If we are to compare Bitcoin to a publicly traded company, it makes sense to wonder if an altcoin can replace it. Some good examples of this are when MySpace was replaced by Facebook and when Apple overtook IBM as the largest personal computer seller. Historical evidence demonstrates that just because a company is great right now, does not mean it will maintain success in the future. At any point, another company may overtake a competitor’s market share because it is able to bring on a game changing product or service that cannot be outperformed. However I will explain why this rule should not be applied to cryptocurrencies and why Bitcoin will remain king of crypto land.
First of all, no other cryptocurrency has currently overtaken the market capitalization of Bitcoin. Traditionally market capitalization is a metric that determines the value of a company. This is determined by multiplying the share price with the amount of outstanding shares a company has. If Apple shares are sold for the price of $100 and there are one million shares available for the public to trade, the market capitalization of Apple would be $100 million dollars. Similarly, we can also determine the market capitalization of Bitcoin by multiplying its current price with the 21 million Bitcoin that will ever exist.
The only future exception to another cryptocurrency overtaking Bitcoin’s market capitalization will most likely be a stablecoin. Stablecoins are cryptocurrencies that are backed by or pegged to fiat currencies. Tether (USDT) is a popular stablecoin that will most likely overtake Bitcoin’s market capitalization in the future since fiat can be infinitely printed. Is it possible for another altcoin to overtake Bitcoin’s value? We will cover some of the other top altcoins and what they claim to offer the market. For example, Bitcoin offers users a store of value, global payments with the Lightning Network (fast transaction layer on top of Bitcoin), and a decentralized verification network that does not rely on human intervention. Is it possible for another cryptocurrency (altcoin) to replace Bitcoin’s use case?
First Mover Advantage
Bitcoin was released to the public in 2009 in the middle of the Great Recession. It was developed as an alternative financial system that could not be manipulated in the same way that a country’s current fiat monetary system may be. With the right incentives put in place, Bitcoin is a system that meets the demands of those who seek to opt out of the failing fiat system for a digital network that is decentralized, is transparent, has a fixed supply, is hard to change without majority consensus, and can be verified by anyone with a computer. Bitcoin’s network is essentially the opposite of a fiat system, where it is centralized by a small group of individuals, it is misunderstood by the public, supply is infinite, rules of the system are changed frequently, and it cannot be verified by the public.
By being the first native digital monetary network that can only be changed with a majority consensus, Bitcoin is able to meet the needs of those who are actively seeking a parallel financial option to the fiat system. After the 2017 bull run, the majority of the online world had at least heard of Bitcoin. During the 2018 and 2019 bear market, a wave of content creators and educators emerged. They argued that the best current use case for Bitcoin was a store of value as opposed to a payment system. With more informed Bitcoin holders than in 2017 (and those with exposure through other investment vehicles), they are less likely to sell their bitcoin at certain prices and periods. Additionally, due to an inflating US dollar, large bitcoin purchases made by institutions are allowing miners to become more and more incentivized to secure the network by increasing their mining operations.
Whatever defects are currently attributed to Bitcoin, altcoins will continue to be created in order to address what the market demands. However, each new altcoin must compete with Bitcoin’s adoption rate, which continues to increase each year and simultaneously deliver a functional and secure network. Does this mean that Bitcoin will be able to solve for every financial product within finance? Not necessarily, but it is possible to build many of these products on top of Bitcoin. However, Bitcoin does not need to be every asset type or replace financial institutions. If an altcoin is more efficient for smart contracts (which Bitcoin is already capable of doing), Bitcoin will still continue to succeed because of the demand for a store of value.
Bitcoin’s network does not need to replace fiat in order to successfully operate. It continues to attract individuals who no longer need to rely as heavily on legacy systems in order to be productive. With this head start, Bitcoin is widely used (mainly as a store of value) across the globe and may be exchanged for goods or services with the Lightning Network (a fast payment system built on top of Bitcoin) if it is required to do so. If a large transaction needs to occur with Bitcoin, the secure on-chain network is able to execute the exchange within the day for a very small fee. If the network is busy during the time of this exchange, the fee may be adjusted to execute at an earlier or later time depending on the needs of the user.
