How does Bitcoin Cash work, and what’s it used for?

Bitcoin (BTC) is the oldest and largest cryptocurrency, but that doesn’t mean it’s immune to criticism. Over the years, prominent figures in the Bitcoin community have raised concerns about the coin’s sustainability. When a group of passionate BTC supporters clashed with core developers in 2017 over how to scale the currency, those debates resulted in a brand new crypto called Bitcoin Cash (BCH).

Although BCH still has much smaller adoption than BTC, it remains a prominent and accessible altcoin project. In this guide, we’ll explain what Bitcoin Cash is and how it’s different from BTC, then give some guidance on how to choose between them.

What’s Bitcoin Cash?

BCH is a cryptocurrency launched in 2017 and designed as a more scalable version of BTC. Like all crypto, BCH runs on a decentralized network called a blockchain that allows users to send and store coins in self-custodial wallets. Many of BCH's core design elements are the same as BTC, but this newer coin focuses less on long-term investment and more on utility as electronic cash for daily purchases.

Why was Bitcoin Cash created?

The idea behind the Bitcoin Cash crypto originated during the euphoria of BTC’s 2017 bull run. During that year, the price per BTC rose from about $1,000 to nearly $20,000. This massive price increase helped bring Bitcoin into the mainstream, but it also exposed weak points in the network’s design.

As activity climbed, Bitcoin developers noticed significant issues with transaction throughput and average fees. Nearly everyone in the community agreed on the need for a solution that would allow BTC to scale enough to become a global form of electronic cash, just as Bitcoin’s founder Satoshi Nakamoto intended. But the community disagreed over how to make that happen.

One proposed solution was an upgrade called Segregated Witness (SegWit) that reorganized Bitcoin’s transaction data. As a soft fork update, SegWit was backwards-compatible, so Bitcoin node operators didn’t have to accept the update to continue processing transactions.

The basic idea behind SegWit was to separate digital signatures that verify BTC transactions from transaction data. Supporters of SegWit favored this approach, because it preserved Bitcoin’s original block size and avoided the network split that comes from a hard fork.

However, other leaders in the Bitcoin community, including Bitcoin.com’s CEO Roger Ver, didn’t see SegWit as a suitable solution. Instead, they favored creating a new blockchain via a hard fork that increased Bitcoin’s 1 MB limit.

After many heated arguments, Bitcoin’s core developers implemented SegWit in 2017. And Bitcoin Cash launched as a separate project the same year, with an initial 8 MB block size that later expanded to 32 MB.

What’s Bitcoin Cash used for?

The word “cash” refers to BCH’s purpose as a currency for daily transactions rather than long-term investment. Although some investors buy BCH because they believe it will be more valuable in the future, this crypto is trying to become a peer-to-peer (P2P) version of e-payment services like Apple Pay.

That means BCH can be used for:

• Day-to-day transactions: With its fast speeds and low transaction fees, BCH offers a convenient option for making seamless smartphone purchases.
• Online shopping: BCH works on e-commerce sites and mobile apps, so if online businesses integrate with this crypto, they benefit from its fast average settlement speeds and low transaction fees.
• Smart contracts and dApps: BCH isn’t as established in the smart contract arena as Ethereum (ETH) or Solana (SOL), but it has a coding language called CashScript that lets developers create intermediary-free programs. This feature makes it possible to use Bitcoin Cash as a base layer to build decentralized applications (dApps).
• Money transfers and remittances: BCH's fast transaction speeds and low fees make it an attractive option for cross-border payments. Since blockchain is a global technology, anyone with a BCH-compatible wallet can send and receive this coin.

How does Bitcoin Cash work?

The mechanics behind Bitcoin Cash are virtually the same as Bitcoin’s. In fact, both blockchains share the same codebase and proof-of-work (PoW) consensus algorithm.

In the PoW system, node operators (aka miners) on Bitcoin Cash’s network compete to solve cryptographic puzzles every ten minutes and post the latest BCH transactions on the distributed payment ledger. The first miner to solve this mini-puzzle wins a block reward paid out in BCH – which is also how the currency enters circulation.

