As Bitcoin Cash (BCH) has marked its first birthday, it has a lot to celebrate. Since its separation from Bitcoin in August last year – a split called a hard fork – the virtual currency has risen to the fourth place by its market capitalization. However, it’s not the only achievement of Bitcoin Cash. To have a better understanding of where BCH is heading, let’s take a closer look at its improvements.
Coinciding with a sharp fall in cryptocurrency transactions this year, both BTC and BCH have weakened against the US dollar. At $6,594 on September 14, Bitcoin is down 53 percent since January. BCH/USD has fallen more than 80 percent to $465 since the New Year.
Bitcoin Cash has come up with new functionality that the market is enthusiastic about – smart contracts and faster peer-to-peer electronic payments at lower transaction costs. Another Bitcoin Cash’s upgrade to a larger block size (32 MB) could give Bitcoin and the fiat payment system a run for their transaction processing business.
If BCH can deliver the higher transaction throughput merchants are demanding, the improved performance could create the wider-scale adoption of cryptocurrencies. BCH would finally compete, and likely surpass Bitcoin on transaction volume which is the leading metric for valuing cryptocurrencies. Delivering the fix to cryptocurrencies’ slow payment processing will place it in more direct competition not only with Bitcoin but also with the fiat payment system.
Under this scenario, BCH would be certain to strengthen against BTC and USD. The future valuation of BCH, however, must also take into consideration alternative blockchains introduced over the year.
Hoarding Free Money
Being the second most valued cryptocurrency, Bitcoin Cash has become a store of value for investors but is still struggling to fulfill its intended purpose as commercially viable digital cash. The basically free money has proven to be a good investment. On its first birthday, August 1, the market capitalization of BCH was $13 billion, one-tenth of the market cap of Bitcoin.
The high valuation reflects how BCH was distributed rather than underlying demand for crypto transaction services. Every Bitcoin holder received 1 unit of BCH for every unit of BTC at the time of the hard fork. This wide-scale distribution assured instant liquidity for the new coin. The pretender to the Bitcoin throne, however, has not yet established itself as a payment system. BCH holders are not opening their digital wallets to spend the virtual money.
Instead, the use of cryptocurrency in merchant transactions is declining. Owing to usability issues such as high fees, use of Bitcoin in transaction processing has slid from a high of $411 million in September 2017 to $60 million in May 2018, according to Chainalysis. Usage of Bitcoin Cash fell from a high of $10.5 million in March to $3.7 million in May.
What is required for holders to spend their Bitcoin Cash? The upgrade of BCH from 8 MB to 32 MB blocks will make the blockchain more competitive with the transaction efficiency of Visa and PayPal. What Bitcoin Cash needs to do to increase adoption is to sign on some big merchants. To kick-start the wider retail usage of virtual money, major cryptocurrencies including Bitcoin, Bitcoin Cash, Ethereum and XRP expect the ability of consumers to check out at Amazon, Starbucks, Nike and other major retailers.
Building Bigger and Better Blocks
At least a dozen alternative blockchains have launched their own scalability solutions over the year. BCH is using an on-chain scalability solution whereas many of its competitors are adding off-chain functionality to improve transaction efficiency. BCH has improved its speed by increasing the block size. The initial block size of 8 MB was quadrupled to 32 MB in May.
How does a 32 MB block compare in performance to 1 MB block size of Bitcoin? Most current blockchain transactions are under 1 MB. As the online retail markets accepting cryptocurrency grow, the performance advantages of larger block sizes are apparent. A 32 MB blockchain will process 100 times more daily transactions than most blockchains at a rapid 240 per second and a significantly lower cost of less than a penny per transaction. Once the 32 MB blocks are put to work, a rebound in growth in transaction processing volume could provide more support for BCH.
Bitcoin Cash Future Transaction Growth
Recently, to prove its ability to handle a huge number of transactions, Bitcoin Cash has conducted a so-called ‘stress test’ that has shown the blockchain is capable of processing over 2 million transactions with no surge in charges. At the time of stress test, Bitcoin Cash enjoyed over 60% of all cryptocurrency transactions. In case such transaction performance becomes a daily routine for Bitcoin Cash, Bitcoin and the fiat payment system will certainly face a heavy competition.
This competition may take some of the shine off of Bitcoin as a viable alternative to digital cash. The popular coin’s current trading premium could be knocked down a few notches, although speculators are likely to remain faithful to the crypto darling. And if the Bitcoin Cash blockchain starts winning transaction volume from fiat competitors, the BCH/USD pair will emerge from its bear market.
But There’s the Rub…
Ironically, Bitcoin Cash is on the verge of a hard fork that is scheduled for November 2018. When it comes to the world of cryptocurrency, the outcome of a hard fork can be extremely unpredictable. Bitcoin Cash might then go two ways – up or down, which means the investors may both win or lose from it.
Unless you can read the future and predict the price movements of BCH, you should always take the appropriate actions to hedge against risks when investing in cryptocurrency. Remember that portfolio diversification and cost-averaging are the keys to smart investment.