Most recent update: [October 13, 2021]
No securities regulatory authority has expressed an opinion about the Crypto Contracts or Bitcoin cash, made available on the VirgoCX Platform, including an opinion that Bitcoin cash is not itself a security and/or derivative.
What is Bitcoin Cash?
On the 1st of August 2017, a small section of the Bitcoin community decided to initiate a hard fork and break away from the main Bitcoin blockchain, leading to the creation of Bitcoin Cash (BCH). Leading up to this, Bitcoin was plagued with severe scalability issues that the community was trying to solve. The community could tackle the scalability problem in two ways, they could reduce the amount of data verified in each block, or the size of the block could be increased. Both methods would make transactions faster and cheaper. The Bitcoin community could not reach a consensus on how they could solve the problem, and when developers initiated the hard fork, Bitcoin Cash was created.
Bitcoin Cash describes itself as a peer-to-peer electronic cash for the internet. Don’t confuse this with Bitcoin’s definition of “peer-to-peer” transactions because Bitcoin Cash focuses on carrying out more transactions than Bitcoin, to be used as a medium that enables transactions quickly. Several features differentiate Bitcoin Cash from Bitcoin.
- Bitcoin Cash has an increased block size of 8 MB
- Bitcoin Cash does not have segregated witness (segwit)
- It does not have the “replace by fee” feature
- It can process more transactions per second than Bitcoin
Bitcoin Cash was a hard fork of Bitcoin. This meant that any user who had BTC would get an equal amount in Bitcoin Cash (BCH), provided they did not have their currency in an exchange and had possession of their private keys when the developers initiated the hard fork.
How Does Bitcoin Cash Work?
As mentioned earlier, Bitcoin Cash was created to solve Bitcoin’s scalability problem, which it tackled by increasing its block size to 8 MB, which is about 4-6 times larger than Bitcoin. This allows Bitcoin cash to process faster transactions at a lower cost. If you look at Bitcoin Cash from a technical point of view, Bitcoin Cash functions pretty similar to Bitcoin. Both cryptocurrencies have their supply capped at 21 million, and both validate transactions through the use of nodes, and both use a Proof-of-Work consensus mechanism. In the Proof-of-Work consensus mechanism, miners have to utilize their computational power to verify transactions. The miners are rewarded for their efforts in BCH.
Thanks to its larger block size, Bitcoin Cash is faster and requires lower transaction fees when compared to Bitcoin. Unlike Bitcoin, Bitcoin Cash is much more suited for smaller transactions. You could go to the neighborhood Starbucks, pick up a coffee and pay using Bitcoin Cash. Bitcoin Cash can also support smart contracts and applications such as CashFusion and CashShuffle. CashShuffle is a coin-mixing protocol that will shuffle your BCH with other coin holders, making the transactions more private.
However, CoinMixing requires the services of a third party which isn’t always a good thing. It also requires users to pay a fee each time they use it, which isn’t ideal for users who carry out transactions often. CashFusion puts your Bitcoin Cash in a large transaction that also consists of BCH from other CashFusion users. After this, your Bitcoin Cash is sent back to you. However, since it has been combined with so many transactions, it becomes difficult to trace transactions. Bitcoin Cash has several projects and protocols, expanding the ecosystem and technology and making it more accessible.
History of Bitcoin Cash
The Bitcoin scalability debate has been going on since 2010 when Jeff Garzik brought up the conversation. According to him, if Bitcoin could support more than ten transactions per second, it would generate significant public interest and offer to patch the network, bringing the scalability up to levels utilized by traditional payment methods such as Visa. However, the community pointed out that this would be a consensus parameter change and rejected the proposal. Satoshi Nakamoto, at this point, suggested keeping the proposal on ice and implementing it when needed. Satoshi left Bitcoin without offering a resolution, and the block size debate faded into the background until 2015.
The Bitcoin Cash hard fork was initiated at block height 478558 by a group of developers led by Haipo Yang, leading to the creation of a new chain with an incompatible rule change against the original network. The fork was initiated because developers on the Bitcoin network wanted to remove the limitations of the small block size placed on Bitcoin. The block size would increase transaction speeds, giving the cryptocurrency mainstream appeal. At this point, Bitcoin was facing issues such as slow transaction speeds and high transaction fees.
However, most of the Bitcoin community was against the hard fork since the larger block size would require a complicated mining process that would require a considerable amount of computational power. This could put miners with less computing power at a disadvantage and potentially lead to the platform’s centralization among miners with the most resources at their disposal. Those who held Bitcoin when the hard fork was initiated were given Bitcoin Cash in equal value.
Features of Bitcoin Cash
Bitcoin Cash is a fundamental redesign of Bitcoin. Some of the features of Bitcoin Cash are
- Anonymity - Bitcoin Cash does not tie any identities with any transactions. This ensures the privacy of users of the protocol and ensures that it remains free to use by anyone who wishes to use it.
