Updated: Oct 4, 2020
Like a lotus flower growing out of swamp water, the Bitcoin (BTC) whitepaper was released on January 3rd 2009 at the tail end of the 2008 financial crisis with the purpose of acting as a hedge against government manipulated fiat currencies. The year is now 2020 and we are on the brink of what will most likely be the largest financial and technological revolution in the history of mankind. Given that this is a brand new asset class, there is understandably a lot of confusion around the difference between BTC and altcoins. The purpose of this article is to educate you on the differences between Bitcoin and altcoins, what problems they’re looking to solve and how, and how I see this technology impacting our future.
BTC in my opinion is digital gold, as it shares all of the hard money properties that gold holds (uniform, portable, divisible, measurable, scarce, non-perishable, and costly to produce). However, BTC is superior when it comes to the need for custody, easy transferability, and not easily susceptible to counterfeiting. The problem BTC is aiming to solve is to become a decentralized non-sovereign form of hard money. It does this in a few ways; BTC is truly decentralized with no single point of failure (meaning that there is not a single person or entity that the government can go to in order to shut it down). This is done by the mechanics of the proof of work consensus mechanism utilized by the BTC blockchain, where individual miners who don’t know each other all have game theoretical financial incentive to verify legitimate transactions. This eliminates the “Double Spending” problem making BTC the most secure network the world has ever seen as it has never been hacked since its existence.
Moving on, you may be asking yourself “How does BTC have value” as you’ve probably heard a lot of respected individuals in the finance industry claim that BTC has “No real value”. The truth is, those people either don’t understand BTC or, they have financial incentive to say these false things in an effort to keep the price down. BTC’s price came from the free market just like gold and, its value is derived from human effort similar to gold, allow me to explain.
We live in a world today where central banks can press a button and create money out of thin air. They then take the money, use it to fund their government operations, while the rest of the world experiences inflation. This is so because there wasn’t any real human effort to justify the value of the dollars that were printed. This is the basis of why so many great countries and nations experience economic collapses over and over throughout history.
As far as gold goes, you can’t press a button and create gold out of thin air, or else it would be subject to the same consequences discussed in the previous paragraph. Instead, you have to pay someone to find a location where the gold is located under the ground, pay to have a small camp built, pay for everything required to operate a gold mine (carts, lights, drilling equipment, etc.). In addition you will need to pay the employees as well as pay for everything they need (food, hats, gloves, shovels, vests, etc.). Next you’ll have to pay for the gold to be shipped out to a company. Finally, that company has to pay to have the gold burned down and formed back together to create a gold necklace. Clearly, a lot has to happen before a consumer can walk in and purchase the gold necklace. So as you can see, the price of gold is justified by the labor/human energy that went into getting it to its end destination. The price of BTC is justified in a synonymous way.
Similar to how gold has to be mined, BTC also has to be mined, the only difference is that it’s “Virtually” mined. There can never be more than 21 million Bitcoins in existence. The issuance is strictly regulated by computer code. Every 10 minutes, BTC miners compete with each other to solve a complex mathematical problem. Whoever solves the problem first is awarded a block reward (currently 6.25 BTC along with all the transaction fees from the previous 10 minutes). In order to mine BTC (assuming you want to do it on a large scale given the competitiveness) you have to first purchase a good amount of mining rigs along with a software to operate inside of them. You will also need to pay for a location to store them, racks/shelves to store them on and fans to keep them from overheating. After that, you turn them on so that it can begin competing with the other miners in an effort to solve the puzzle to win the block reward. But here’s the kicker, operating these mining rigs is very expensive because it's using a ton of electricity, and whoever has access to the most computing power (electricity) has the highest chances of winning the block reward. So as you can see, the price of BTC is justified by the amount of electricity needed to mine it (currently BTC mining consumes more energy than the entire nation of Switzerland).Now that you have a firm understanding of BTC, how it works, and where it derives its value, let's take a look at altcoins.
