What Is Bitcoin Cash?

October 14, 2019 13:30 UTC
Reading time: 11 minutes

This article will provide traders with everything they need to know about Bitcoin Cash. You will learn about the differences between Bitcoin Cash and Bitcoin, the blockchain, the key differences between cryptos and fiat currencies, reasons why you should consider trading CFDs on Bitcoin Cash, and much more!

Cryptocurrencies are quickly gaining recognition for having the potential to be the most significant technological development since the internet revolution. As recently as three or fours years ago, Bitcoin and the other crypto and alt currencies popping up were widely considered, at least by the economic and political establishment, to be a passing fad.

Fast forward to 2019 , and all but the most blinkered now accept that cryptocurrencies, and the blockchain technology they are built upon, will almost certainly, at the risk of employing a buzz word, 'disrupt' the financial and political establishment in a way that arguably has no parallel in modern history. The evidence is mounting that this will be to an extent that will have a fundamental impact on our daily lives, and the way the world works in the future.

Bitcoin vs. Bitcoin Cash

In order to best explain what Bitcoin Cash is, the logical starting point is a brief history and explanation of cryptocurrencies more broadly, including the original Bitcoin.

What Is the Blockchain?

We won't delve too deeply into the technical details of blockchain here because, firstly, only those with a specific technical background really understand the intricacies and, secondly, it's not really relevant to our context of Bitcoin Cash as a tradable instrument. However, an overview is necessary to illustrate why blockchain-based cryptocurrencies are successfully gaining traction, and why they are expected to become an established alternative/rival to fiat currencies.

As previously mentioned, blockchain is a peer-to-peer data storage and transfer technology. However, it is much more specific in that the 'data' is a huge digital ledger that is stored and updated on multiple computers simultaneously. A traditional ledger is a physical book (more recently an electronic format) that contains a complete history of all financial transactions in and out of a company, though it can theoretically be a history of any kind of transaction.

A good definition of blockchain is that of Sloan MIT's Christian Catalini, who stated that at a high level it "allows a network of computers to agree at regular intervals on the true state of a distributed ledger". Each storage location is called a 'node', and each node doesn't have to store the whole ledger, just parts of it. Key nodes, however, hold the entire ledger.

An additional, crucial, feature of blockchain is that the ledgers are secured using cryptology. How this works is complex, but the key point is that transactions are quickly confirmed and verified by nodes through the use of cryptology – mathematic based code. Once this has been completed, the transaction is locked into the ledger, and the update is distributed to all nodes storing the same part of the full ledger.

What this all means is that unlike a traditional ledger system, where one or a few authorised individuals can make and record transactions, a blockchain ledger means that anyone can make a transaction, and the system verifies it. There is no reliance on any central authority.

Crypto vs. Fiat Currencies

The fiat monetary system - that is the current global monetary system - started nominally in 1931, when the UK abolished the gold standard, followed by the USA in 1933. The last remnants of the gold standard were dismantled by President Nixon in 1971. With the gold standard, a country's currency had a value directly linked to gold and banknotes had to be backed by the equivalent in actual gold held by the central bank. The new fiat system meant central banks could print as much currency as they wished.

This, many argue, allows governments, especially those of countries whose currencies are internationally dominant, the dangerous ability to manipulate the global economy by being able to increase and decrease the money supply at will. Cryptocurrencies have a finite number of units which is established at the point of their launch, with their release into the system controlled by a process known as 'mining'.

The pace of mining is controlled through a process of computers that are required to solve complex mathematical formulae, which increase in complexity as the computer power harnessed to solve these formulae is increased. Solving these formulae results in the release of new 'blocks' of Bitcoin.

In theory, anyone can 'mine' cryptocurrencies if they know how to and have the hardware resource to support it. The finite nature of the supply prevents the devaluation of currency units, which occurs when central banks print more money . As the demand for the finite number of currency units increases, so too does their value, and they are simply broken down into smaller subunits.

Secondly, the fiat currency system gives financial institutions a level of power that proponents of cryptocurrencies also consider dangerous. In a fiat currency system, financial institutions have the role of the small number of individuals authorised to enter transactions into a traditional ledger. When fiat money is transferred electronically between two entities, an authorised third party has to confirm that the transaction has taken place, then they must subtract the value from the ownership record of the first entity, and then add it to the second.

Without these third parties, digital copies of currency could potentially be infinitely created. A system reliant on third party verification, with a limited number of authorised third parties, is, (perhaps to supporters of cryptocurrencies), both inefficient and overly exposed to the potential for corruption. Blockchain technology removes the need for third-party verification, and creates a supposedly incorruptible or alterable objective record.

What Is Bitcoin?

Bitcoin is a cryptocurrency initially released in 2009 by 'Satoshi Nakamoto', a pseudonym for one or a group of individuals. Their motivation was the dissatisfaction with the incumbent fiat currency system and its role in global economics , as well as the perceived reinforcement of geopolitical power structures.

While there are a number of differences between cryptocurrencies, the main difference between Bitcoin and other cryptocurrencies such as Litecoin and Ether, is that it has, so far, gained more traction. Bitcoin was the first real cryptocurrency to experience widespread adoption, and its traction has accelerated as businesses have started to accept payments in Bitcoin.

