If you think your portfolio has put on a show since the end of the Great Recession, it's probably just a blip next to the returns of cryptocurrencies over the past couple of months. Since the year began, bitcoin has risen by more than 300%, while digital currency Ethereum, the second-largest cryptocurrency by market cap, has vaulted higher by almost 3,900%! No, that's not a misprint -- that's a 3,900% return on your investment in less than eight full months.
Bitcoin and bitcoin cash split in two
Of course, the ride has been anything but smooth. Bitcoin wound up plunging by more than $1,000 per coin a little over a month ago when it became apparent that software engineers and the bitcoin community may not come to a consensus about the future of its blockchain. Blockchain is the decentralized digital ledger than underlies bitcoin and logs all transactions.
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Essentially, upgrades were needed to make transaction times on bitcoin's network faster. A majority of its members wanted to go the route of BIP 91, which introduced an update known as SegWit2X. This update moved some of the data out of bitcoin's blockchain network, speeding up transaction times, lowering transaction fees, and most importantly, increasing capacity to potentially go after merchants and enterprise customers.
A minority of the community, but enough of a minority that the required 80% consensus couldn't be reached, wanted to keep bitcoin as a libertarian's dream currency. Instead of implementing SegWit2X, this group of engineers and community members wanted to work with larger blockchains within the bitcoin network.
The result? On Aug. 1, 2017, the world awoke to a currency that had split in two: bitcoin and bitcoin cash. The latter represents the minority of its members and the former received the SegWith2X upgrade. Since the split, bitcoin has been off to the races, nearly hitting $4,500 per coin last week after briefly dipping below $1,900 more than a month ago.
Bitcoin cash just soared more than 200% in two days
Now here's the really interesting and slightly dumbfounding aspect: Bitcoin cash has been off to the races, too. In just a two-day period last week between Aug. 17 and Aug. 19, bitcoin cash rose from about $300 per coin to $913 per coin, a greater than 200% return in about a 51-hour period. That's insane! What's even crazier, no one's exactly sure why bitcoin cash tripled in price, albeit there are numerous postulations.
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In particular, CoinDesk has suggested that bitcoin cash is arguably more profitable to mine than bitcoin. Mining in this sense is the process of using high-powered computers and servers to solve complex math equations to unlock bitcoin or bitcoin cash, which allows miners to be paid. CoinDesk has suggested that a difficulty adjustment in mining bitcoin cash has made it easier, and thusly more profitable, to mine than original bitcoin. This could certainly explain some of the surge in bitcoin cash, along with sheer momentum and emotions taking over.
Bitcoin-cash gains make little sense
However, bitcoin cash could also be dangerous for investors' wealth in a number of respects. For example, the basis of its split from bitcoin is that a minority within the community didn't want bitcoin to become a mainstream currency, or to be used by enterprises. This should, in theory, limit the usefulness of bitcoin cash's blockchain. What's more, it may not be supported by a number of popular cryptocurrency exchanges, which doesn't help in any way legitimize bitcoin cash.
Another issue to consider is that larger blockchains within bitcoin cash may not resolve lengthy transaction times or high transaction fees. For miners, at least, it takes twice as long to receive a reward from bitcoin cash (about 34 hours) than it does from bitcoin (17 hours), which could disincentivize miners from considering bitcoin cash. This is already an issue since there were fewer bitcoin cash miners in place, post split, which could adversely impact liquidity and increase volatility.
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Lastly, it remains to be seen what can be done with bitcoin cash. While there are some brand-name businesses that currently accept bitcoin, there are no guarantees that any businesses will accept the smaller bitcoin cash. That lack of legitimacy could come back to haunt those holding onto bitcoin cash.
For now, it doesn't make much sense to be invested in any cryptocurrencies, least of all bitcoin cash, given how little enterprises are involved. This isn't to say that businesses aren't interested in blockchain technology, so much as to suggest that the foundation for these cryptocurrencies is still virtually nonexistent. Until we see a more defined pathway forward for these digital currencies and their underlying technology, they're simply not worth the risk.
