Bitcoin cash is already the third most valuable cryptocurrency

Some of Bitcoin enthusiast Mike Caldwell’s coins and paper vouchers, often called “paper wallets”, are pictured at his office in this photo illustration in Sandy,…
Some of Bitcoin enthusiast Mike Caldwell’s coins and paper vouchers, often called “paper wallets”, are pictured at his office in this photo illustration in Sandy,…
Image: Reuters/Jim Urquhart
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Bitcoin cash, the offshoot of cryptocurrency bitcoin that was created yesterday, is now worth $7.6 billion, according to data provider Coin Marketcap. That pegs the value of all the bitcoin cash in circulation at 17% of bitcoin’s total market value of $44.4 billion. This makes bitcoin cash the third most valuable cryptocurrency, behind bitcoin and ethereum. It trades under the BCH symbol on most exchanges, while bitcoin retains BTC.

Bitcoin cash’s vault up the valuation charts can be explained by its provenance as a fork of bitcoin—think of it like the splitting of an amoeba in two. The market value of all the coins in circulation—usually referred to as the “market cap” in cryptocurrency jargon—is calculated by multiplying a coin’s price by the total supply of coins in circulation. When bitcoin cash splintered off from bitcoin, it also inherited the supply of coins in circulation. In other words, there is roughly the same amount of bitcoin cash in circulation as bitcoin, and both cryptocurrencies each currently have 16.5 million units in circulation.

There are slightly more bitcoins in circulation than bitcoin cash—a difference of 474 coins—because when bitcoin cash forked, there was a period of several hours when no new bitcoin cash blocks were mined. In the meantime, bitcoin miners continued to find blocks, introducing new coins to the circulating supply.

What exactly happened on Aug. 1?

A chain split is a slow and confusing event, even with a deadline. Bitcoin cash had a much publicized deadline of Aug 1, 12:20 UTC (or 8:20am US Eastern time) for the split to occur. Yet it wasn’t until hours later that the split actually took place.

The reason for this confusing state of affairs is as much about semantics as technicalities. Firstly, the bitcoin cash software uses a particular calculation for time called “median time past” that’s based not on clock time but on the number of blocks mined after the 12:20 deadline. Since there is an element of chance that determines when exactly a block is mined, experts could only estimate when the bitcoin cash software would kick in. In practice, this meant that the bitcoin cash software would only activate about an hour after 12:20 UTC, which was the case.

Once bitcoin cash was activated, the bitcoin cash blockchain stopped growing for several hours, while the bitcoin blockchain continued to add new blocks as normal. This activation happened at 12:37 UTC when both blockchains had just mined block number 478,558—this would be the last common block shared between bitcoin and bitcoin cash. All future blocks would send the coins on their independent trajectories.

There was confusion as the bitcoin cash blockchain stalled at block 478,558. What would normally happen is that a new block would have been mined—478,559—in about 10 minutes. But as hours went by, it became clear that not enough miners were committing processing power to the new blockchain to discover a new block. This was because the new chain also inherited the difficulty threshold for finding a new block from the bitcoin blockchain, meaning a massive amount of processing power would be required.

At this stage, although the chains have split, the new chain didn’t yet have any new blocks, so was technically simply a stalled version of the bitcoin blockchain. Most observers in the bitcoin world thought it would take hours, or even days, for miners to devote enough processing power to the bitcoin cash blockchain to discover a block.

But around six hours later, ViaBTC, a Chinese mining pool based in Shenzhen that has vocally supported bitcoin cash, added block number 478,559 to the bitcoin cash blockchain. This block was 1.9 megabytes in size—nearly double the maximum size allowed on the bitcoin blockchain. Compare this to the same block on the bitcoin blockchain, which coincidentally was also mined by ViaBTC, but was only 272 kilobytes in size. Subsequent blocks, however, have been well below 1 MB, reflecting the small number of transactions on the new blockchain.

Stock split or dividend?

Two metaphors from the traditional equity markets have been used to describe the creation of bitcoin cash: a stock split or a dividend. But there are good reasons to think that bitcoin’s split is not like a stock split at all, as this CoinDesk piece suggests. For starters, a stock split doesn’t change the assets’ value; it simply adjusts the quantity and therefore price of the stock on the market. An increase in the number of stocks leads to a commensurate drop in price, without changing the fundamentals of the company in question.

Bitcoin’s fork doesn’t split existing units of bitcoin—in fact, the bitcoin price has remained more or less the same throughout (which could be seen as a bullish vote of confidence in the cryptocurrency’s continued supremacy). Neither have any new units of bitcoin been created by the fork.

