Today's Hot Topics

Here’s Why Bitcoin Cash’s Low Transaction Fees Don’t Matter

Here’s Why Bitcoin Cash’s Low Transaction Fees Don’t Matter
Breaking News / Cryptocoins

Note: This article is using bitcoin cash as an example, but these points can also be applied to other altcoins focused on low transaction fees.

Bitcoin Cash (Bitcash) started as a spinoff of the Bitcoin network with the intent to increase the block size limit in an effort to allow on-chain transactions to be processed in a much cheaper fashion. Other coins, such as Litecoin and Dogecoin, have also had a focus on low-cost, on-chain transactions, but Bitcash was an attempt to bring this functionality to existing Bitcoin users.

As it turns out, the market (for now at least) isn’t much interested in low-fee transactions when they are attached to a newly-created cryptocurrency, so there may not be much room for the bitcoin cash altcoin to grow in this particular niche.

Lack of Liquidity and Price Stability

For one, bitcoin cash does not have anywhere near the liquidity and price stability of bitcoin. This is clear when looking at the relevant data points, such as exchange-traded volume, on-chain transaction volume, and the volatility of daily returns.

In other words, it’s easier to exchange bitcoin without encountering slippage, more people are willing to accept bitcoin for transactions, and bitcoin’s price (while volatile in its own right) doesn’t move as wildly as bitcoin cash’s.

Low fees sound nice at first, but the issue is no one wants to hold bitcoin cash, which means no one has it available to make a transaction within the first place.

Bitcoin is currently processing more than ten times as many transactions per day as Bitcoin Cash, and that number is understated due to the increased use of transaction batching on the Bitcoin blockchain. Transaction activity on Bitcoin Cash is more comparable to the level of activity found on the Dogecoin and Litecoin networks.

On-chain Transactions vs the Lightning Network

Bitcoin and Bitcoin Cash effectively deal with the problem of high transaction fees in two different ways.

Bitcoin uses the Lightning Network, which effectively allows for transaction batching in a decentralized manner and enables instant, practically-free payments (if all goes according to plan). The batching of transactions also allows the cost of operating a full node to remain low, which protects the permissionless and incorruptible nature of the network.

With Bitcoin Cash, the idea is to rely more heavily on on-chain transactions that will need to be placed into the blockchain and stored forever. If more on-chain transactions are going to be encouraged on the Bitcoin Cash network, then the cost of operating a full node may become prohibitively expensive for some due to the need to store and process more data (that is, if it becomes a popular cryptocurrency network).

A keynote on this point is that Bitcoin’s Lightning Network is still in the early stages of being rolled out on top of the Bitcoin network. There are tradeoffs with on-chain vs lightning-powered transactions for day-to-day payments, but it appears that the market is currently betting that the Lightning Network will be the proper solution over the long term.

At the end of the day, it’s also true that not many people have made the move over to bitcoin cash simply because low fees don’t matter when store of value is still the overwhelmingly most popular use case of public blockchains.

You can share this post!