What Is Bitcoin Cash?

Bitcoin Cash has existed since 1 August 2017, making it a relatively new cryptocurrency still. While new cryptocurrencies are popping up all the time, some are significantly distinctive from Bitcoin, and some are more or less copycats, the crucial difference with Bitcoin Cash is that its origins come from the original Bitcoin.

On 1 August 2017, the Bitcoin blockchain 'Hard Forked' into two new blockchains – Bitcoin and Bitcoin Cash. For those unfamiliar with the term, when the blockchain 'forked' it meant that up until the fork, Bitcoin and Bitcoin Cash had exactly the same ledger history. From the fork onwards, the ledgers become distinct, meaning two distinct cryptocurrencies came into existence.

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Why Did the Bitcoin Hard Fork Happen?

Bitcoin's blockchain technology relies on data 'blocks'. As Bitcoin adoption increases, and more transactions are made, these Bitcoin blocks fill up quicker. Transaction speeds were slowing down when they needed new 'blocks' to confirm and verify them, which couldn't be created quickly enough by miners. Again, without going into the technical details, this became a scalability issue.

Bitcoin's block size had to be increased, which necessitated a software update and the 'fork'. There are some technical differences between Bitcoin and Bitcoin Cash, such as Bitcoin Cash having a smaller block size. From a trader's point of view, the difference is that Bitcoin and Bitcoin Cash are now two separate cryptocurrencies, and as derivatives are now two separate financial instruments – BTC (Bitcoin) and BCH (Bitcoin Cash).

Why Trade CFDs on Bitcoin Cash?

The main attraction of cryptocurrencies as tradable derivatives is their relative volatility in comparison to the more 'mature' fiat currencies. They are like emerging market currencies that are moving with intense speed, with demand rollercoasting on the sentiment around their future adoption trajectories. As a newer cryptocurrency, Bitcoin Cash's volatility could be expected to be more pronounced in comparison to Bitcoin and other more widely adopted cryptocurrencies such as Ether, LiteCoin, and Ripple.

This potential for volatility is attractive for traders with a higher appetite for risk. Bitcoin Cash CFD trading, and trading other alt-coins, may provide opportunities to make a return on your investment, however, it must always be remembered that high volatility also leads to a higher risk of loss. Take advantage of Admiral Markets' volatility protection settings and try out your trades on a free demo trading account, with virtual funds, before trading Bitcoin Cash CFDs for real.

Another feature of cryptocurrencies that appeals to traders is their low correlation to traditional financial markets and other asset classes, not only fiat currencies. Because cryptocurrencies are not part of the fiat system, their value is not influenced by trends in fiat currencies. And because they are not tied to any government or central bank, they are not influenced by geopolitical factors in the same way as every other asset, and the financial instruments based on them.

What Influences the Price of Bitcoin Cash?

Source: CryptoCompare - BCH/USD Chart - Data Range: July 31, 2017 - September 18, 2017

If the Bitcoin Cash value – as well as other cryptocurrencies – is not influenced by the monetary policy of central banks and geopolitical events like other assets, then what are the main influencers? Trading Bitcoin Cash requires traders to have an understanding of what influences the price. It is currently, despite being a newer cryptocurrency, the second most valuable in the world (by market capitalisation), behind only Bitcoin itself. So, what are the main drivers?

  • Exchanges accepting BHC – when Bitcoin Cash started, exchanges and wallets were reluctant to take up the new cryptocurrency. More and more are now accepting it, driving up its value as it is becomes easier to store and transfer. This is a major factor in how successful Bitcoin Cash will be in gaining adoption traction in the future. Traders should keep an eye on new exchanges and wallet providers, especially the bigger ones, when they are announcing that they will start accepting Bitcoin Cash.
  • The Pace of Mining – Bitcoin Cash is very attractive for miners as its smaller block size, in comparison to the original Bitcoin, means that it is currently easier to mine, and therefore more lucrative for them. The smaller block size also means that more transactions and miners earn money on transactions involving their mined blocks, thereby further increasing its popularity.

What's Next For Bitcoin Cash in 2020?

The simple answer is that no one really knows. How successful Bitcoin Cash will be in terms of adoption, and what repercussions it will have on the original Bitcoin is impossible to tell at this stage. The only thing that can be stated for certain at this stage is that the 'Hard Fork' from BTC has kept the records of existing transactions intact, and that what is happening is a very interesting experiment that will tell us a lot about the future of cryptocurrencies, not only Bitcoin and Bitcoin Cash.

The smaller block size of Bitcoin Cash is enticing for miners, which will have an impact on the future Bitcoin Cash price, as well as, potentially other cryptocurrencies. If the Bitcoin/Bitcoin Cash 'Hard Fork' has really addressed the scalability issue of the blockchain technology, time will also tell.

It's not impossible that BCH might eventually overtake BTC and become the primary Bitcoin chain. However, It's all speculation at this point. What is for sure is that this situation will throw up some potentially interesting opportunities for high risk traders with an appetite for cryptocurrencies over the coming weeks, months, and years.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

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