Security of the Network and Decentralization
The security of the Bitcoin network is determined by the estimated hash rate that miners are producing. Bitcoin mining requires an enormous amount of processing power from computers or ASIC devices that are built specifically for this purpose. The higher the hash rate, the harder and more expensive it is to attack and control the network. With higher security, more time is needed in order to confirm each transaction. Blocks are mined every 10 minutes and after a successful miner includes a user’s transaction in a newly mined block, the full nodes of the network must verify and store that data to be broadcasted to the rest of the network. This is all accomplished without the need of a third-party or human to verify network activity. In this way, Bitcoin cannot be corrupted by humans.
Many are critical towards the legitimacy of Bitcoin’s network being decentralized. It is true that a large percentage of the monthly hash rate is located within China. But from September, 2019 to April, 2021, the country’s hash rate fell from 75% to 46% and will continue to become more decentralized. Countries like Iran, Kazakhstan, Malaysia, and the US have gained hash rate during this same period. Below is a map to show the distribution of miners throughout the world for April of 2021.
If an altcoin claims to have faster transactions on their blockchain, it will mean that the network is allocating resources away from security and will require more confirmations to have the same level of security as Bitcoin. Confirmations are important because they must then be transmitted across the network to be validated with all of the Bitcoin nodes. Each Bitcoin node is a guardian for the transaction history, while miners are the gatekeepers that ensure each block (page in a digital ledger) is mined (added to the ledger) legitimately. The more miners participating, the higher the difficulty (hashrate) becomes and vice versa. The hashrate provides the security of the network by making it more expensive and harder to mine a bitcoin.
If a group of bad actors attempted to take over the network, they would have to pay for all of the hardware and power needed to control or change the transaction history. Bitcoin incentivizes miners to participate honestly by mining for the network rather than against it. For a confirmation to take place, there is always the possibility that two miners (in different parts of the world) will solve a block at the same time. When this happens, a fork (a clone of the blockchain) occurs. To determine which blockchain will continue, the next miner to solve the next block will have to accept one of the previous miner’s blocks. Altcoin networks may choose to make the block time shorter or longer than Bitcoin’s 10 minute intervals. The shorter the block time, the less secure the network becomes since more issues occur with competing forks and “orphan” blocks not recorded on the blockchain. With every network that requires a blockchain, there cannot be instant transactions and strong security simultaneously. Below is a table indicating how many confirmations some of the top altcoins by market cap would require in order to provide the same level of security as Bitcoin:
In addition to maintaining security and decentralization, the Lightning Network allows for instant transactions to occur on top of Bitcoin for a very low fee. However if a user needs to make a transaction with a substantial amount of bitcoin, they may find it more convenient to do so on-chain for a higher fee rather than instantly with the Lightning Network. If a user is not pressed for time, they may also customize their fee to be fairly low and wait a longer period for confirmations.
While Bitcoin miners are the gatekeepers for new transactions, full nodes are the guardians of the full history of each Bitcoin transaction. Each new confirmation is broadcasted to the network and confirmed by each node. Below is a list of all the publicly confirmed Bitcoin nodes:
~13,000 Active Nodes (7/18/21)
Bitcoin forks are also another method that some have used as an attempt to “control” the network. However, this method is impossible to accomplish without the consensus of the majority of participants. A Bitcoin fork is essentially when a group of individuals wishes to apply their own rules to Bitcoin’s network that are conversely not widely accepted by the community. These individuals then clone Bitcoin’s source code and transact with the participants of the new network. Prime examples of Bitcoin forks include: Litecoin, Bitcoin Cash, Bitcoin Gold, Bitcoin Diamond, and the fork from Bitcoin Cash that is Bitcoin SV. These altcoins have varied in success when compared with one another but have nowhere near the community or price accumulation that Bitcoin has garnered over the years.
