Why Bitcoin is Different than other Cryptocurrencies

In my last article, I discussed how the market cap of many altcoins is deceiving as recently, there’s been a large run-up in the prices of a lot of altcoins. In this article, I seek to show how and why Bitcoin is different than all the other altcoins that exist.

How People Progress in Bitcoin

Having been involved in Bitcoin for a long time, I’ve noticed that there’s a pattern to how people think about Bitcoins as they discover more and more of the ecosystem surrounding it. Usually, the thoughts go something like this:

  1. Mining sounds really cool. That sounds like where the money is going to get made. How do I get miners and start making some Bitcoin?
  2. Mining looks really hard and difficult. I guess it’s better if I just buy it. Now where can I go buy some?
  3. Awesome, now I own some Bitcoin, but what are all these other coins? Are they going to take over sometime?
  4. I want to hedge against Bitcoin self destructing somehow. Maybe I should buy some of these altcoins.
  5. I can’t possibly look into every altcoin there is, there’s just too many of them. How do I choose?
  6. I know, I’ll just buy the most popular ones since they’re probably the most likely to have any chance at all of beating Bitcoin anyway.
  7. Hmm, but the popular ones look pretty expensive. Maybe I’ll buy some of these other ones that are just starting.

Why People Buy Altcoins

Mostly, people get into altcoins as a way to hedge against Bitcoin. Here are some common reasons for someone to hedge with altcoins:

  1. An altcoin may have some future utility that is significantly better than Bitcoin allowing the altcoin to overtake Bitcoin.
  2. Even if Bitcoin continues to be the most valuable cryptocurrency, there may be room for altcoins to serve some other niche and hence may not be bad bets in their own right.

Bitcoin Catastrophe

There are several ways in which Bitcoin could die catastrophically. The first would be a technical flaw (for example, a bug that would allow someone to steal coins). The second would be an economic flaw (for example, a code change that would instantly give 10 million coins to some entity for some reason). The third would be a consensus flaw (for example, Bitcoin splits into two roughly even coins).

Future Utility

Most altcoins have some technical difference compared to Bitcoin and that is often the reason given for why people invest in them. The reasoning is that since these altcoins have much of the same utility of Bitcoin plus something else, the altcoin can be more useful than Bitcoin and thus take over.

Niche Usage

Certainly, many altcoins have tried to carve out niches for usage. Dogecoin, for example was built on tipping each other and transferring value, often just for the sake of transferring value. Ripple was originally conceived as a way for banks and large institutions to transfer value.

What Makes Bitcoin Different

The main advantages of Bitcoin are network effect and proven security. Both are nearly insurmountable advantages.

An Example

To make this clearer, imagine I create a coin for email spam filtering. Let’s call this altcoin SpamCoin. It’s an altcoin that lets you message someone only if you pay them some SpamCoin. Suppose this actually turns out to be very useful and lots of people start using it, making SpamCoin more valuable. What would happen?

Conclusion

This is not to say that altcoin investment is bad. Each investor needs to evaluate their own risk vs. reward ratio and decide whether that’s a good fit for their goals. What is clear is that altcoins are actually not a great hedge against Bitcoin. Much of the same risk exists in the altcoin and much of the potential rewards consumable by Bitcoin.

Bitcoin Educator, Developer and Entrepreneur. Book: https://amzn.to/2RSlnTb PGP Fingerprint: C1D7 97BE 7D10 5291 228C D70C FAA6 17E3 2679 E455