Instead, what happened is more like cloning. That’s because anyone who held bitcoin before the split would now also hold the equivalent amount of bitcoin cash. This makes the bitcoin fork more like a dividend: investors who held on to bitcoin and weren’t scared off by the fork were now credited with an equal amount of bitcoin cash.

The ethereum example

A major cryptocurrency forking, and the market supporting both resulting coins, isn’t as weird as it sounds. This already happened with ethereum in July 2016, when a philosophical disagreement among ethereum holders led to a hard fork, creating ethereum and “ethereum classic.”

Ethereum classic has gained influential backers, such as venture capitalist Barry Silbert. Ethereum classic is traded on a handful of major exchanges. It has a market value of $1.3 billion, or 6% of ethereum’s $21 billion. As ethereum went on a dizzying rally this year, so did ethereum classic, rising by 16-fold from the start of the year to a peak of nearly $22 per unit in June.

But ethereum classic’s rally was muted compared to ethereum’s 40-fold increase over the same period. Nevertheless, its price trades well below that of ethereum, with each unit of ethereum classic trading for just over 0.05 ether.

While the ethereum and bitcoin splits share some similarities such as a contentious dispute over the fundamentals of each protocol, bitcoin’s split is more significant. Whereas ethereum classic has maintained all the features of ethereum when it split—including preserving the transactions that allowed funds to be stolen from the Decentralized Autonomous Organization last summer, which was the root of the disagreement—bitcoin cash has significant differences in its underlying programming.

Chief among them is an eight-fold increase in the block size limit, allowing bitcoin cash miners to handle eight-megabyte blocks compared to bitcoin’s one megabyte. Being able to handle more transactions helps bitcoin cash act more like a payment channel, which is what its proponents are advocating.

Getting bitcoin cash

One way to get bitcoin cash is to buy it. It’s now trading on several major exchanges (here’s a list), with the bulk of trading volume taking place on Kraken and Bittrex, according to Crypto Compare.

The other way to get bitcoin cash is to claim it from any bitcoin holdings you owned before the fork. In theory, it’s simple: All private keys—basically the password to unlocking bitcoin holdings—are identical on both the bitcoin and bitcoin cash blockchains. This means you use the same private key to access funds on both chains. But in practice, this can be tricky.

The most reliable, though fiddly, method is to run a bitcoin cash “full node.” This is software that downloads the entire bitcoin cash blockchain , which is around 126 gigabytes, and also checks the validity of live transactions on the bitcoin cash network. Import the private keys from your existing bitcoin wallet to the wallet linked to the bitcoin cash full-node. You should then be able to access the new bitcoin cash funds. Check out the detailed instructions, and several other methods, including hardware wallets and paper wallets, in this Bitcoin Magazine piece.

Some exchanges also automatically credit pre-fork bitcoin holders with bitcoin cash. These include Kraken, Bittrex, and Bitfinex. This seems simple, but there can be several drawbacks. You must rely on the exchange to credit the new coins, which can be a slow process, and you may be unable to withdraw the new funds immediately, as Kraken users are currently experiencing.

Some exchanges also apply a discount to the amount of bitcoin cash that’s credited, like Bitfinex, which offers 0.85 bitcoin cash for every bitcoin. The discount was applied because the exchange claimed customers were manipulating its peer-to-peer margin financing system to inflate the amount of bitcoin cash they would receive.

What happens next?

Bitcoin cash is now, for all intents and purposes, an asset independent of bitcoin. It must develop its own ecosystem of developers, exchanges, and startups in order to flourish.

Bitcoin cash’s price will be an important indicator of its future potential. If it is indeed what bitcoin ought to be—a payment system with a large transaction capacity, as its advocates argue—the market should value it above bitcoin at some point in the future.

Another important indicator will be the amount of hash rate or processing power that miners commit to bitcoin cash. There isn’t a data source for the hashrate on the bitcoin cash network yet, but we know that miners are crunching 6.4 million terahashes per second on the bitcoin network. That consumes an estimated 15 terawatt hours of electricity a year, putting the bitcoin network’s consumption between Turkmenistan and North Korea, if it were ranked with countries.

If miners abandon bitcoin cash because mining it turns out not to be profitable, then bitcoin cash could wither away. As one expert observer of the fork, Andrew Chow, who developed the widely watched BTC Fork Monitor, told me, if that happened, the new chain would simply be “dead.”