Bitcoin Cash has nearly halved in value, down from more than $600 last month to now trade around $360 after reaching a recent low of $340.
Its trading volumes have also picked up, standing near $325 million, but no where near its all-time high reached during incredible volatility soon after it was launched on August 1st.
It’s unclear why the currency has fallen so sharply, down 10% yesterday. One reason might be its difficulty adjustment algorithm.
Bitcoin Cash’s difficulty has now fallen to 5% of the difficulty it had on August 1st, making it 58% more profitable to currently mine than BTC.
This is a problem at many levels. While it was useful to bootstrap the currency, this constant adjustment makes transactions very unpredictable.
There can be many hours with no blocks, until the difficulty adjusts, then there can be as high as 50 blocks within one hour. That creates inflation.
As such, the currency is clearly not operating as it should because it is not keeping blocks within an average of 10 minutes. Instead, blocktimes are very volatile.
As can be seen from the above chart, Bitcoin Cash is highly volatile at a protocol level. It can temporarily be vastly more profitable to mine than BTC, so attracting many miners, which find blocks far faster than 10 minutes, creating huge inflation.
Then, once difficulty adjusts again, it can be sharply less profitable to mine, with miners leaving, which causes the network to operate with no blocks for hours and hours.
That would have been a small detail of no care in August, but now months later, we are seeing no stability at the protocol level. Which means this will continue, perhaps forever. Something that objectively makes Bitcoin Cash inferior because it is unable to perform a crucial function of keeping blocks within an average of ten minutes.
An obvious solution is to adjust difficulty at every block, like ethereum does. Another solution is to keep it at the current 5% level of difficulty and then use the usual method of adjusting every two weeks.
A third potential solution is to change proof of work, returning back to CPU, or more likely GPU, mining. Current miners, however, would probably disagree with that, making the matter controversial. But it is unlikely they would attack the new chain, therefore if the rest find agreement the change would probably go smoothly.
Neither is a perfect option, but if ethereum can function fine by changing difficulty at every block, there might be no reason why Bitcoin Cash can’t likewise function fine.
That, however, might be just one reason for the price fall as there may be another reason. Apparently some 70,000 BCH were sold from Xapo wallet users as that company does not support the currency and has asked them all to withdraw BCH before December or they’ll convert them to BTC.
But the action of Xapo wallet users may be a symptom, rather than a cause. We can’t assume they are so stupid or lazy as to mindlessly just sell if they had any good reason to think their asset would appreciate in value.
They clearly are thinking the opposite and considering the continuous slow decline in price for now more than a month, it is unlikely they alone caused such fall.
It is far more likely, instead, that the market is wondering whether BCH’s protocol will ever find stability, with potential added concerns regarding its future if 2x is adopted.
It is notable that, following yesterday’s skills test between 1x and 2x developers with 2x coming on top, it is BCH, out of all currencies, which showed the greatest movement in price.
That may suggest the market is wondering, or perhaps even judging likely, that 2x may happen, and they may be thinking that if it does happen BCH would hold less value.
Necessarily, much of the above is speculation and the reason for the sharp fall in price, uniquely among currencies in the time frame in question, might be quite a combination of factors.
But what is clear, in our view in any event, is that BCH can’t continue having no blocks for hours and then 100 blocks in an hour. That’s not, in our view, a well functioning peer to peer payment network.