- Transparency - All Bitcoin Cash transactions are recorded on a public ledger. The ledger is accessible to anyone who wishes to see the history of transactions. This feature ensures complete transparency and also eliminates any potential fraud.
- Immutability - Transactions once completed and recorded on the blockchain cannot be changed or reversed in any way.
- A rules-based system - Nodes on Bitcoin Cash follow a set of rules that help them achieve consensus. However, Bitcoin Cash can also evolve according to the demands of participants, although it requires a high level of consensus to do so.
- Low fees - The larger block size enables Bitcoin Cash to process transactions faster and at a lower fee. The protocol is capable of processing transactions quickly, reliably, and affordably.
- Effective medium of exchange - Bitcoin Cash makes peer-to-peer payments between individuals possible with fees for transactions amounting to less than a penny for each transaction. Transactions are also processed almost instantly regardless of where the transaction has been sent. Bitcoin Cash is ideal for day-to-day transactions and can also be used to purchase goods or even coffee. The low fees also make it ideal for micro-transactions.
Technology Behind Bitcoin Cash
Like other cryptocurrencies, Bitcoin Cash also runs on the blockchain that keeps a record of every transaction taking place on the network. The transactions are verifiable by anyone that chooses to do so, ensuring complete transparency. On a technical level, Bitcoin and Bitcoin Cash are very similar, with both cryptocurrencies having a cap of 21 million, validating transactions through nodes, and using the Proof-of-Work consensus mechanism. The key difference is that Bitcoin Cash processes transactions faster and also involves lower transaction fees. This is possible thanks to its increased block size.
Bitcoin Cash also supports smart contracts and applications such as CashShuffle and CashFusion, giving users greater privacy when conducting transactions. While the larger block size ensures faster transactions, it also brought potential issues such as the security of the protocol being compromised due to the larger block size.
Supply and Incentive
Like Bitcoin, the Bitcoin Cash supply is also capped at 21 million, and new BCH is created through mining. Since it uses a Proof-of-Work consensus mechanism, miners use their computational power to verify and process transactions. As a reward for their efforts, the miners are rewarded in BCH. Like Bitcoin, Bitcoin Cash also sees rewards for miners halve, with the halving set to occur every four years or every 210,000 blocks.
New Bitcoin Cash transactions and new blocks are added to the blockchain through mining. Miners use their computing power to solve complex puzzles and produce new blocks. If the network accepts their block, the miner is rewarded in newly mined Bitcoin Cash. As the price of BCH rises, miners are incentivized to bring more hash rates, increasing the competition between miners to produce blocks. Having more miners increases the network’s security by preventing a single miner from controlling the Bitcoin Cash network.
Smart Contract Support
Bitcoin Cash allows developers to utilize smart contract languages such as CashScript and carry out more complex functions than Bitcoin. Developers can potentially create Decentralized Finance applications on Bitcoin Cash.
Developers can use the Simple Ledger Protocol and issue new tokens that are based on the Bitcoin Cash blockchain. These tokens are similar to the ERC-20 tokens on Ethereum. The Simple Ledger Protocol can also support NFTs. These are unique digital tokens and open up several use cases, from digital artwork to trading in-game items.
Difficulty Adjustment Algorithm
Bitcoin Cash utilizes aserti3-2d, a difficulty adjustment algorithm. This works by cutting the difficulty in half for every two days that the blocks are behind schedule. When the blocks are ahead of schedule, it doubles the difficulty. This mechanism ensures that new blocks are generated at a consistent rate even through high price volatility.
Risks Associated with Bitcoin Cash
While Bitcoin Cash was created out of a hard fork of the original Bitcoin blockchain, Bitcoin Cash eventually had to deal with its own set of hard forks that led to creating not one but two new cryptocurrencies, Bitcoin Cash and Bitcoin Cash SV.
Prior to listing Bitcoin Cash on the VirgoCX Platform, VirgoCX performed due diligence on Bitcoin Cash and determined that Bitcoin Cash is unlikely to be a security or derivative under Canadian securities legislation. VirgoCX’s analysis including reviewing publicly available information on the following:
- The creation, governance, and location of Bitcoin Cash and/or its primary development team;
- The supply, demand, maturity and liquidity of Bitcoin Cash; and
- Legal and regulatory risks associated with Bitcoin Cash.
Statutory Rights under Securities Legislation
VirgoCX is offering Crypto Contracts on crypto assets in reliance on a prospectus exemption contained in the exemptive relief decision Re VirgoCX Inc. dated May 30, 2022 (the Decision). Please be aware that the statutory rights in section 130.1 of the Securities Act (Ontario), and, if applicable, similar statutory rights under the securities legislation of each other province and territory in Canada, do not apply in respect of the Crypto Fact Sheet to the extent a Crypto Contract is distributed under the prospectus relief in the Decision.