Three Reasons Bitcoin Cash is Still Down 91% From Its All-Time HighBy Kyle Torpey
Bitcoin Cash (BCH) was originally launched as an altcoin on August 1, 2017. The basic idea was to take the Bitcoin (BTC) protocol and increase the block size limit, which would allow more transactions to be processed by the cryptocurrency network at a lower cost. Additionally, BCH would not include the Segregated Witness (SegWit) improvement that made its way into Bitcoin via a soft fork around the same time.
While BCH did not receive much attention when it first launched, it gained much more notoriety after it became clear that a hard-forking increase of the Bitcoin block size limit was not going to be attempted by the signatories of the so-called New York Agreement.
According to Coin Metrics, the BCH price skyrocketed from 0.08333 BTC to an all-time high of 0.24613 BTC in the days after support for the 2x hard fork was officially dropped by 6 CEOs associated with the New York Agreement on November 8, 2017. This fast-rising BCH price led to increased media coverage, especially from CNBC.
However, the all-time high set in November 2017 might be BCH’s high-water mark. In fact, the BCH price is down 87.5% against BTC since then. In terms of U.S. dollars, BCH is down 91% from its all-time high in December 2017, according to OpenMarketCap.
Let’s take a closer look at three of the key reasons BCH hasn’t been able to achieve much real-world success up to this point.
1. Bitcoin is Mainly Used as a Store of Value
BCH is supposed to be a good payments option, but it's unclear if people really want to use crypto for payments. Perhaps the most glaring reason why BCH is struggling is that the vast majority of people who are using BTC and other crypto assets are using them as stores of value rather than as tools for payments.
According to blockchain analytics firm Chainalysis, 90% of Bitcoin network activity is related to exchanges. And that number only covers transaction count. The percentage of BTC network activity involving exchanges measured by transaction volume should be even higher, seeing as transactions involving exchanges are likely to be the larger value transactions on the network.
Additionally, when looking at the recent BTC fee market compared to activity on exchanges, it’s clear that higher fees occur when there is increased activity on exchanges.
The simple truth is that not many people use BTC and other cryptocurrencies for payments, as the data shows. This is likely due to the various issues with using the currently available cryptocurrencies for payments such as tax implications, price volatility, and poor user interfaces.
Additionally, the demand for using BTC as a store of value is clogging up blockspace that could otherwise be used for payments. This demand to gain access to BTC as a store of value effectively worsens BTC’s utility as a means of payment due to increased fees.
It’s possible that more people will eventually want to use BTC for payments, but that may not happen until the digital asset becomes much less volatile. Xapo CEO and PayPal Board Member Wences Casares outlined how BTC could become money some years ago, and in his view, it would have to become a trusted store of value before it could become a useful medium of exchange.
Of course, there’s nothing wrong with developing medium of exchange use cases as BTC is still growing as a store of value, as a growing number of startups are doing with the Lightning Network today.
As long as the vast majority of BTC users are mainly interested in gaining access to a new asset class, it appears that transaction fees will not be much of a concern. In other words, BCH’s whole reason for existing (larger block sizes that enable lower fees) does not appear to fit what is desired by the market.
In these still early days where the focus is almost entirely on the store of value features of this technology, all BTC really needs to do is not break, as Blockstream’s Andrew Poelstra has explained in the past.
Obviously, it would be great if BTC could support lower fees today, but it’s not something that is easy to achieve due to the network effects around the current consensus rules and limitations on scaling caused by the need for the network to remain decentralized.
The network effects around BTC also make it difficult for BCH to compete as a credible store of value.
2. Network Effects Around Bitcoin
BTC enjoys a first-mover advantage that has proven extremely difficult to overcome. BCH was innovative in that it piggybacked on top of BTC’s network effects from the start, but that tactic may have simply inflated BCH’s market cap over the short term rather than led to longstanding interest from investors.
BTC’s network effects also make it difficult to make changes to the network via a hard fork. This is likely why SegWit was adopted while the 2x hard fork was abandoned.
