction as a more widely accepted medium of exchange, it could pose a formidable challenge to its older counterpart.

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