How Does Bitcoin Cash Work? BCH and Electronic Cash

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Contributor, Benzinga
Updated: October 12, 2021

As Bitcoin gained massive global acceptance, it became difficult to handle large amounts of transactions. With a block size of 1MB, Bitcoin was slow.

Hal Finney, one of Bitcoin’s lead developers, had added the 1MB block size into the original Bitcoin code with plans for it to be increased down the road. The block size limits the amount of transactions that the network can handle to around 5 transactions per second. 

By limiting the blocksize, the transaction fees cost more than a cup of coffee or a slice of pizza, making Bitcoin impractical for small purchases. Satoshi Nakamoto planned to increase the block size once more people were using the network.

Then Satoshi disappeared, and Hal Finney died in 2014 leaving the future of the block size in the hands of a community that could not agree. In 2017, those who wanted to increase the blocksize created a fork of Bitcoin known as Bitcoin Cash - a product capable of completing every day transactions. 

Bitcoin Cash (BCH) increased the number of transactions processed per block by increasing the size of blocks from between 8MB to 32MB instead of Bitcoin’s 1MB. This  resolved scalability.

Learn more about how Bitcoin Cash works now.

What is Bitcoin Cash?

Bitcoin Cash (BCH) is a peer-to-peer electronic payment currency that enables users to send and receive payments without the inconveniences of long delays and high transaction fees. It’s a fork of Bitcoin aimed at providing a more transactional peer-to-peer electronic cash payment system.  

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Electronic cash (ECash) is a digital payment product that allows you to carry out payments for products and services without resorting to paper or coin currency.

Benefits of Bitcoin Cash

A major advantage of BCH transactions is that they are fast and suitable for everyday transactions like paying for a coffee and making retail purchases. 

Some other benefits include:

Comparably low fees: BCH fees are next to nothing, so it’s suitable to carry out multiple transactions without worrying about exorbitant service fees.

Privacy: Using electronic cash like BCH provides better privacy and allows you a greater degree of anonymity than traditional financial institutions.

Exclusive promotions: By eliminating bank card fees from the equation, BCH allows merchants to offer better rates, discounts and promotions.

Decentralized: BCH was developed on a decentralized blockchain just like BTC. Therefore, unlike fiat currency, no central authority has control over the digital asset. It's good to point out here that decentralization highly benefits BTC due to its larger network compared to BCH with a smaller network.

Stability: Bitcoin Cash is relatively stable and less volatile, making it a great everyday electronic payment option. Although, overtime, stability in a bull market may signify a dead currency.

Healthy payment infrastructure: BCH provides robust payment features for users and merchants. Features like Point of Sales Solutions (POS), low transaction fee, and speed enhances users’ convenient payment experience. 

How Does Bitcoin Cash Work?

According to Satoshi's design from the Bitcoin white papers, Bitcoin was supposed to be a peer-to-peer cryptocurrency for everyday transactions. As its popularity and growth increased, people began to use it more as a wealth creation vehicle than as a currency. 

Bitcoin Cash was created as electronic cash, providing a channel for everyday transactions in line with the original purpose. A good number of exchanges support BCH, and you can buy directly with your credit card or exchange BTC for BCH. 

Getting started with BCH requires 3 simple steps:

Get a Bitcoin wallet

You require a Bitcoin wallet to send and receive Bitcoin Cash. It doesn’t matter if it’s a hot or cold wallet. A Bitcoin wallet will keep a record of the balance held in your Bitcoin address. It also keeps a record of all your BCH transactions.

Purchase Bitcoin Cash

Once you've got a Bitcoin wallet, the next thing is to add some BCH to your wallet. You can use your credit card to buy electronic cash (BCH) by visiting your wallet's buy Bitcoin page.

Spend your Bitcoin Cash

After buying your BCH, you can now use it to carry out transactions electronically. Many individuals accept BCH, and most websites and businesses also accept it as a medium of exchange.

Bitcoin Cash History

As Bitcoin kept breaking new grounds, its deficiencies became apparent over the years, especially as it relates to scalability. On its fastest day, it was processing 3 to 7 transactions per second.

To put this in perspective, Mastercard processes more than 5,000 transactions per second, and Visa completes a whopping 24,000.  As more and more people adopted Bitcoin, it overwhelmed the network leading to less reliable transactions and higher transaction fees.

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A block stores BTC transactions and records them to ensure no one receives value twice for the same order. Consensus ensures the authenticity of BTC transactions.

In 2015, 2 different camps emerged in the Bitcoin community to address the issue of scalability. One group opted to introduce Segwit (BIP- 91). Segwit is a soft fork  implying that its rejection doesn’t give rise to a new cryptocurrency and blockchain unlike the hard fork that created BCH as a new currency. 