The futures markets for the 2x hard fork indicated a split would occur with the majority of the network sticking with the status quo, which is why miners decided to back out of the deal. These miners didn’t want to operate at a loss for an extended period of time. In other words, those who are using BTC as a store of value are the ones who make the rules. Both miners and those who use BTC mainly as a medium of exchange don’t have much say in the matter because miners are incentivized to mine the blocks that will generate the greatest profits for their operations.
In terms of important metrics like hashrate and liquidity, BCH is nowhere near BTC. According to Messari’s OnChainFX, BTC has a combined “Real 10” 24-hour trading volume and adjusted on-chain transaction volume of $4,508,547,091, while the same metric for BCH stands at $187,185,219.
Additionally, this data does not factor in that the median BTC transaction fee is $0.70, while the median BCH fee is far below $0.01. In other words, BTC users are more than willing to pay a premium to use that particular cryptocurrency network.
In terms of hashrate, BCH’s mining power is roughly 2.7% the size of BTC’s, according to fork.lol. As Litecoin (LTC) creator Charlie Lee has explained in the past, the security guarantees of Nakamoto Consensus break down if a cryptocurrency only accounts for a few percentage points of a particular hashing algorithm’s total hashrate (in this case SHA-256).
The most alarming metric associated with BCH’s weak hashrate may be that the fees alone collected by BTC miners surpassed BCH miners’ entire block reward earlier this year. These problems could become much worse for BCH next year, when the network experiences a halving of the block subsidy before BTC.
BTC is still processing more than seven times as many payments per day than the major altcoins focused on providing cheaper transactions (BCH and LTC), and users of darknet markets still prefer BTC over more privacy-conscious alternatives (although software like Wasabi Wallet and Samourai Wallet is helping in this area).
The preference for BTC comes down to factors like liquidity, hashrate, brand recognition, and general acceptance — all of which are parts of BTC’s overall network effects.
Whether it’s a new altcoin or an attempt at a BTC hard fork, the network effects around the status quo are extremely difficult to overcome.
Due to these factors, those who wish to see BTC or cryptocurrency in general develop into a medium of exchange may be better off building on top of BTC rather than trying to bootstrap a completely new network from scratch.
3. Competition from Other Altcoins and Bitcoin’s Layer-Two Protocols
The third reason BCH is struggling is due to the high level of competition facing the altcoin.
Another coin focused on low transaction fees that existed six years before BCH is LTC, which has not strayed far from the BTC codebase, so it’s able to easily integrate all of the changes that are made to Bitcoin Core in Litecoin Core. For example, LTC adopted SegWit (even before BTC), and the altcoin has also already been integrated into the Lightning Network.
While Ethereum was originally sold as the “world computer” that would allow developers to build smart contracts, the platform has recently pivoted to a focus on Decentralized Finance (DeFi). More ETH proponents are now pitching the altcoin as money rather than digital oil. ETH has more liquidity and functionality than BCH, so it’s unclear why anyone would pick BCH over ETH if they’re interested in lower fees.
And of course, BTC has its own offerings in terms of enabling cheap transactions.
The Lightning Network allows users to make instant, low-cost payments with each other in a low-trust manner, and it’s already in use by key Bitcoin companies, such as Bitrefill and Fold, that make it easier to use BTC at well-known retailers like Amazon and Starbucks.
Although the vision of trustless sidechains has not happened yet, federated sidechains like Liquid and RSK offer additional alternatives to those who are willing to opt into permissioned blockchains that use BTC as their native token.
More decentralized sidechains could become available to BTC users in the near future via Paul Sztorc’s drivechains proposal. It should be noted that RSK plans to slowly migrate away from a federated system towards a network that combines the federation with the drivechains model.
Additionally, strides are being made to use the block space that is available on Bitcoin more efficiently and privately via proposals like Schnorr signatures and Taproot.
There are major issues associated with hard forking BTC, and a completely new coin will lack sufficient liquidity. This means that the best option for achieving BCH's original goals related to lower fees may be to build additional protocols on top of BTC, the most widely-used and liquid cryptocurrency in existence.