Bitcoin cash (BCH) is emerging as a key contender in the altcoin space. But one of Sweden’s leading blockchain experts, Magnus Kempe, explains why bitcoin cash won’t solve the transaction problems associated with its “parent” bitcoin (BTC).
Bitcoin’s remarkable value surge this fall has been clouded by its attendant ills.
As Business Insider’s Becky Peterson recently noted, as bitcoin has soared in popularity it’s become too expensive to use in small transactions. Who wants to buy a cup of coffee if transaction fees are 200 SEK ($25)?
Bitcoin’s questionable merits as a currency has not only been floated by institutions like Morgan Stanley – which recently noted bitcoin’s true value may be zero – but also one of Sweden’s leading experts on blockchain technology, Magnus Kempe.
“Extremely high transaction fees creates a catch 22 for bitcoin,” says Kempe.
Kempe has led two of the most well-known Swedish blockchain projects outside of the Swedish finance industry, inculding one with the Swedish land registry, in addition to authoring serveral widely circulated reports about the technology.
The backdrop for bitcoin’s catch 22, according to Kempe, goes back to its very founding – specifically, the 1 Mb memory block size limit that bitcoin founder Satoshi Nakamoto imposed on the network in order to prevent spam and to create a global network.
”The limit on the capacity means that the law of supply and demand will dictate the transaction costs,” Kempe says.
As to alternative solutions, or altcoins, that are being developed on top of bitcoin infrastructure, Kempe sees a negative tradeoff between security on the one hand, and speed and cost of transactions on the other.
But you can’t know for sure.
”Seeing how many people there are doing experiments in this space, I’m not saying it’s impossible for bitcoin to become a transaction network.”
How about Bitcoin Cash?
All of this is a big reason why bitcoin cash, with its 8 Mb limit, was created as a “hard fork” of bitcoin in August.
But even that spin-off currency, which is subject to a lot of derision from “core bitcoin” supporters, has its catch 22, according to Kempe.
”There can naturally be more transactions on block sizes of 8 Mb, but in practice, there is no big difference,” Kempe explains, referring to less profitable and more time-consuming ‘mining’ in the bitcoin cash network.
“If [bitcoin cash] becomes popular, it will still be too expensive. With bigger blocks, it takes too long for bitcoin miners to ‘mine’ the currency.”
In purely technical terms, the files that carry transactions will not be able to ’travel’ fast enough in the 8 Mb network. “On a global scale, many miners will have problems mining the currency,” Kempe says.
Bitcoin remains the more popular alternative; BCH is currently worth around a sixth of one bitcoin.
“Today, there are more people who value stability and safety and the fact that more people can be miners on equal terms, globally. This makes people prefer bitcoin over bitcoin cash.”
“99% of blockchains need to be private”
Kempe estimates that around 99 percent of blockchain-based applications he encounters cannot be run on public blockchains of the type that run bitcoin and bitcoin cash.
Applications for storing patient data or food tracking, for instance, cannot tolerate transaction costs as high as those of cryptocurrencies.
”You have receipts and traceability, but if you need to pay 150 SEK ($18) every time a verification will be registered, it’s clear it won’t work.”
Kempe thinks it makes sense to see bitcoin as a store of value, a digital gold: You will not often transact with gold, and it costs a lot to transport gold in a safe way.
”At first, people liked that bitcoin was compared with gold, but lately many have been disappointed as they have realized that bitcoin is becoming something much more boring than what was first believed.”
Is bitcoin’s price surge in 2017 a bubble in the making?
“If you see bitcoin as digital gold it doesn’t have to be a bubble, and thus bitcoin could yet surge 10 times in value, but at the same time as it could lose 99 percent. If you want to sleep well at night, it’s not recommended.”