When newcomers first enter this space, they often fail to compare the returns of altcoins to the price of BTC. Most of the time they will only consider the USD gains that each altcoin had made during its history, rather than compare the altcoin price to BTC.
Digital scarcity and first mover advantage go hand in hand because once verifiable scarcity is created, the phenomenon cannot be recreated. Many have attempted to do so, but all have failed while Bitcoin consistently succeeds. Bitcoin has had ample time to establish a community that understands the underlying properties it provides. In order to be successful, any clone or competitor would need to be built under the same conditions Bitcoin was built in. This is nearly impossible to replicate while Bitcoin still exists. Being created during the great recession of 2008 was a once in a lifetime occurrence. Additionally, it is generally much harder to convert a user than it is to acquire new customers, like converting customers from using one smartphone operating system to another (Apple versus Android). Brand new users will certainly gravitate toward altcoins but if prices do not perform well, users will generally convert what funds they have left for Bitcoin or exit the space entirely.
One of the most underappreciated features of Bitcoin is the fact that the creator(s) Satoshi Nakamoto’s true identity is unknown. Wall Street and the mainstream media have considered this aspect of Bitcoin to be a weakness. But in the long term, it is a strength. There is no team, office, or customer support to call when there is an issue with Bitcoin. Every new development and the maintenance of the network is all voluntary. The way that most earn a living in the space is to invest their savings into Bitcoin, accept donations, create new content, or provide services and products to those within the space. There are no executives or board of directors to answer to.
In contrast, every altcoin has a team of people or creators to blame when things go wrong, creating a central point of failure. When the token or coin does not meet the regulatory guidelines that government agencies enforce for businesses, the creators may be sued or told to halt operations. Creators of altcoins must answer to their investors, pay fines, pay fees, and adhere to regulations in order to operate. If, for any reason, an altcoin team does not follow all guidelines set in place, they can be sued or incarcerated for not following the regulations. The debacle with Ripple and XRP (the token they use) is the perfect example of what can happen when a company creates a cryptocurrency and disregards SEC regulations. On December 22, 2020, the SEC filed an action against Ripple Labs Inc., Brad Garlinghouse (CEO), and cofounder Chris Larsen for raising 1.3 Billion dollars in an unregistered digital assets offering. In addition, when the creator(s) of a cryptocurrency is known to the public, the success/failure of the altcoin will highly depend on the actions of that person or team. For example, the adoption of Ethereum has been strongly influenced by the public appearances of its creator, Vitalik Buterin. Therefore, the public's knowledge of who the creators are make it very difficult for any altcoin to achieve decentralization.
Altcoin Use Cases
Altcoins have historically underperformed against Bitcoin and are typically not an ideal investment for most people. The majority of altcoins are scams, or poorly run projects to help the founders make the most profit. Yet there is a small number altcoin projects that can be used as testnets for Bitcoin. Ethereum has a devoted community of developers and businesses that support the project, but it operates similarly to traditional finance companies. A good portion of Ethereum’s use case is creating stablecoins. This is fine, but it does not resolve the underlying issues with our current financial system. Ethereum creates more of the same.
There are also some altcoin projects that present sound use cases but do not require a blockchain or token. Other projects may look great on paper, but they provide no use case for real world application. It is important to do all of the necessary research before investing in anything. Be aware that it is possible for Ethereum to run into a lot of the same issues that XRP or other failed projects have gone through, while Bitcoin is not prone to being shut down by a centralized group of people.
Certain altcoins bring innovation within the space, but the majority are not necessarily good investments. Many altcoins perform well in the short term, but do not have the support needed to follow through with the promises made by the development teams. With every great feature that does come from the altcoin space, Bitcoin is able to adopt it and implement the feature slowly with a lot of testing. Bitcoin is the opposite of the Silicon Valley mantra: “move fast and break things”. Bitcoin adheres to a “move slowly and implement what works” philosophy and it has continued to pay off since its inception.