• Team Sygnum

Why Bitcoin Cash is different from Bitcoin

The origins of Bitcoin Cash

Bitcoin Cash (BCH) is a hard fork of Bitcoin that was created in August 2017. The catalyst for this was the scalability issues that were revealed as Bitcoin was gaining momentum. The Bitcoin network has a capacity of about seven transactions per second, and during periods of high transaction volume the network can become overloaded with an increase in transaction fees. Originally designed as a peer-to-peer (P2P) electronic cash system, the low throughput of the network presented a difficulty for Bitcoin.

The key to the solution was to increase the number of transactions that could be processed on each block, and the community differed in their opinion of how to accomplish this. The majority voted to remove signature data from each block and attach it in an extended block, thereby increasing the transaction density of each block. However, a minority disagreed with this approach, and preferred to increase the block size instead. Thus, Bitcoin Cash increased its block size to 8MB compared with Bitcoin’s 1MB.

Different ideals, different use cases

The differences in perspective largely stem from loyalty to vision versus ideals. Most DLT networks are faced with the ‘scalability trilemma’, which is the trade-off required between the three key DLT properties of decentralization, scalability, and security. A certain level of decentralization and/ or security is sacrificed (in different ways) in both approaches to scale Bitcoin, but the original Bitcoin network implemented the change through a soft fork, which was not mandatory for all users to adopt. As a result, some believe that Bitcoin has become less effective as an electronic cash system, one of the original visions for the network.

The technical hard fork which resulted in the creation of Bitcoin Cash has therefore also led to a fork in use cases, which now clearly differentiates the two protocols. Bitcoin has been gaining ground as a store of value and potential hedge against inflation, giving rise to the moniker of ‘Digital Gold’, but becoming less of a transacting currency. Bitcoin Cash remains faithful to the original use case of a trusted, permissionless P2P electronic cash system, and with faster processing times, lower fees, and reliable confirmations, it is well suited for that purpose. In addition, features such as smart contract capabilities are being implemented to improve the network’s functionality.

Bitcoin Cash, a potential diversifier for digital asset portfolios

During the fork those who held Bitcoin were given a corresponding amount of Bitcoin Cash. However, Bitcoin Cash has its own merits as an independent investment. It is currently the sixth largest protocol token by market capitalisation at USD 4.1 billion, with USD 1.1 billion being traded daily[1]. It is also one of the most widely adopted protocol tokens by merchants globally and is ideal for micropayments and remittances. In countries with limited payment infrastructure, Bitcoin Cash offers an alternative to credit cards.

With its addition to Sygnum’s platform, clients can now use their traditional fiat currency deposits, including CHF, EUR, SGD and USD, to buy, hold, and trade Bitcoin Cash. They can also transfer Bitcoin Cash into their Sygnum custody account or increase fiat liquidity with a lombard loan against Bitcoin Cash. The top 3 protocol tokens (Bitcoin, Ethereum and XRP) mostly form the core of any digital asset portfolio, but investors could also consider adding exposure to selected smaller, niche protocols such as Bitcoin Cash to diversify their holdings.

[1] CoinMarketCap, as of 6 October 2020