What Distinguishes Bitcoin From Another Cryptocurrency
How to invest in Bitcoin
Being already familiar with Bitcoin for a long time, we noticed that many people, gradually discovering this system, change their attitude to it. As a rule, people think like this:
1. Wow! Bitcoin is great! Their release is limited, and my money is under control. Where can I get them?
2. Mining or Mining sounds simply cool. It seems that this is how money appears. Where can I find the miner and get the first bitcoin?
3. Mining is very difficult. Probably, it’s better to just buy coins. And where to buy them?
4. Great! Now I have bitcoins, and what are these other coins? Will they ever replace Bitcoin?
5. It is necessary to do something for this case. Maybe buy any of these altcoins?
6. But there are so many of them, I can never understand them. On what to choose?
7. I know, I’ll just buy the most popular ones – they probably have more chances to bypass Bitcoin.
8. Hmm, but they are very expensive. Maybe it’s better to buy some others just emerging?
Many stops at this or that stage. For example, I know people who have never bought Bitcoin but have always produced them on their own. They happily spend thousands of dollars on mining equipment, but they will never buy a single bitcoin on the market. Others stop at Bitcoin and are not at all interested in altcoins. And there are some who try to hedge by buying all the altcoins in a row. The bottom line is that whatever path you choose, everything will be predictable enough, but each person has his own beliefs, and everyone will act in his own way.
Why buy altcoins
Most often, Altcoins buy to protect themselves from possible problems in Bitcoin. Here are some reasons to insure yourself with altcoins:
1. Bitcoin network may one day come to a catastrophic failure, which is not subject to altcoins.
2. Prospects for using altcoins in the future are significantly higher than those of Bitcoin, so one of the altcoins may sooner or later replace Bitcoin.
3. Even if Bitcoin remains the most valuable cryptocurrency, altcoins will still have a place, and they will be able to occupy their niche, so, perhaps, investments in them make some sense.
Let’s study each point in more detail.
The Collapse of Bitcoin
There are several options for the catastrophic death of Bitcoin. First of all, these are technical malfunctions (for example, some kind of bug that will allow you to steal all the coins). Secondly, an economic error (for example, the code will change and give someone at a time 10 million coins). Third, a consensus error (for example, Bitcoin will split into two roughly equal currencies).
- Among the technical failures, the most likely vulnerability is the encryption used by Bitcoin or the security of the consensus code used. Vulnerability in encryption (“smart” attack against a specific elliptical curve used in Bitcoin) naturally goes to most other coins using the same cryptographic libraries. Vulnerability in Security will again extend to all coins with the same code.
- In any case, the question arises: what will happen if something of the above happens all the same? First, if the vulnerability is detected quickly enough, then, most likely, Bitcoin developers will have time to write the necessary patch and, probably, will immediately create a fork that is not subject to this risk. In fact, something similar has already happened, and then the reaction of the community was a fork.
- It is more interesting to know what will happen if the moment is missed. Most likely, the price will drop sharply not only on Bitcoin but also on the majority of altcoins, because people will stop trusting cryptocurrency as such. By and large, we do not know if there are any vulnerabilities in the altcoins.
Under the economic error, one should understand certain changes in the economic rules of Bitcoin itself. Such a situation in Bitcoin has never been, moreover, such an opportunity has never even been discussed. But from the recent Bitcoin scaling debate, we know for sure that any changes require the full agreement of the entire community. Such an outcome, as a rule, is inadmissible a priori.
On the other hand, the prevention of technical and economic errors requires the availability of a talented, committed and reliable team of developers, as well as the risks that need to be countered. Of course, all altcoins are at risk, however, it should be noted that Bitcoin is one of the few crypto-currencies that has a natural barrier in the form of alternative customers.
- The last drawback, perhaps, is a real threat, from which it is worth insuring. Debate on scaling showed that in the community, at least, there is a desire to divide the network. Offer to make a soft fork, activated by users, or activate the function of disabling consensus. Both say that in reality, Bitcoin does not have a leader and there is no dominant position. The majority of altcoin have a creator, the so-called “magnanimous dictator”, who in fact decides the fate of the currency. The fact that Bitcoin does not have it carries a certain risk. Although there is a positive moment in the absence of such a “magnanimous dictator” – the risk of economic error is reduced.
Prospects for future use
Most altcoins are technically different from Bitcoin, and it is often for this reason that people invest in them. Explain this pattern is simple – altcoins can be used as well as Bitcoin plus somehow else, so they are more useful than Bitcoin, which means that someday they will be able to surpass it.
- It seems that everything is logical. With the same technical parameters, altcoin, existing in a vacuum, will do well not less, or even more, than Bitcoin, which also exists in a vacuum. Even if the source code bases are significantly different, but the economies are similar, in a vacuum, the effect is likely to be similar.
- But we, of course, do not have a vacuum, and the life of Bitcoin influences its use in the future. Most likely, Bitcoin itself in one form or another will take the necessary use. So far, none of the properties of Altcoins that distinguish them from Bitcoin have proved their usefulness, therefore they were not accepted as the first cryptocurrency.