Altcoins by definition is literally any other crypto asset other than BTC. After BTC was released with its open source code, it spawned a wave of massive innovation from entrepreneurs trying to either create a crypto asset they claimed did things better than BTC (ex. Scale, faster transactions, etc) or just trying to make money. Some of these crypto assets are easier to mine than BTC, but there are tradeoffs, including greater risk brought on by lower levels of liquidity, value retention and value acceptance. While BTC was created to be a non-sovereign form of money, each altcoin proposes different solutions to different problems. Let’s take a look at the number two crypto asset (in terms of market capitalization), Ethereum (ETH).
ETH is a decentralized software platform that enables smart contracts and decentralized applications (DApps) to be built and run without any downtime, control, fraud, or interference from a third party. To give a simple analogy as to what ETH is doing, let's look at Apple and its creation of the app store. Inside of your iPhone is what's called an Operating System, this Operating System has allowed the creation of applications to be built on top of it that didn't exist before its creation. The app store paved the way for billion dollar businesses/applications to be created on top of it (ex. Facebook, Instagram, Uber, Airbnb, Whatsapp, Snapchat, Candy Crush, Angry Birds, etc.).
ETH is essentially an “Operating System” for DApps, in other words, most of the crypto assets on the market today are built on top of ETH. The rise of Ethereum with its Turing-complete scripting language and the ability for developers to include state in each block, has paved the way for smart contract development. This has led to an influx of teams building decentralized projects seeking to take advantage of the most valuable property of blockchains — the ability to reach a shared consensus that everyone agrees on without intermediaries or a centralized authority. The problem that any crypto currency is aiming to solve determines its place inside what many like to call “The Blockchain Ecosystem”, let's take a look at some of the categories inside.
The first category to emerge was the “Currency” category (BTC, Ripple, Stellar Lumens, Litecoin, etc). For the most part, these projects were created with the intention of building a better currency for various use cases and represent either a medium of exchange, store of value, or a unit of account.
Another category is the “Developer Tools” category (ETH, EOS, Neo, Chainlink, Tezos, Cosmos, etc). Projects within this category are primarily used by developers as the building blocks for DApps. In order to allow users to directly interact with protocols through application interfaces (for use cases other than financial ones), many of the current designs that lie here need to be proven out at scale.
Next, we have the “Fintech” category (Kyber Network, 0x, Salt, Ripio Credit Network, etc). This category is fairly straightforward. When you’re interacting with a number of different protocols and applications (such as in the Developer Tools example above), many may have their own native cryptocurrency, and thus a number of new economies emerge. In any economy with multiple currencies, there’s a need for tools for exchanging one unit of currency for another, facilitating lending, accepting investment, insurance, etc.
Finally, we have the “Value Exchange” category (Basic Attention Token, Steem, Streamr, iexec, etc). Today, middlemen and rent seekers are a necessary burden in order to keep order, maintain safety, and enforce the rules of P2P marketplaces. But in many areas, these cryptoeconomic systems can replace that trust, and cutting out middlemen and their fees will allow users to exchange goods and services at a significantly lower cost. There are more categories within the Blockchain Ecosystem that I did not cover, but now you have a better idea as to how you can be diversified within the blockchain space.
In my opinion, blockchain technology is going to change the way business is done forever just like the internet did. In modern history, the biggest revolutions were caused from platforms/things that businesses can build on or around. The steam engine, electricity, mass production (assembly lines), and the internet were all concepts that sparked massive waves of innovation because they could be utilized by all or a majority of industries to either cut costs, or provide new or more value to their customers. The real question is, are you going to take the time to educate yourself so that you are appropriately positioned to benefit from this oncoming wave of massive innovation? If you have any questions, comments, or concerns or if you just want to talk crypto, I’d love to hear from you! As usual, I’ll end this with one of my favorite quotes as it pertains to this article;” Everything large started off small and focused”.