Note: Throughout this article, ’Bitcoin’ with a capital ‘B’ refers to the Bitcoin protocol and ‘bitcoin’ with a lowercase ‘b’ refers to units exchanged using the Bitcoin protocol.

Many introductory Bitcoin articles aim to teach the basics of Bitcoin as a technology, convoluting themselves with technobabble and three letter acronyms. Unfortunately, technological accounts ignore the properties that make Bitcoin important, as well as the versions of Bitcoin and how they differ. The goal of this piece is to inform the reader about the properties that make Bitcoin valuable as well as the version of Bitcoin that best embodies those properties.

Why Bitcoin Is Valuable

Bitcoin is a tool that addresses a set of problems that are inherent to traditional financial systems. Traditionally, electronic payments have been processed by financial institutions acting as trusted third parties (e.g. banks and credit card issuers). These third parties carry the responsibility of handling fraud and mediating disputes. Both are tasks that eat up time, and thus money. As a result, transactions become expensive and merchants bear the burden of paying a transaction fee. Merchants aren’t the only ones adversely affected by this; customers often come across an $X amount minimum when using debit or credit cards. On top of this, merchants face the risk of customers disputing purchases and reversing transactions for non-reversible goods and services. Consequently, merchants require more information from their customers as a means to reduce fraud [9]. Bitcoin has been used for years to mitigate all of these problems. It offers fast, non-reversible transactions, at basically no cost. Micro-payments and remittance are now cheap and easy as well.

By removing trusted third parties, Bitcoin users become custodians of their money. No one has access to their funds unless access is given. This means that no one can stop transactions or freeze accounts. Having custody of your money is even more appealing considering banks loan out customer funds on top of charging expensive and hidden fees. By having complete control of your money, you lose the fees and enjoy an increase in economic freedom.

Yet another problem with traditional currency Bitcoin solves is the problem of inflation. Every year that passes, each unit of a traditional currency has less buying power than it did before. Taken over large periods of time, this effect is very noticeable. For example, 1 USD in January 2018 has the same buying power as .65 USD in January 1998. Over 20 years, the USD has lost 1/3 of it’s value! Some currencies even experience hyperinflation, in which the value of their currency dwindles to practically nothing [5]. Venezuela is experiencing this right now [14]. Inflation is a result of printing more money. No one will ever "print" more bitcoin as there is a hard cap 21,00,000 allowed to exist. In this way, Bitcoin models a scarce resource. Instead of inflation, bitcoin will experience deflation (an increase in buying power).

The above describes the unique value proposition Bitcoin introduced to the world. Many people ignore the value proposition and let the fiat price equivalent of a bitcoin influence their buying/selling decisions. However, that is no better than gambling. Coming to an understanding of the problems Bitcoin solves and the utility it has are essential to understanding why it is valuable in the first place. If you don’t agree that Bitcoin is valuable, read no further.

Versions of Bitcoin, and How They Compare

I’ve been speaking as if Bitcoin were a single cryptocurrency. For a while, it was. Bitcoin had the ticker symbol BTC. Over time, the team of software developers the BTC community trusted to maintain the Bitcoin protocol started to implement harmful “features” and they ignored safe solutions that allowed Bitcoin to grow [16]. This was allowed to happen largely due to censorship [2]. Eventually, the community split and created a second Bitcoin protocol which removed the harmful “features” and implemented the safe scaling solution. This new branch is branded Bitcoin Cash and has the ticker symbol BCH, while the defunct protocol is branded Bitcoin Core and retains the ticker symbol BTC. Outlined below are the key differences between Bitcoin Core and Bitcoin Cash.

Scalability

Technically, Bitcoin Core and Bitcoin Cash can scale as much as they need to. However, the Bitcoin Core team and community have taken a hard stance against scaling BTC. Right now, the Bitcoin Core network can handle 3 transactions every second. In contrast, Visa currently handles approximately 24,000 transactions per second [15]. Let it be noted that Bitcoin Cash can, has and will continue to scale as much as it needs to in order to support everyone who wants to use BCH.