- If one of the altcoins shows its usefulness, there are several ways that Bitcoin can adopt the required property. First, Bitcoin can easily borrow that property that it finds useful enough for itself. An example is the confidential transactions offered in the Bitcoin sideline. Certain characteristics, however, may conflict with the current scenarios for using Bitcoin. Bitcoin, for example, perfectly preserves the cost, so it is worthwhile to think several times before adding parameters that create more favorable conditions for an attack. And here comes the second opportunity to add useful properties to Bitcoin. Entrepreneurs can introduce similar functionality at a time when they themselves make a profit. Given that the consensus is difficult to change, the last way to introduce innovations into the Bitcoin network seems to be the most plausible.
In other words, altcoins have to compete not only with Bitcoin itself but with all entrepreneurs who want to earn on it. It turns out that in spite of the fact that in some cases the protection of risks makes sense, it’s still likely that as a result Bitcoin in one form or another will take over other usage scenarios and reduce all the advantages of altcoins to zero.
Highly specialized use
Undoubtedly, many altcoins are trying to occupy their niche. Dogecoin, for example, is built on a system of incentives and the transfer of value, often for the very movement. Ripple was originally conceived as a means of moving value to banks and major institutions.
The only possibility for coins, occupying small niches, to achieve some results, i.e. Be able to do what Bitcoin can not and will never do. Dogecoin quickly realized that giving out as cash bonuses (promotions) Bitcoin is also easy. You can argue that this is quite problematic in view of commissions for a transaction in Bitcoin and, perhaps, Dogecoin has a chance to break ahead, but let’s start with the fact that Dogecoin bonuses were never issued on-chain (on the network), as well as Bitcoin bonuses (ChangeTip was a centralized service). If the incentives again become fashionable, the Bitcoin ecosystem will easily cope with them. Banks that transfer cost to each other can do this with Bitcoin.
The question of occupied niches is similar to the issue of future use, but not so large. Businessmen have many reasons to bring similar, profitable innovations to Bitcoin, given the wider base of its users.
What is the difference between Bitcoin
The main advantages of Bitcoin are the network benefit effect and proven security. Both of these advantages are almost insurmountable.
- Bitcoin has a proven use case – storage of value. Significantly, most coins are trying to somehow differ from Bitcoin, so they offer less-demanded usage scenarios, including forecast markets, completely anonymous purchases, or the addition of a decentralized name server.
Bitcoin leads the way in storing value among all the altcoins, and for 8 years of existence, it did not have a single failure. The safety of Bitcoin is much higher than that of its younger counterparts
- In addition, Bitcoin is much more affordable – more exchanges, more sellers, more software and more supported hardware. Bitcoin is much more liquid at volumes significantly exceeding the volumes of any altcoin. Bitcoin has the largest ecosystem of developers with a lot of software and implementations, in comparison with altcoins. Bitcoin has more entrepreneurs investing their intellect, desire, and creativity in the development of the network.
Competing with Bitcoin, you compete not only with the largest user base, development team and production, but you also compete with the largest ecosystem of start-ups, open source projects, and entrepreneurs.
Example
To be clearer, imagine that I’m creating a coin for an email spam filter. Let’s call our currency SpamCoin. This altcoin allows you to send a message only after paying a certain amount of SpamCoin coins. Suppose that such an opportunity was very useful, and many began to use it so that SpamCoin began to gain more and more value. What will happen?
It’s unlikely that Bitcoin will directly take over the function of SpamCoin (although in the case of kitchens, I think you can not even resist it). But there is a high probability that some entrepreneur will create such a service based on Bitcoin. They initially have a much larger base of potential users, and no SpamCoin will be needed to run the service. Before them, there are almost no obstacles to entering the market, the user base is larger, so in the end, the new Bitcoin service will initially have the benefits of the network benefit effect, which you can not say about SpamCoin.
I’m not saying that SpamCoin will lose, but on its way, it will face much greater difficulties.
Conclusions
I do not want to say that investments in altcoin are useless. Each investor must himself assess the risk-profit ratio and decide whether or not a particular coin is suitable for him. It’s clear that altcoins will not protect you in the event of a Bitcoin crash. Altcoins are subject to the same risks, and a large share of the potential profit goes to Bitcoin.
- Undoubtedly, there is a possibility that some altcoin will take the place of Bitcoin, but before that it should show its (now, not in the future) profitability, it must develop independently to compete before the Bitcoin ecosystem has a chance to add the same function.
In the process of its development, Bitcoin can begin to grow in any, the most unexpected direction, depending on the appearance of new uses. Owners of Bitcoin can be sure that over time the scope of its application will only increase. The owners of the altcoins, on the other hand, are at great risk of refusing to use their coins.
In other words, Bitcoin is already ahead of everyone in the circle, with a great advantage, given its ecosystem and resources. There are two factors that help Bitcoin achieve success: stability and entrepreneurship.
