What Sets Bitcoin Apart?
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A few weeks ago, I went to see a friend from school whom I've not seen since before the pandemic. After a few pints and catching up on life, work and new hobbies, our talk slowly segued onto cryptocurrencies (I guess all discussions in pubs lead to crypto these days). My friend talked excitedly about the new cryptocurrency projects that have remarkable properties, new applications and significant potential investment returns. I listened with great curiosity because I have only brushed the top of these other cryptocurrencies. I must admit that I've been mainly focusing on Bitcoin lately.
While we talked, I remembered a detail I'd read in an article not long before our meet up. All cryptocurrencies are just tech -- software if you wish -- with ever-changing features, but not Bitcoin. Bitcoin is something more permanent and definitive, much more, in fact, like digital gold. Tech companies and tech stocks come and go, but gold has been used for thousands of years.
I've been planning to write this blog for quite some time now, but until now I was missing a relevant opening. So here it is. Enjoy!
There is a common belief among the most enthusiastic altcoins supporters that Bitcoin is a relic of the past and that the new generation of cryptocurrencies -- Solana, Cardano or Avalanche -- will be the technology of the future that will disrupt the legacy of monetary and financial systems. I am not denying that this might be true.
Bitcoin has limitations that make widespread adoption difficult (you can check one of my previous articles on this). Still, these limitations are features, not bugs. Besides, Bitcoin has an ace up its sleeve. It is the most superior form of money ever invented, as Saifedean Ammous points out in The Bitcoin Standard.
It is not my intention to persuade anyone; please do your own research. I'm merely summarising the points that I discussed with a friend, albeit in greater detail, of why I think Bitcoin is staying strong and is not going anywhere.
Decentralised mint
In the final chapter of The Bitcoin Standard, Saifedean Ammous discusses alternative coins (altcoins) and their ability to displace Bitcoin. Let me summarise his conclusion in one sentence.
[I]t is my firm belief that none of the coins that copy bitcoin's design can compete with bitcoin on being sound money.
We should define sound money first. Sound money is chosen freely by the market, giving complete control to the owner who legitimately earned it (not to the third party). In other words, no one will be able to seize your sound money balance or stop you from spending it the way you want to.
Bitcoin gives you control over your money because it is a sovereign piece of code outside of any group of people or authority's reach.
However, if we look at any other cryptocurrency, they all have people or a company behind them. Let's take Ethereum, for example.
As history shows, the Ethereum Foundation has control over the Ethereum blockchain, despite claiming it is fully decentralised. In 2016, The DAO, a decentralised autonomous organisation, -- an application built on top of the Ethereum blockchain -- was hacked, and $60 million of ether invested in it was stolen. The Ethereum Foundation responded with a proposal to hard fork the blockchain, a very controversial solution that was ultimately implemented to restore stolen coins. You can read more about this chain of events here or here.
The decentralisation and sovereignty of Bitcoin also make it superior to all other altcoins from a monetary perspective.
As long as money falls under the control of anyone other than the owner, whoever controls it always has an incentive to steal the value of the money through inflation or confiscation, according to Saifadean.
While the implicit idea of "sovereignty" across the crypto space could stop the outright confiscation of coins, the inflationary policies could transfer the value away from the holder.
Bitcoin's total supply is fixed at 21 million coins - no more and no less. Moreover, bitcoin is not just scarce. It has unforgeable costliness, a term proposed by Nick Szabo. It means that the production can't be easily faked, unlike fiat money and coins with no supply cap or those that are controlled by a group of people who can easily influence the supply.
Alex Gladstein used the term decentralised mint in an interview to describe the monetary system innovation introduced by Bitcoin.
No other altcoin possesses the same feature. Most altcoins have an inflationary policy, or their monetary system can be changed by a small group of people. How different is this from the current fiat system?
Bitcoin revolutionises the modern monetary system with its inflationary currency. It gives us an ultimate store of value, a medium of exchange that does not lose value through supply growth. And it wouldn't be possible without Bitcoin's sovereignty.
Saifedean wrote in his book:
In order for a digital system to function as digital cash, it has to be outside the control of any third party.
Sacrifices Have To Be Made
Not only is Bitcoin the most decentralised monetary system, but it is also the most secure. However, Bitcoin lacks scalability, at least at its base layer. (A layer two technology -- Lightning Network -- offers a solution to this problem). It takes around 10 minutes to create a new block or, in other words, to process a transaction. In contrast, Visa processes around 3,200 transactions each second. Most Bitcoin critics claim this is the Achilles heel of Bitcoin and where other altcoins strike it to win this battle.