Transaction Fees

Due to the fact that Bitcoin Core can only handle about 3 transactions per second, users must compete to have their transaction approved. Users compete by paying a large transaction fee. This led to an average Bitcoin Core transaction fee of around 55 USD on Dec. 21, 2017 [1]. Because Bitcoin Cash can support it's user base, there is no competition and transaction fees are negligible. The chart below shows average transaction fees for Bitcoin Core and Bitcoin Cash. Core transaction fees are shown in blue, Cash transaction fees are shown in red.

Due to Bitcoin Core's high transaction fees, it became unusable for most things. When people stopped using it, transaction fees started dropping as the chart indicates.

Transaction Times

Bitcoin Core transaction times are generally higher than those of Bitcoin Cash. A user of either network can have their transaction acknowledged in almost no time at all. However, it should take about 10 minutes before it becomes cost prohibitive to reverse a transaction. Keeping true to this articles introduction, the technicalities needed to understand this won’t be discussed, instead I’ll explain the fact of the matter. Bitcoin Core transactions, depending on how congested the network is at the moment, can take up to 190 hours (over 1 week). On the other hand, you can assume Bitcoin Cash transactions are safe when they are acknowledged (a few seconds at most).

Non-reversible Transactions

Bitcoin was designed to not have reversible transactions. Even though reversible transactions were never part of the plan, especially when they’re unmediated and arbitrary, Bitcoin Core added something called “replace by fee” to their protocol. The “feature” in essence, allows users to reverse transactions [3]. This is dangerous for anyone trying to provide a good or service in exchange for Bitcoin. Because replace by fee is a very undesirable “feature,” the Bitcoin Cash protocol does not allow it.

Safe Transactions

Transactions on the Bitcoin protocol are supposed to be safe and easy. In an attempt to scale and satisfy the Bitcoin Core community, the Core developers created yet another feature known as “segregated witness,” abbreviated SegWit. SegWit does allow for scaling, but only by 60%. This means Bitcoin Core is now capable of handling almost 5 transactions per second. Not nearly as much as it needs to. Furthermore, SegWit isn’t even considered a scaling solution [11]. The real problem with SegWit is not so much the change in protocol, but the fact that the change wasn’t required by everyone securing and validating the Bitcoin Core network. Changing the protocol in this manner is dangerous, as pointed out by one of the previous and most prolific developers of the Bitcoin protocol [4]. Whether or not SegWit by itself is dangerous for Bitcoin, Bitcoin Cash has opted to remove SegWit due to the dangerous nature of how this update has occurred, as well as the legal problems it presents [10].

Size of the Network

Metcalfe’s law dictates that the usefulness and value of a network is proportional to the square of the number of users of that network. To make that last sentence comprehensible and applicable, the value of the Bitcoin network quadruples every time the number of users doubles. This is the one area where Bitcoin Core trumps Bitcoin Cash. Because Bitcoin Core was the protocol supported by many companies before the community split, they offered support for BTC by default. However, due to the un-usability of Bitcoin Core, many people are dropping support for it, instead picking up support for Bitcoin Cash [6] [7] [8] [12] [13]. Looking at Metcalfe’s law another way, when Bitcoin Core loses half of its user base, it loses 75% of it’s value. The tides are quickly changing and Bitcoin Cash support is on a trajectory that will overtake the support for Bitcoin Core.

Conclusion

The value of the Bitcoin network, or a Bitcoin network is derived from it’s value proposition. Many people aren’t aware of the differences between the Bitcoin Core value proposition and the Bitcoin Cash value proposition. When one considers the difference between Bitcoin Core and Bitcoin Cash, it isn’t hard to see that Bitcoin Core has turned into a wild speculative instrument while Bitcoin Cash retains the original value proposition of Bitcoin. While the author can’t offer financial advice, he hopes you will approach investing in a version of Bitcoin the same way you would invest in a company; by determining the value it offers to the world.

Bibliography

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