This article is taken from our FREE daily investment email Money Morning.
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Today we consider the relative merits of bitcoin and its offshoot, bitcoin cash.
Within the crypto community, opinion is, to put it mildly, divided.
Should you own one ahead of the other? Both? Or neither?
You should definitely own a little bit of cryptocurrency
Let me start by answering one part of that question straight away. If you are an investor, you absolutely should own some cryptocurrency in your portfolio, even if only a small amount. The transformative potential of the technology is too great not to have some exposure to it.
If you haven’t already got some crypto, get some, even if it’s only a tenner’s worth (read my step by step instructions on how to do that here). Start small, as I always say, educate yourself, get used to the tech and, once you’re familiar, if you still think this thing has legs, increase your exposure.
It’s important you make the decision whether to increase your exposure yourself (not based on what somebody somewhere said) and that you make that call from an informed position.
I rather suspect you have plenty of time to get educated. My macro view is that, for the time being, the sector is in a period of consolidation. After the enormous gains of last year, it needs a period of digestion. This is normal and natural. Use this consolidation period (assuming I’m right that it is consolidating) to your advantage and get educated, if you are not already.
When Satoshi Nakamoto announced his invention, bitcoin, to the world on an out-of-the-way mailing list for cryptographers, the very first thing he said was: “I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party.”
It’s important to distinguish, here, between cash and money. In the physical world, we are using cash less and less. That’s not to say we do not need it: the recent breakdown of the Visa network showed the dangers of relying on third parties for transactions.
Cash involves no third party. There is no dependence on anyone else, no intermediary. It is paid directly from A to B. We use it for small transactions, which are too expensive to process (a pint of milk from the corner shop). We use it for quick transactions (throwing money to a busker). We use it for private transactions (things you don’t want your spouse to know about) and, yes, we use it for illegal transactions (paying the cleaner or buying AK47s).
The birth of bitcoin cash
The idea of bitcoin was to be a system of cash for the internet: an online payment system, which involved no third parties.
But the developers of bitcoin cash felt bitcoin had strayed from that original goal. Transaction fees were too high for small payments. Transaction times too slow for quick payments. The criticism was valid.
Bitcoin has morphed into a speculative asset, more like digital gold than cash. Gold has its uses as a store of value. It once provided the backbone of the global monetary system. But its use in payments was always limited. People preferred to hoard gold and pay with copper, nickel, silver or paper. Bitcoin’s role in the crypto eco-structure is similar.
Interestingly, Nick Szabo, who developed a precursor to bitcoin called bitgold, once told me his aim with it was “To become a reserve, high-powered currency”. (You can read more about that conversation in my book). Bitcoin has fulfilled that goal. But, for payments, it was failing.
And so bitcoin cash was forked out of bitcoin (see it as a spin-out). Everyone who owned bitcoin on 1 August, 2017 got some bitcoin cash. Bitcoin cash has since proved to be better for payments. The transaction times are quicker. The fees are lower.
However, a multitude of other cryptocoins are perhaps as just as good as bitcoin cash for online cash payments: Dash, Monero, Zcash, Stellar, to name some of the better-known.
Bitcoin diehards argue that bitcoin cash has unscrupulously tried to steal bitcoin’s limelight. They say that people are misled into buying it thinking it is bitcoin. One of the key bitcoin cash developers, Craig Wright, has – falsely, they declare – claimed to be Satoshi Nakamoto.
I once met Wright. He’s supremely bright, but he is also awkward and he rubs people up the wrong way. He has rubbed up much of the bitcoin community the wrong way. This has only added to the friction.
Certainly, the politics of the fork could have been handled better (though I have to say I have some sympathy with why they have not).
No matter. We are investors. We keep our politics out of our investment choices. Which one is the better investment now?
Bitcoin, bitcoin cash – or both?
Bitcoin is the backbone of crypto. Though there are better coins, bitcoin has a network effect like no other. You should own some.
But – and I know I am going to upset a lot of people by saying this – at current prices I think bitcoin cash is actually the better investment.
Whereas in the bitcoin community there is quite a bit of in-fighting amongst developers, bitcoin cash seems to be more united. I went to meet some of the developers to discuss my financial gameshow, when I was looking for sponsors.
Within about three minutes of talking to me, they were trying to get me to arrange for bitcoin cash to be a means of payment for the entire Edinburgh Festival, and offering to build the infrastructure. Given that this is the most ticketed event in the world after the Olympics and the World Cup, this is no small undertaking.
I was deeply impressed with the ambition of the enterprise. They are really pushing this thing. In the coming weeks there are big deals for payments with major international merchants to be announced. They are building an enormous and ambitious payment infrastructure across all six continents. Owning the coin is like owning shares in the network, a network which is rapidly growing and well marketed. They want bitcoin cash to be used as widely as possible as a means of payment: to make sure it is actually used.
(Full disclosure, we have shaken hands on a deal to sponsor my show, though nothing has yet been announced, so I am almost certainly biased. On the other hand, I wouldn’t have a bunch of bozos sponsoring my product).
When the fork happened last August, bitcoin was sitting around $2,800. Bitcoin cash began life around $250. At its highs bitcoin went to $20,000. Bitcoin cash hit $4,000. Today bitcoin sits around $7,500. Bitcoin cash is $1,100. Bitcoin cash has outperformed.
Bitcoin cash is more volatile and the downside risk is greater, but if you ask me which of the two is more likely to go up ten times from current prices, I’d have to say bitcoin cash.
One way of looking at it is to see bitcoin cash as silver to bitcoin’s gold. The bitcoin cash people won’t like me saying that. They want it to supersede bitcoin – and there’s a very outside chance it might.
I like bitcoin. Gosh, I wrote a book about it. I like bitcoin cash. My view is that you should own both. And if you want to get started with both, head on over to bitcoin.com. My guide to getting started with bitcoin is here (though it was written before the fork). Remember – start small and don’t speculate significant capital until you know what you are doing.
Of course, all research into bitcoin should begin with what is surely the definitive book.
And if you are free this Sunday and in London, I’m doing another try-out of my Financial Gameshow at the Backyard in Bethnal Green. You could actually win yourself some bitcoin cash as well as some silver.
Entry is free. Did I say free? Yes, I did.