Bitcoin Cash: What You Need to Know
Bitcoin Cash’s sudden announcement on Saturday that they’ll go ahead with a fork on August 1 caught a lot of people, including myself, by surprise. In this article, I’m going to explain what Bitcoin Cash (aka BCC) is, how it affects you and how you should prepare for August 1.
What is Bitcoin Cash?
From the project website’s FAQ:
What is Bitcoin Cash?
Bitcoin Cash is peer-to-peer electronic cash for the Internet. It is fully decentralized, with no central bank and requires no trusted third parties to operate.
The prominent use of “peer-to-peer electronic cash” is purposeful here. Bitcoin Cash is seeking to be a cryptocurrency that’s focused on transaction capacity.
Why is this fork a surprise?
Many people (including myself) thought that this fork would only trigger if BIP148 were able to split the network. In other words, many people thought Bitcoin Cash (and its client Bitcoin ABC) was just a credible threat to prevent a contentious user-activated soft fork (UASF). Bitmain actually stated that the Segwit2x (aka New York Agreement) would be preferable:
So naturally, when BIP91 (first part of Segwit2x) locked-in and activated ahead of BIP148, which is scheduled for August 1, most assumed this would prevent the so-called user-activated hard fork (UAHF) from triggering.
But, it looks like Bitcoin Cash supporters had other ideas.
Why should I care?
You should care because Bitcoin Cash is a permanent fork of Bitcoin.
Again, from the FAQ:
Is Bitcoin Cash different from ‘Bitcoin’?
Yes. Bitcoin Cash is the continuation of the Bitcoin project as peer-to-peer digital cash. It is a fork of the Bitcoin blockchain ledger, with upgraded consensus rules that allow it to grow and scale.
This means that if you own Bitcoin (that is, you control your own private keys) prior to the fork on 2017 August 1 12:20 UTC, you will have the same amount of Bitcoin and Bitcoin Cash after the fork.
Lest you think these BCC isn’t worth anything, BCC futures are currently trading at about $475 on ViaBTC.
What do I need to know?
First, you should know that many exchanges, including Coinbase, are simply not prepared for this event.
Again, from the FAQ:
If I own Bitcoin, do I automatically own Bitcoin Cash too?
Yes. Because Bitcoin Cash is a fork of the ledger, that means you own the same amount of Bitcoin Cash as you did Bitcoin at the time of the forking block. However, if your Bitcoins are stored by a third party such as an exchange, then you must inquire with them about your cash.
Note that last sentence. Exchanges or third-party bitcoin storage providers may or may not give you your Bitcoin Cash. It’s likely that third party services will try to do the right thing, but there’s no way to know if they can get everything set up in time to be able to give you the Bitcoin Cash you’re entitled to.
Second, all hard forks present two risks: replay and wipeout attacks. Wipeout is not a as much risk since this is a permanent fork (there are scenarios where one chain’s miners may attack the other, but this isn’t in play yet). Replay protection is provided as part of the Bitcoin Cash release as explained in the FAQ:
How is transaction replay being handled between the new and the old blockchain?
Bitcoin Cash transactions use a new flag SIGHASH_FORKID, which is non standard to the legacy blockchain. This prevents Bitcoin Cash transactions from being replayed on the Bitcoin blockchain and vice versa.
Rest assured that as long as you control your own private keys, you should be able to use those keys to create transactions on either chain safely.
I thought Bitcoin solved scaling! Why is this happening?
Good question. After the scaling drama of the past few years, we finally made progress when BIP91 locked in on Thursday. Though Segwit increases transaction capacity, it’s not done so in a way that everyone is happy with.
BCC looks like an appeal to the segment of the Bitcoin users that don’t like Segwit. Since Segwit is getting activated on Bitcoin, this fork gives many of these people a place to go.
From the FAQ:
Why was a fork necessary to create Bitcoin Cash?
The legacy Bitcoin code had a maximum limit of 1MB of data per block, or about 3 transactions per second. Although technically simple to raise this limit, the community could not reach a consensus, even after years of debate.
So what features does Bitcoin Cash have?
Bitcoin Cash offers three new features. First, it offers a much larger block size of 8MB.
Second, it offers replay and wipeout protection. The transaction signature is slightly different and the forking block has to be greater than 1MB.
Third, it offers a way to adjust the proof-of-work difficulty quicker than the normal 2016 block difficulty adjustment interval found in Bitcoin.
From the project announcement on Bitcointalk:
“REQ-7 Difficulty adjustement in case of hashrate drop
In case the MTP of the tip of the chain is 12h or more after the MTP 6 block before the tip, the proof of work target is increased by a quarter, or 25%, which corresponds to a difficulty reduction of 20% .
RATIONALE: The hashrate supporting the chain is dependent on market price and hard to predict. In order to make sure the chain remains viable no matter what difficulty needs to adjust down in case of abrupt hashrate drop.”
In other words, the difficulty will adjust pretty quickly should there be a low hash rate.
What does this mean for Bitcoin?
This is the hardest thing to answer. It may mean nothing, it may mean a lot. Some obvious things that we’ll now need to think about are:
- Who will mine Bitcoin Cash?
- Who will have the larger hash rate? Both coins will use double-sha256 as the proof-of-work.
- What will the price ratio be?
- What will the volumes on both coins be like?
- How will hash rate react to price? How will price react to hash rate?
- How will this affect the 2x HF part of Segwit2x?
- What chain will coins that operate on top of Bitcoin like Omni and CounterParty choose?
Unfortunately, the Bitcoin Cash announcement brings more questions than answers. One thing is for certain: if you want to maximize your holdings, it’s in your best interest to get your Bitcoin off third-party services and control your own private keys before August 1st.