Bitcoin's little sibling: What is Bitcoin Cash?

Among the many controversies in crypto history, SegWit stands out as one of the most debated. 

Short for "Segregated Witness," this update to the Bitcoin (BTC) blockchain divided the growing BTC community into two camps. Supporters argued SegWit respected Bitcoin's original design while introducing essential scalability improvements. Critics, however, claimed it fell short of making BTC a practical global currency. Dissatisfied with the update, the latter group eventually split off to create Bitcoin Cash (BCH), an alternative to Bitcoin.

In this guide, we’ll explain what Bitcoin Cash is and how it differs from the original Bitcoin blockchain. We’ll also provide insights to help determine if this altcoin aligns with your crypto strategy.

What is Bitcoin Cash? A history of Bitcoin Cash and SegWit

Bitcoin Cash (BCH) is a peer-to-peer (P2P) virtual currency launched in 2017 as a faster, cheaper alternative to Bitcoin. As a "hard fork" of Bitcoin, it’s a non-backward-compatible update that runs on a separate blockchain. While Bitcoin Cash shares Bitcoin’s original codebase, it operates on its own decentralized network.

As Bitcoin gained popularity, its developers faced challenges like slow transaction speeds and high fees during network congestion. While the Bitcoin community agreed on the need for scalability improvements, they clashed over the solution. 

The debate peaked in 2017 with the introduction of SegWit ("Segregated Witness"), a "soft fork" upgrade that reorganized transaction data. Unlike hard forks, soft forks are backward-compatible and don’t split the network. SegWit moved "witness data" – digital signatures used to verify transactions – offchain, creating more space in Bitcoin’s 1 MB blocks for transactions. Supporters favored this approach to preserve Bitcoin’s original block size and avoid a hard fork.

Others in the community, including Bitcoin.com’s CEO Roger Ver, argued SegWit didn’t go far enough. They advocated for directly increasing Bitcoin’s block size instead of adhering to the 1 MB limit. Despite their objections, Bitcoin adopted SegWit in 2017. In response, Bitcoin Cash launched the same year with an initial 8 MB block size, later expanding to 32 MB in May 2018.

What is Bitcoin Cash used for?

While Bitcoin Cash shares Bitcoin’s scarce supply of 21 million coins, it doesn’t position itself as a long-term store of value or inflation hedge. Unlike Bitcoin’s "digital gold" narrative, Bitcoin Cash focuses on being a practical medium of exchange for fast, cost-effective daily transactions.

Bitcoin Cash aims to compete with electronic payment solutions like PayPal and Apple Pay, offering an alternative for everyday financial activities. Common use cases for BCH include sending cross-border payments and paying for goods and services on e-commerce platforms or at brick-and-mortar stores.

How does Bitcoin Cash work?

Bitcoin Cash operates almost identically to Bitcoin, relying on the same proof-of-work (PoW) consensus algorithm to verify transactions and reward miners. Node operators, or miners, on the Bitcoin Cash blockchain run computers to solve cryptographic puzzles approximately every 10 minutes. The first miner to solve the puzzle publishes the next block of transactions on Bitcoin Cash’s transparent payment ledger.

Winning miners are rewarded with BCH coins, which is how new BCH enters circulation. Like Bitcoin, Bitcoin Cash has a fixed supply of 21 million coins. Once all BCH is mined, the blockchain will have a 0% inflation rate. Additionally, Bitcoin Cash follows a halving schedule, reducing the number of new BCH awarded to miners by half every four years.

BCH versus BTC: What are the major differences? 

Bitcoin Cash shares Bitcoin’s consensus mechanism and maximum supply, but its mechanics are what sets the two apart. As a result, Bitcoin Cash’s price significantly differs from Bitcoin’s. 

Transaction throughput 

Despite Bitcoin’s SegWit upgrade, its average transaction confirmation speed is much slower than Bitcoin Cash. With a block size cap of 1 MB, Bitcoin processes around 7 transactions per second (TPS). During periods of heavy congestion, confirmation times can extend to hours or even days for simple wallet-to-wallet transfers.

