Note: This article assumes a basic understanding of virtual currencies. For starters, I’d recommend reading Satoshi Nakamoto’s Bitcoin paper before you read this article.
On Nov. 11, the price of Bitcoin Cash (BTH) skyrocketed, at one point surpassing Ethereum (ETH) as the second most valuable virtual currency in market value.
So what is Bitcoin Cash, and why should you care?
Bitcoin Cash was created on August 1, 2017 after a disagreement within the Bitcoin community about how the virtual currency should handle more and more transactions.
When Bitcoin holders transact, data are included in a block that is confirmed cryptographically by miners. Every transaction takes up space.
When Bitcoin was first created, there was no block size limit, meaning that transaction data were unbounded. At the time, users were required to download the entire Bitcoin blockchain every time they transacted, meaning that it was possible for computer hackers to slow down the network by creating a large number of “dust transactions.”
Consequently, a 1MB block size limit was introduced by the Bitcoin community to limit these attacks on the network.
But as Bitcoin rose in price, many argued that a 1MB block limit prevented the currency from reaching mass adoption. Today, Bitcoin only has the capacity to handle between 4–7 transactions per second, slower than other payment processors such as Visa and PayPal.
On the other hand, some in the Bitcoin community argued that if the block size limit was increased, there would be more centralization of bitcoin mining because the hardware requirements to download transaction code would become more costly.
The Bitcoin community moved forward with creating a “fork” (similar to a “spin-off”) to increase the block size from 1MB to 8MB and remove Segregated Witness (aka SegWit), a Bitcoin code adjustment that was designed to free up space by removing code during transactions. Some people holding Bitcoin (BTC) on August 1 also received a unit of Bitcoin Cash (BCH).
When the “spin-off” occurred, there was some initial fluctuation in prices, and past August 17, Bitcoin Cash generally began to lose value relative to Bitcoin. The price for Bitcoin Cash hovered between 5–17% of Bitcoin’s price, as the price of Bitcoin increased past $7800 USD.
Then, beginning on Nov. 9, a seismic shift occurred. The price for Bitcoin Cash rose to 26% of Bitcoin’s price, at one point reaching past $1950 USD — from the $620 it was at on Nov. 9.
The reason for this shift is that on Nov. 8, participants of a Bitcoin code change called SegWit2x announced that they had “suspended” it. This code change would have increased the block size to 2MB, and it did not receive enough support from the Bitcoin community.
Money flowed into Bitcoin Cash, and the price of Bitcoin began to fall. The Korean exchange was particularly heavy with volume.
Today, the future of Bitcoin Cash and Bitcoin continues to be uncertain with significant variation in prices.
But one thing is for certain: when trading, mining, or transacting Bitcoin, it’s important to understand the alternatives.