Bitcoin vs. Altcoins
Scroll back two years to 2017, the “breakthrough year” of the crypto market, when concepts such as Bitcoin, blockchain and decentralisation suddenly exploded in the mainstream media. This exposure was driven by price increases that seemed unstoppable and left many viewers completely astonished. At the same time, many experts warned that the party wouldn’t last forever — and it seems they were right.
One of the most prominent phenomena of those heydays was how the rise of Bitcoin stimulated the entire market. Certain optimistic analysts predicted that a decentralised revolution was just around the corner, having high expectations of the potential of various cryptocurrencies. New coins were joining the market every other day; although some of them were poorly structured, and others had no working plan at all — only promises. The term given for the flourish of new coins and tokens was Alt season — coming from the term, altcoins, meaning alternatives to Bitcoin.
The graph below illustrates how the Alt season of 2017 cut through Bitcoin’s reputation, which, as the pioneering cryptocurrency, it had had enjoyed for years. At this point, Ethereum had become the second largest cryptocurrency by market cap. However, Bitcoin did regain some of its supremacy at the end of 2017, as it approached its all-time-high of $20K. The overall crash of the crypto market in 2018 was followed by a sharp decline in Bitcoin’s dominant position, yet it started to recoup its former glory shortly afterwards. This all but catapulted us back to the original starting point: when Bitcoin was the undisputed king, all the altcoins had faded into the horizon, and Bitcoin was still 10 times the size of its biggest challenger, Ethereum.
The Power of Bitcoin
So much for the technical analysis, but what might the fundamental reasons be for those shifts in dominance between the various cryptocurrencies? Let’s review the characteristics of Bitcoin that helped it gain, and then regain, its supreme role in the crypto market:
Time is money
Bitcoin recently celebrated its 10th anniversary, which in crypto years translates into a long time. No other coin has been around for that long, nor proved its resistance so effectively to market flips, hacker attacks, regulator fire and the challenges of inner politics. In fact, 90% of cryptocurrencies have proven that they cannot stand up to these challenges. Bitcoin’s past success is also a powerful weapon going forward: it helps to overcome obstacles and offers experience to all those involved in the business, plus it offers an advantage with which it is hard to compete. In seeking the most obvious and natural reason for Bitcoin dominance, it is simply because it was the first.
The power of decentralisation
That said, being first isn’t always enough. One obvious example is that of Facebook vs Myspace. Entering an existing market can be a huge advantage. Mistakes can be learned from, tools improved, and users already understand the concept. This could have been the case for altcoins, and it was usually the message: “Bitcoin is an amazing pioneer; Bitcoin still has a function in the market / has come to the end of its historical role — and we can take it from here, for a better future.”
It’s a convincing enough argument — so why didn’t it work out? There are many reasons for this, and each cryptocurrency has its own story, which we will examine in more detail later in this article. Yet, if we can point to one critical advantage of Bitcoin, it is the concept that already sounds like a cliche: decentralisation. Having a decentralised network offers many advantages. Let’s look at these, in no particular order, since each and every one of them contributes to the others:
- A decentralised network adapts more easily to changes, while enjoying the benefits of consensus among the different players. In turn, this can weaken competitive interest, and strengthen a common interest to move forward.
- There is no single point of failure, rather many scattered nodes that can survive attacks on other parts of the network. This resilience is vital when facing continual hacking attacks, as experienced by Bitcoin from day one. While secondary networks, such as exchanges and wallets, suffer from hacking attempts to the tune of hundreds of millions of dollars, the so-called Bitcoin core network has as yet not been hacked once.
- Concurrently, these features give Bitcoin one of its most attractive advantages: resistance to censorship. Although this worries most world governments, and some even wish to ban it completely as a result, so far this has not been done or attempted. True, the decision to coexist with Bitcoin also serves their interests; and there were even times when shutting down Bitcoin’s network was a potential danger. However, should a government decide to challenge Bitcoin now, it would be a hard task, even nigh on impossible.
- A distributed grid also eliminates the need for third parties and other intermediaries. This is expected to improve efficiency and protect privacy, and is another motivating factor for participating in the Bitcoin ecosystem.
- It is important also to note the disadvantages of decentralisation. Not every use case is suitable, and centralised networks can be far more cost effective in financial and technical terms. It is beyond the scope of this article to drill down to all the various aspects of this comparison, but we can point to a crucial point for decentralised networks’ survival: an economic incentive (such as the miners’ reward in the Bitcoin network) or a willingness to contribute to a common goal by enough participants (for example, Wikipedia).
Further to the last point, the incentive to take part in the Bitcoin distributed network derives not only from financial incentives, but also from the existence of a strong and active community. From the Bitcoin core programers — some of whom claim to have never actually purchased the coin — to those who became much richer than expected after buying Bitcoin for pennies in the early days, and all those in between. There are tens of thousands of people around the globe who are rooting for this initiative to succeed and are contributing to that common goal with their actions. There is no other coin which enjoys such professional and enthusiastic support.
The collective sum of all these points leads to an essential concept: Trust. When a network is growing, overcoming challenges, defeating resistance and gathering supporters — it gains a certain reputation and attracts others to join. As is, this can be seen as a normative achievement, but can also be simply summed up as a network effect. As long as Bitcoin isn’t facing competition or a serious failure, this network effect is expected to prosper, and improve its advantage over other cryptocurrencies.
The weaknesses of altcoins
After examining the fundamental reasons for Bitcoin’s success, we now need to examine the criteria which prevent altcoins from being successful. Note that this is only a general overview, since thousands of coins have been released to date. We will touch on the main reasons why they are having difficulty taking off.
Not enough usability
While Bitcoin is still a niche product, in comparison to other cryptocurrencies, it is relatively well known, holds a significant transaction rate and from a long-term perspective, is scaling up. Altcoins, on the other hand, are either poorly used or not used at all and have a very low trading volume. Excluding Ether, Ripple and a few other tokens, no coin can even theoretically compete with Bitcoin in terms of number of users, scalability and functionality.
The downside of centralisation
While the level of decentralisation is always an open question with respect to any distributed network, Bitcoin is usually described as having the highest level. There are bitter controversies between Bitcoiners and Ethereum enthusiasts on these issues, but it is generally agreed that all of the other networks are much more centralised. Although we mentioned the upside of centralisation earlier in this article, it seems that in the crypto market, with its unique characteristics, it is usually a disadvantage. The small, closed and concentrated systems of altcoins make them less attractive to users, less efficient, and non-competitive.
Scams and Lambos
In the heyday of the alt season, one of the catchphrases that was spinning around the crypto market was Lambo – an abbreviated form of Lamborghini, the Italian sports car that has become a symbol of the sudden wealth of many crypto investors. Of course, there was no genuine link between that wealth and the success of the projects themselves, and this is only one vivid example of the many stories of scams, “pump and dumps” and other negative effects that hurt innocent participants in the game. These events have led to the crash of most of the cryptocurrencies, and emphasise the short-term thinking that defined them.
As an optimistic remark at the end of this article, we can estimate that the growth of a more mature market is still an option. There will always be those who buy into get rich quick stories, but lessons have been learned, technological improvements achieved and better economic understanding is increasing – enabling the growth of more meaningful and successful ventures.
* The information above does not constitute any form of financial or investment advice and should not be relied upon. Investing in Digital Assets carries risk. For more information please see our risk warning.