Altcoins, competitor cryptocurrencies to Bitcoin, are doomed. Basically all of them will decline in relative terms vis-a-vis Bitcoin. The ‘more successful’ altcoins seems to follow the same pattern. First they experience an exponential boom as new users buy-in and a miniature speculative bubble is created. Then the inexorable crash follows. Perhaps a few recoveries, a few see-saws of price action, and a few more aftershocks ensue. But the long-term trend is pretty-much-always of decline relative to Bitcoin.
Altcoins fans will be angered by these words. They will point out the technical merits of their particular blockchain technology. They will rightly highlight all the technical innovations that have occurred since the release of Bitcoin. There are myriad choices of cool tech that have not made their way into Bitcoin: Anonymous transactions (ZCash), Turing Completeness (Ethereum), better mining algorithms, and many others. Other altcoins have pursued the bleeding edge of innovation and surpassed Bitcoin, technically, in many respects. An important caveat should be added for considerations of stability and robustness, qualities which the Bitcoin team has preserved with exceptional wisdom. But in aggregate, certainly the best tech is found in the latest altcoins, not in Bitcoin.
But these qualities simply don’t matter with respect to adoption. In the face of network effects, the slightly-more advantageous technical features of a competitor to Bitcoin are… trivial. The cultural foibles of one group vs those of another, the periodic bouts of irrationality of the Bitcoin community, these things just don’t matter. For those of us who are close to the technology, and can appreciate its beauty and its ingenious elegance, there is a powerful temptation to thing that this is the thing that matters. But it need not be so. And for those who associate strongly with their particular tribal-cultural-cryptocurrency group, you may think that this is the thing that will determine the relative success of cryptocurrencies. But they simply won’t.
Bitcoin was the first and enjoys much-touted network effects. But there is another force at play here. The advantage of Bitcoin is not some unseen power, it is the weakness of its competitors to innovate for something that actually matters. It turns out that a lot of these technical improvements don’t really matter. Here are the things that matter in descending order:
- Network Effects
That’s it. Compared to these, absolutely nothing else matters.
This is actually Bitcoin’s killer app. It’s dead simple. There will only ever be so many Bitcoins. We have absolute confidence in that. In a world of fiat money debasement, this is an incredibly rare and unique property.
Altcoiners will protest that their currency has scarcity… and more! Precisely. Since Scarcity is by far the #1 killer app in the cryptocurrency space, your currency’s other features are far, far less relevant, and thus lose. If the limited supply of Bitcoin were a less important feature, Bitcoin would have a far weaker hold on the cryptocurrency world; the space of valuable improvements would be far larger than it actually is. That’s how important scarcity is; it outshines every other feature.
Bitcoin has never experienced a hard fork. With all the F*%k’ed up stuff that has happened to people’s bitcoins, the sanctity of the blockchain has never been abrogated. That’s incredible.
In it’s early days Bitcoin had far less time under its belt, and thus commanded much less trust from potential users. But it’s been around a long-enough time now that we can be confident in its stability, at least for the foreseeable future (5–10 years). Earning the trust of users has been a very hard-fought effort. But Bitcoin has succeeded. The difficulty of this feat is often overlooked.
Much credit must go to the Bitcoin lead developers, who have consistently emphasized safety, robustness, and stability, over great leaps and bounds. They understand how paramount trust is over new technical features. No technical feature could give Bitcoin more valuable if it endangered trust in the protocol. In this regard, the developers of other technologies, such as Ethereum, have practiced very poor judgment through repeated and unnecessary hard-forks. Seeing their mistakes puts the light on the admirable behavior of Bitcoin’s lead developers.
This is the one everyone knows. And yet I think it is actually the least important of the three. Network effects are significant, but if an altcoin actually had better features in something that matters, then it could conceivably overcome Bitcoin. Let’s not forget that the whole space is still quite new and in flux. Bitcoin’s network effects, while significant, are not strong enough to resist a genuinely valuable innovation in another blockchain. But as I have said, Scarcity and Trust are actually the most valuable assets of any existing blockchain; and Bitcoin excels in these areas. So network effects are enough to maintain, and gradually widen, Bitcoin’s lead over competitors who, after all, have not succeeded in offering anything tangibly more valuable.
I wish it were not so. I wish the technical merits of this or that blockchain mattered more. It might spur innovation. But the evidence thus far strongly suggests that they… simply don’t matter as much as their creators, fans, and proponents think they do. It is completely pardonable. The underlying tech of some foredoomed altcoin may be brilliant, captivating, and wholly enthralling. But as in many spaces of technology, brilliance is not equivalent to consumer value. Sometimes we can be blinded by our own petty geekiness.
And finally, to underestimate the significance of scarcity, trust, and network effects, is to misunderstand the public-at-large, particularly finance people. They don’t care about the technical details. They want it to work. They want a cryptocurrency for the monetary features it commands, ie scarcity and decentralized settling, not the technical mechanics that implement them.
That’s not to say that other blockchain applications may not be found. But no one has really found a compelling one yet. There has been much hand-wringing over the search for Bitcoin’s killer app. I claim that it’s been staring us in the face all along: the oft-overlooked combination of scarcity and trust.
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