Bitcoin became too big, too slow, and too expensive to manage, as said in one of his interviews by Charles Hoskinson, a founder of Cardano and co-founder of Ethereum. He added that Bitcoin does not provide anything desirable from the user's point of view, stating that it has no programmability and a slow settlement time.
Yet all of this is not as easy as it sounds. Any new altcoin that claims to be an upgrade on Bitcoin will face a blockchain trilemma -- a trade-off between decentralisation, scalability and security that every decentralised database faces. The new altcoin will require sacrificing either decentralisation or security to improve scalability. A recent newcomer into the space -- Solana -- offers significant improvements in transaction processing time, has lower fees and is generally viewed as the primary challenger of the other incumbent, Ethereum. But if you dig deeper, you will find some red flags.
Every new digital coin will have to face the trade-off to differentiate itself from bitcoin because no one needs another Bitcoin. Why would you switch away from the largest monetary network in favour of smaller but identical ones?
Monetary Network Effects
We can see the fruits of bitcoin's sovereignty, decentralisation and security through the market's preference towards bitcoin. According to the Fidelity Digital Assets research, the market values bitcoin as a highly decentralised and secured store of value, not a payment network. The next bitcoin's strength grows from this market preference.
Bitcoin is a network of miners, developers and users. The value of a network tends to grow as the user base increases -- the network effect. However, Bitcoin is not any network. It is a monetary network.
They are even more powerful than other networks because the incentive to choose the right money is much stronger than any other choice of a network, such as a social network, telephone network, etc.
One will probably need to compromise when selecting a new broadband, mobile provider or a new social media. But, investors looking for digital assets that could act as a store of value will opt for the largest, most secure, decentralised, and liquid asset—bitcoin ticks all these boxes.
Let's get a bit more technical and look at another curious property of monetary networks -- a reflective property. People feel an incentive to join a network when they see others joining it. Think of why you joined Facebook or Instagram.
In the Bitcoin ecosystem, the reflective property manifests itself through both bitcoin holders and miners. As interest in bitcoin and its value grows, the latter group is more willing to invest in the computational power (hashrate) due to higher profit margins. A higher hashrate makes the network even more secure, drawing even more users.
The Origin
Before I conclude, let me give you another straightforward but sentimental reason. It fits nicely with the network effects argument.
In my opinion, the most overlooked strength and attraction of bitcoin lies in its narrative. No other altcoin can compete with bitcoin in the narrative behind it.
Bitcoin was launched in the wake of the Great Financial Crisis by an anonymous person (or entity) -- Satoshi Nakamoto -- who did not seek glory or credit and disappeared in 2010, leaving their child in the capable hands of the most prominent Bitcoin community members.
The community slowly grew, spreading the knowledge, mining bitcoins at a free market rate and strengthening the network.
In one of his interviews, Nic Carter points to another critical feature of bitcoin -- there was no grab on the bitcoin supply in the early days. Satoshi did not have any privileges and mined early bitcoins under the market conditions with everyone else.
These days, new cryptocurrencies are being bought aggressively by venture capital and hedge funds that benefit them handsomely once the exchanges list these coins to the public. If you think about this, how can a digital coin become a new form of money when a venture capital fund holds 30% of its supply?
Bitcoin was designed as a decentralised peer-to-peer payment system. Satoshi did not intend to house smart contracts or decentralised apps. Bitcoin prioritises the stability and security of the network, features that are necessary to establish it as a store of value. Functionality comes after these two core features, either on the core protocol layer or on the layers building on top of the Bitcoin blockchain, as Alyse Killeen said on Odd Lots.
Conclusion
Bitcoin brought us a monetary revolution, which is only possible when there is "maximum decentralisation and predictable monetary assurance", according to Ark Invest's Big Ideas 2022.
In the meantime, all other cryptocurrencies have offered a financial and internet revolution, which require some trade-offs to achieve innovation or scalability.
I find slide 43 in the Ark Invest's Big Ideas 2022 report extremely helpful in understanding the differences between bitcoin and other cryptocurrencies.
A free market makes it possible for new digital assets to emerge. But regardless of its competition, bitcoin firmly holds its fort and will unlikely be displaced from its throne by any new digital assets, as the authors of the Bitcoin First report by Fidelity Digital Assets pointed out.
Disclaimer: This blog post is not intended as financial advice. It is provided for information and entertainment purposes only. Do your own research.