Bitcoin Cash, on the other hand, was designed to prioritize speed by increasing the blockchain’s available data space. With a block size limit of 32 MB, Bitcoin Cash achieves an average throughput of over 100 TPS. As a result, BCH transactions are typically confirmed within seconds, even during high network activity.

Transaction costs

Bitcoin’s limited block size drives up the average cost per transaction compared to Bitcoin Cash. During periods of high demand, Bitcoin transaction fees can spike significantly, sometimes reaching several dollars. In contrast, Bitcoin Cash minimizes congestion by allowing more transactions per block, resulting in fees that are typically just a few cents.

Market cap and adoption 

Despite its scalability enhancements, Bitcoin Cash lags behind Bitcoin in market capitalization, transaction volume, and global adoption. At the time of writing, Bitcoin’s market cap hovers just below $2 trillion, while Bitcoin Cash sits at approximately $10 billion.

Bitcoin also has broader recognition and integration. For instance, nations like El Salvador have adopted Bitcoin as legal tender, and countries such as Bhutan hold Bitcoin in their reserves. Additionally, Bitcoin enjoys greater liquidity in financial markets and web3 ecosystems, supported by products like Bitcoin exchange-traded funds (ETFs), derivatives, and tokenized versions like Wrapped Bitcoin (wBTC).

While Bitcoin Cash remains accessible on many wallets and trading platforms, it lacks the extensive network effect and adoption that Bitcoin has achieved.

Wallet addresses

Although Bitcoin Cash is a fork of Bitcoin, traders cannot use the same wallet for both cryptocurrencies. When BCH forked from Bitcoin, it created a separate blockchain, making BTC and BCH wallet addresses incompatible.

To complicate matters even more, some Bitcoin and Bitcoin Cash addresses share similar formatting, such as starting with "1," "3," or "bc1." Sending BCH to a BTC wallet – or vice versa – will result in a permanent loss of funds. To avoid this, traders should always carefully verify that the wallet they use is specifically designed for either BCH or BTC before sending or receiving these assets.

Advantages and disadvantages of Bitcoin Cash

Like any cryptocurrency, Bitcoin Cash has its pros and cons. While it succeeded in creating a faster, cheaper alternative to Bitcoin, it has yet to dominate the P2P payment space. Recent advancements like Bitcoin’s Lightning Network, also raise questions about Bitcoin Cash’s long-term viability.Here’s a closer look at BCH’s advantages and disadvantages:

Pros of Bitcoin Cash

• Faster transaction speeds: Bitcoin Cash offers reliably fast transaction processing, with most transactions settling within seconds. Its 32 MB block size allows for significantly more transactions per block than Bitcoin’s 1 MB limit.  
• Lower transaction fees: The larger block capacity also results in lower fees for users. Even during periods of high congestion, BCH transaction costs typically remain just a few cents.  
• High accessibility: Bitcoin Cash is widely available across centralized exchanges (CEXs), crypto ATMs, and fintech platforms like PayPal and Venmo. Its relatively high market cap ensures accessibility for millions of users.

Cons of Bitcoin Cash

• Centralization risks: The higher resource requirements for mining BCH’s larger blocks create a barrier to entry for node operators. This smaller network is less decentralized than Bitcoin’s, increasing the risk of a 51% attack if malicious actors gain control of the majority of mining power. 
• Limited developer adoption: Web3 developers and projects tend to prioritize established blockchains like Bitcoin and Ethereum (ETH), leaving Bitcoin Cash with a comparatively smaller ecosystem. This limited adoption curbs BCH’s potential for innovation and growth.
• Increased competition: Bitcoin Cash faces stiff competition from other cryptocurrencies offering fast and less costly P2P payments, including altcoins like Ripple (XRP) and Dogecoin (DOGE) and stablecoins like Tether (USDT) and USD Coin (USDC). Additionally, Bitcoin’s Lightning Network provides an alternative for sending small amounts of Bitcoin with lower costs and faster speeds, further challenging Bitcoin Cash’s niche.

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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.