The 1 factor that makes Bitcoin more like gold than cash

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People often assume that Bitcoin (CRYPTO: BTC) is digital money – but that’s only true on the surface. Bitcoin was invented for this purpose, but network congestion and exorbitant transaction fees stood in the way. Today, Bitcoin has totally different goals than when it was launched – and investors who don’t understand this difference might regret it.

Why is Bitcoin useless as a daily currency?

Cryptocurrency fans like to claim that the technology “will someday bank the unbanked.” Since the majority of the world subsists on tiny wages, any version of global digital money should be cheap to use. But Bitcoin has continuously seen its transaction costs climb since its invention due to a key factor built into its design.

Blockchain is literally just that – a blockchain. Each contains all the transactions people make on a daily basis. The number of transactions that can be inserted into a block at any given time depends on the size of the block.

Image source: Getty Images.

Miners confirm a new block on the chain every 10 minutes, and users must pay to have their transaction included in the next block. The more they are willing to pay, the more miners advance to the start of the line, and the less users wait for it to complete.

For most of its existence, Bitcoin’s block size has been limited to 1MB, allowing the blockchain to process around five transactions per second at most. This was not a problem in 2012, when only a few thousand people were using the technology, and the fees were perched at less than a fraction of a cent. But as Bitcoin’s popularity increased, so did its problems.

Growing pains

As more and more people started competing for the same limited transaction space in those 1MB blocks, users had to pay increasingly higher fees to see their transactions go through.

Indeed, during the bullish period of 2017, Bitcoin’s average transaction fees rose to $ 50, making purchases with the currency prohibitive. Online stores that were previously eager to embrace Bitcoin summarily ditched it, including the popular gaming platform Steam, which ditched Bitcoin in December.

By April 2021, average transaction costs had risen again – this time to a new all-time high of $ 62, as shown below thanks to data from Bitinfocharts.com.

Average Bitcoin transaction fees since January 2016. Data source: Bitinfocharts.com.

Today, the average Bitcoin fee has dropped to $ 2, a massive 96% reduction. Yet, it’s still far from affordable enough to make the technology viable as an everyday transaction currency.

In short, Bitcoin’s popularity and limited block size takes it further away from practical everyday uses. But other currencies have since moved to try to take over.

Enter (or exit) Bitcoin Cash

Bitcoin has always had a potential solution to increasing transaction costs: increasing the block size and allowing more transactions in every 10 minute window. A significant portion of the Bitcoin community wanted to go this route when fees started to rise in 2013.

But opponents have argued that increasing the size of the blockchain would force people to use too much hard drive space to store the newly enlarged data – an argument that looks more fragile in retrospect, as prices of Storage per gigabyte for consumer hard drives has declined by around 50% since 2013, and the trend appears to be continuing.

In 2017, the disgruntled “big blockers” decided to part ways with Bitcoin. Their new currency shared the Bitcoin blockchain until this point, when it banked on its own. The new Bitcoin Cash (CRYPTO: BCH) offered larger blocks – first 8MB, and now 32MB.

Today, Bitcoin Cash’s fees are less than a fraction of a cent, but the blockchain suffers from less public exposure than Bitcoin, which means it has attracted fewer users. In fact, despite the current block size of 32MB, the most recent data shows that blocks are only filled with around 500KB of transactions, or 1.5% of their total capacity.

Bitcoin Cash’s hashrate – the total computing power securing and running the blockchain worldwide – is also only a fraction of Bitcoin’s. This means that it would take less computing power for any malicious actor to hack Bitcoin Cash.

The future of Bitcoin and Bitcoin Cash

To become a store of value – essentially digital gold – Bitcoin must stabilize its price. Bitcoin supporters believe this will happen when the coin is exposed to a larger trading arena, expecting widespread institutional investment to eventually calm Bitcoin’s volatility.

Bitcoin Cash, meanwhile, has taken up the torch of Bitcoin’s original goals, but struggles to be seen in the shadow of its better-known ancestor.

Despite this, Bitcoin Cash usage has grown by over 500% in the past year alone, with its daily transaction count increasing from 14,000 to over 90,000. In March 2020, Bitcoin Cash briefly overtook Bitcoin for daily transactions, when it recorded 424,000 transactions in one day, compared to 237,000 for Bitcoin.

Bitcoin Cash’s recent wave of activity has been spurred, in part, by the launch of various social media sites on its blockchain, where users can post without fear of censorship and tip each other using BCH. Sites like Read.Cash and Memo.Cash attracted more attention to the Bitcoin Cash blockchain in late 2020 and early 2021. Between February and April alone, the number of unique visitors to the Read.Cash website more than doubled, going from 227,000 to 513,000, according to publicly available data.

As Bitcoin progresses towards its goal of becoming digital gold, it naturally leaves room for a cryptocurrency capable of handling daily high-speed transactions at low cost. In this sense, investors don’t have to choose Bitcoin or Bitcoin Cash – as long as they understand the reason for existence that is completely different from each blockchain.

This article represents the opinion of the writer, who may disagree with the official recommendation position of a premium Motley Fool consulting service. Were motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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