In Segwit (BIP-91) each node on the network can choose whether to adopt the new set of rules. This allowed Bitcoin to handle more transactions per block without significantly larger block sizes. 

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Nodes store copies of the entire blockchain, keeping the network running in consensus.

The 1st group supported the Segwit (BIP-91) integration. It wanted to maintain the 1MB block size while improving the number of transactions but did not want to sacrifice decentralization for speed. Because speed exists in a spectrum with decentralization, the more you gain speed, the more you lose decentralization. 

The 2nd group did not want the Segwit (BIP-91) integration. Instead, it wanted to increase the block size to allow more transactions and keep fees low. This could ensure Bitcoin can function as electronic cash for everyday transactions. This group introduced Bitcoin Cash. Because Bitcoin Cash uses a much larger block than BTC, it processes transactions faster. It also has lower transaction fees compared to BTC. 

Concerns About Bitcoin Cash

One of the major reasons for Bitcoin Cash is to develop larger blocks. Bitcoin Cash is still yet to deliver on that promise. The average size of blocks mined on the Bitcoin Cash blockchain is still smaller than those on the Bitcoin blockchain. 

In less than 5 years, Bitcoin Cash has split into 2 factions:  Bitcoin Cash ABC and Bitcoin Cash SV (Satoshi Vision). The split raises questions about Bitcoin Cash's sustainability. There are growing concerns that its developers can’t agree on necessary fundamentals.

Another concern is the rising competition. More altcoins with similar ambitions have sprung up, announcing significant partnerships with traditional financial institutions. 

Its inability to garner mainstream recognition is of serious concern to developers. BCH is only accepted in approximately 5,000 stores. For a cryptocurrency that has been in existence since 2017, that isn't very reassuring. 

Differences Between Bitcoin Cash and Real Money 

BCH developers designed it to serve as an alternative to real money payments. It provides a flexible payment alternative, offering a Point of Sale (POS) solution service for businesses. 

However, while you can use both Bitcoin Cash and real money to pay for goods and services, some fundamental differences exist.

Here are some differences between Bitcoin Cash and real money.

Completely virtual

Bitcoin Cash is virtual in the sense that it is only available in an electronic format and so lacks tangible paper or coin equivalent, unlike real money.

Decentralized

Bitcoin Cash is decentralized, and no single entity has control over it. On the other hand, the government controls real money.

Lesser risk of counterfeits

It is easier to find counterfeit in real money than fake cryptocurrency. There is presently no available technology that can generate fake Bitcoin Cash for illegal reasons.

Is Bitcoin Cash Secure?

BCH, like most cryptos, guarantees some level of anonymity compared to traditional financial assets like bonds. However, you should note that activities on the internet are traceable. With increasing regulations on crypto trading, most exchanges now collect personal data for customer verification. 

This is to comply with the mandatory Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. Bitcoin Cash uses the same secure blockchain like Bitcoin. 

As an extra security measure, you should store your coins on dedicated wallets with guarded 2-factor authentication and passphrase. 

BTC Fees and Commissions

The average transaction fee of BCH as of March 2021 is $0.0000055 BCH, which is equivalent to $0.0029. The highest price was in January 2018 when it crossed the $0.90 mark. This fee is still very low when compared to Bitcoin, with an average transaction of $26.

Is Bitcoin Cash a Better Alternative to Bitcoin?

Both cryptocurrencies serve different purposes. If you are looking for a secure means of carrying out digital payments, you should look at Bitcoin Cash, but if you want to trade or invest, then Bitcoin is most likely your best bet.

Frequently Asked Questions

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Q. What happens if I send BCH to the BTC wallet?
A

BTC and BCH share a similar address format, so it is possible to accidentally send BTC to your BCH. When this happens, BCH will not appear on the BTC blockchain. 

Suppose you send your BCH to your BTC wallet, and you have the exact backup phrase for both your BCH and BTC wallets. In that case, the sent BCH will automatically appear in your BTC sub-wallet, and there will be no need to recover them.

But if you send the BCH to your BTC wallet with a different recovery phrase, you will need to recover your BCH.

Q
Q. Why is Bitcoin cash dropping?
A

Despite its high prospects, Bitcoin cash is yet to gain traction in the crypto community. In terms of adoption, it’s still behind altcoins like Ethereum and Litecoin.

Q
Q. How do I avoid Bitcoin scammers?
A

You can avoid Bitcoin scammers by observing the following guidelines.

  1. Never give out your data. No genuine exchange will ask you for information like your passphrase, 2-factor codes or private keys.

  2. Avoid phishing scams by ensuring that you do not use a clone website set up by fraudsters. Scammers might send you an email mimicking a popular exchange with a link to a clone website, such as cOinbase.com instead of coinbase.com

  3. Use only trusted exchanges. When in doubt, look up an exchange or crypto platform on a search engine like Google for an overview and reviews.
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