Like BTC, BCH has a fixed supply of 21 million coins. Once all BCH is mined, the blockchain will have a 0% inflation rate. BCH also follows a halving schedule, reducing the amount of new coins awarded to miners every four years.

What are the major differences between BCH and BTC?

Most foundational elements of Bitcoin Cash’s architecture mirror those of Bitcoin, but four key features set these cryptocurrencies apart.

Transaction throughput

Despite upgrades like SegWit and Taproot, Bitcoin’s average transaction confirmation rate isn’t fast. The 1 MB block size cap limits Bitcoin’s average transaction rate to seven per second. With such a low processing time, BTC transactions can take hours or days to clear during periods of high network activity.

In contrast, Bitcoin Cash was designed for speed. With a block size limit of 32 MB, Bitcoin Cash can achieve a throughput closer to 100 transactions per second. As a result, BCH transactions are typically confirmed within 10 minutes, even during busy periods.

Transaction costs

Bitcoin’s limited block size also drives up the average transaction cost when compared to Bitcoin Cash. During periods of high demand, BTC transaction fees can spike to several dollars, but BCH typically charges a few cents.

Market cap and adoption

Despite its attractive fees and fast speed, BCH lags far behind Bitcoin in global adoption and liquidity. At time of writing, Bitcoin’s market cap hovers around $1.2 trillion, while BCH sits at approximately $10 billion. Bitcoin’s higher market cap makes it a more established project with wider accessibility on exchanges and through products like exchange-traded funds.

Wallet addresses

Although Bitcoin Cash is a fork of Bitcoin, the blockchains are separate, so wallet addresses aren’t compatible. But some Bitcoin and Bitcoin Cash addresses share similar formatting, which can cause confusion.

Anyone who sends BTC to a BCH wallet or vice versa can lose their funds, so it’s important to verify that the wallet you’re using is designed for the right currency. Bitcoin Cash also has a unique privacy policy feature called CashFusion, which anonymizes addresses and can make sending and receiving BCH more complicated.

What are the advantages and disadvantages of Bitcoin Cash?

BCH succeeded in creating a faster and cheaper alternative to BTC, but it hasn’t yet achieved its goal of becoming a globally used P2P currency. Some critics even believe that competing projects and advancements, such as Bitcoin’s Lightning Network, could make BCH obsolete in the future.

Pros of Bitcoin Cash

Here's what BCH has to offer for crypto traders and investors:

• Faster transaction speeds: It usually only takes 10 minutes for a BCH transaction to settle on the payment ledger.
• Lower transaction fees: Even during periods of high congestion, BCH transaction costs remain under a dollar.
• High accessibility: BCH is widely available on centralized exchanges (CEXs), crypto ATMs, and fintech platforms like PayPal. And with a market cap consistently in the top twenty crypto projects, it’s likely BCH will remain widely accessible.

Cons of Bitcoin Cash

Before investing in BCH, consider these potential downsides:

• Centralization risks: BCH’s larger blocks require more resources from miners, creating a barrier to entry for node operators. This smaller network is less decentralized than Bitcoin, increasing the risk of issues like 51% attacks.
• Limited developer adoption: Blockchain developers tend to prioritize larger and more established projects like Bitcoin and Ethereum, leaving Bitcoin Cash with a comparatively smaller ecosystem. This limited development activity curbs Bitcoin Cash’s potential for innovation and growth.
• Increased competition: BCH faces stiff competition from other cryptocurrencies that offer faster, lower-cost P2P payments, including altcoins like Ripple (XRP) and stablecoins like Tether (USDT). Additionally, Bitcoin’s Lightning Network provides a fast and cheap alternative for sending BTC microtransactions, further challenging BCH’s niche.

Invest wisely in Bitcoin Cash and other altcoins with CoinTracker

Bitcoin Cash caused a lot of controversy when it came out, but this crypto has since been accepted as a promising P2P payment altcoin. On the positive side, BCH is fast and cheap to send between wallets and exchange accounts, making it ideal for microtransactions or daily purchases. However, only time will tell whether BCH becomes a viable payment option when compared to competing tokens and the Bitcoin Lightning Network.

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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.