Bitcoin’s First Mover Disadvantage
I love cryptocurrency. Every morning, I open my Palm-pilot smartphone, click on my Netscape browser app, and navigate to my Friendster dot com profile where my peers and I discuss all things cryptocurrency. Some know all of the ins and outs of crypto, naming every alt-coin from Ethereum to Pepecash. Others aren’t quite as educated. However, despite lacking intimate knowledge regarding cryptocurrency, everyone can name the KING OF CRYPTO: Bitcoin.
Since around May of this year, Bitcoin has been slowly regaining its dominance in total market share. Rising from the high 30’s to around 58% dominance in the total cryptocurrency market capitalization. What do we owe this rise to? What competitive advantages does Bitcoin enjoy over its ‘alternative’ siblings? Ironically, Bitcoin’s “drama” has more than likely been the key contributor to its threefold increase since July.
Bitcoin doesn’t have the greatest or most innovative technology in the space. Many projects have improved on its shortcomings. The mantra that it has “the greatest developers in the world” is — at best — an argument from ignorance or proof by assertion. Therefore, the most obvious advantage driving up its price is Bitcoin’s notoriety. And the drama surrounding Bitcoin’s scaling has only amplified this advantage. The scaling debate has dominated cryptocurrency news and has driven discussion away from alt-coins such as Dash, Ethereum, and Monero. It has forced people to pay attention to Bitcoin and to chose a side (not to mention the ‘free money’ from its forks).
Bitcoin was the first cryptocurrency and remains the most well-known. Because of this, many people (including prominent YouTube personalities) take the position that Bitcoin is the safest investment because it will never be unseated. It was the first — therefore, it is the crypto-king. Many people hold the belief that being first to market, as Bitcoin was, is an almost insurmountable market advantage.
This is a fallacy. The myth of the first-mover advantage is a fallacy which history has disproved time and time and time again. As Palm-pilots, Netscape and Friendster have exemplified, the advantages of being ‘first’ are often greatly outweighed by certain disadvantages.
The fact that being a first-mover is still referred to as an ‘advantage’ shows that the myth persists despite the data. The general belief is that being first to market allows you to learn the market quicker, gain a loyal following, and monopolize the market. Thus, competitors face greater barriers to entry and its expensive (in terms of time and resources) for customers/investors to make a switch.
And it’s partially true. From this Harvard Business Review study, it found that “Early entrants tend to make a large and lasting impression on customers, earning strong brand recognition, and buyers often face high switching costs in moving their business to a later entrant.” That sentiment certainly holds true for Bitcoin today. However, the article goes on to state “as years passed, the brand and marketing advantages faded while the cost penalty (disadvantages) persisted, which steadily eroded the…edge.”
This classic study examined the success of businesses which were first to market (or ‘pioneers’) compared to those whom came later (or ‘settlers’) after a market has been established. The data is undeniable. Failure rates were 47% for pioneers compared to only 8% for settlers. And even when pioneers did survive, they only ended up capturing an average 10% of the market share. The study’s poetic conclusion states “the logic of success is not to be first to enter the market, but to strive for leadership by scanning opportunities, building on strengths, and committing resources to serve consumers effectively.”
This leads us to ask: Is Bitcoin building on strengths? Is it striving to better serve its users? Some people might believe so… but isn’t the reason behind the scaling debate is that there is a community-wide acceptance that the answer to those questions is currently a resounding no?
Bitcoin’s recent technological improvements have been modest (e.g. Segwit). There’s still a sleuth of issues for Bitcoin to address. From its slow speed, to high fees, to centralization (of both miners and lightning-network hubs), to its fractured community and lack of effective governance.
- But all entities face issues, why is it a disadvantage to be a first mover?
A study of roughly 3,000 startups shows that 70% fail due to premature scaling. And its not because of the investment costs of premature scaling, but rather the assumption cost. These startups are making investments which the market isn’t yet ready to support. Putting their eggs all in one basket, without even knowing if that basket has a bottom. First-movers do not have the advantages of learning from predecessors, thereby eliminating solutions already proven useless.
“[M]ost startups are chasing an idea: the founders, no matter how much they believe in their idea, are operating on a guess about an unknown opportunity with a potentially unknown solution.”
In BTC’s case (or Bitcoin1x), its scaling solution is off-chain — which brings a host of different issues which I’ve previously outlined. Many people think that off-chain scaling (or the lightning network) will be as smooth as butter. However, a wise investor would look at worse case scenarios and the possibilities of them coming true. I can entirely envision the following scenario coming to fruition:
A newcomer downloads a bitcoin wallet and purchases her first Bitcoin. Then she accidentally sends .01 BTC to an online vendor who accepts crypto, however, she accidentally sent it to the vendor’s Bitcoin2x address. Not understanding why the transaction didn’t confirm, she contacts customer service who explains that her funds are lost and she will also not be receiving the vendor’s product. Frustrated and annoyed, the newcomer reluctantly tries to purchase something again. This time, she decides to buy a cheaper item for .001 BTC, only to find that the fee is also .001 BTC.
Wondering why its so slow and expensive, she seeks an expert’s advice whom recommends that such purchases be completed with a lightning-network wallet (assuming this is years later), which carries lighter fees. Although she barely understands the concept, she downloads it anyways. She soon realizes that to use the lightning network at all, she still has to pay a .001 fee to create a ‘funding transaction.’ However, after investing multiple frustrating hours on learning how to use the LN, she follows the advice and transfers the remainder of her BTC to the LN wallet. She then makes the purchase for an additional .0001 fee. Much better!
She now wants to make a second purchase with a separate vendor, who doesn’t have a LN address. She then commands her wallet to broadcast her LN balance back onto the BTC mainnet, pays the .001 fee again for that ‘broadcast transaction,’ and waits at least an hour for the standard six confirmations. When it’s finally confirmed, she purchases the good and pays another .001 fee.
Obviously, this descriptive scenario would drive more users away from crypto than attract newbies. This would leave prime real-estate for ‘settlers’ or alt-coins to better serve users.
Settlers are more receptive to listening to the market and resolving issues unaddressed by the pioneers. The reason being, well, because they have no other choice! We can all agree that an alt-coin substantially similar to Bitcoin, lacking innovation above that of the pioneer, will not unseat Bitcoin (*cough* Litecoin *cough*).
But other projects are expanding on Bitcoin in various ways and methods, leading me to believe that Bitcoin being unseated as the King of Crypto is a foregone conclusion. Historical data of first-movers combined with the Core developers’ insistence to an unproven market solution only strengthens this belief. In my eyes, if Dash fulfills its promises, it’s best positioned to unseat the current king. But only time will tell.