August 26, 2017    3 minute read

Diverging Cryptocurrencies: The Future of Bitcoin Cash

Fork In The Road    August 26, 2017    3 minute read

Diverging Cryptocurrencies: The Future of Bitcoin Cash

If history is any indication of future, one could look at the divergence in the prices of Ethereum and Ethereum Classic; the former priced at $333 and the latter at $15.38. Bitcoin and Bitcoin Cash are clearly on a different path for now. While many investors are dazed by the stellar performance of Bitcoin after the hard fork, the million-dollar question – whether Bitcoin Cash will go down the same path – is unanswered.

The Value of Bitcoin

In 2014, Bank of England suggested the potential death of the cryptocurrency in the future. In short, miners must compete to verify the next block of transactions and earn fees should they be successful. Hence, their revenue depends on their mining power, or ‘hash rate’. However, the problem is that the difficulty of the math problem by design is also increasing in the total amount of computational power within the network. Therefore, miners would not get more revenue out of their machines if all other miners are also upgrading. The marginal cost of investment would eventually exceed the marginal revenue from mining. Then, miners would stop working and Bitcoin fails. It is the same mechanism design that drives its success to failure.

The core argument of the Bank is that difficulty increases faster than the rate at which advances in computing bring cost saving to the market. It has been seen in recent years that the growth in computational power can barely follow Moore’s law, which is a prediction that the speed of processor grows exponentially over time. Unless the currency’s algorithm makes changes to allow greater scalability, it is extremely difficult to refute the Bank’s view.

Bitcoin vs Bitcoin Cash

If the BoE’s view sounds too dismal and far-fetched, it’s important to go back to the present day. Suppose BoE’s prediction marks the end of bitcoin, then the question is whether Bitcoin and Bitcoin Cash would differ in the interim valuation. The first mover advantage is very strong in the cryptocurrency. Bitcoin still has the largest market share after Ethereum and Bitcoin Cash were introduced. It is not a small feat to defeat the seven-year-old currency.

On the other hand, Bitcoin cash is supposed to be more efficient as it allows more transactions per block than the original Bitcoin. Different from the previous challenger Ethereum, the similarly structured Bitcoin Cash implies that the old Bitcoin community can move to the new Bitcoin environment at ease. Once the current rally in the price of the original turns around, existing miners may find it more profitable to switch to the other Bitcoin. More importantly, following the BoE’s argument, the lower cost of transaction translates to a lower marginal cost, thereby the inflexion point, where marginal revenue equals cost, may appear later than the original Bitcoin. Hence, Bitcoin Cash would survive longer with the lower transaction. After all, the blockchain is said to bring about security, lower cost of transaction and, above all, efficiency.

Conclusion

The jump from $2700 to $4200 by the original Bitcoin is impressive, but there is very little fundamental to support it. All Bitcoins have left is the network effect. Bitcoin Cash is an improvement over the original, and in a market which seeks for greater efficiency, it is only a matter of time before the crowd moves to the new Bitcoin. That said, the inherent design of cryptocurrency as the BoE suggests is a classic example of the tragedy of the common, and investors must be wary when the music stops.

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