Is Bitcoin the Myspace of Crypto?
Sound money requires a commitment to decentralization, and properties hard to change and attack. Altcoins are built by centralized teams with a profit motive, not a happy accident of a growing ecosystem by cypherpunks.
“Let’s say Buffet is right. Bitcoin dies. So what? Myspace and Friendster both died, but they paved the way for other social media like Facebook and Twitter to completely overrun the planet. Crypto is out there, and it’s not going away.”
- Gilfoyle, Silicon Valley on HBO
After understanding the basics of how Bitcoin works, the next logical question tends to be: “Blockchain tech sounds interesting. How do we know a better version won’t show up and turn Bitcoin into the Myspace of crypto?”
A moat is a competitive advantage a business builds that prevents new entrants from easily competing. For Myspace, that moat was a huge user base with friend relationships. People wouldn’t use competing services if their friends weren’t already there. But as large a moat as a well-connected social graph is, it wasn’t enough to stop Facebook from eating Myspace’s lunch in the span of only a few years.
Bitcoin’s moat is much, much larger than Myspace’s. To understand that, let’s examine what it would take for a Bitcoin Competitor to displace Bitcoin.
The first thing to understand is that the Myspace vs. Facebook comparison is poor because you can have an account on Myspace and Facebook simultaneously at no cost. Many people did this during the transition phase from one to the other. Once enough critical mass was on Facebook, people stopped using Myspace.
This is not how money works, however. If you hold a dollar’s worth of Bitcoin, that’s a dollar’s worth of another coin that you’re not holding. You have to make a conscious decision to sell one currency for another. You cannot store the same value in both at the same time. Now ask yourself why you would hold anything but the most liquid, widely accepted currency?
The answer is only speculation. If you can’t shift the entire economy around you to also hold the other coin, there is no way that it can become dominant.
Bitcoin’s liquidity is far beyond any of its competitors. Today, the market cap of Bitcoin is about $160B, according to Messari. The next biggest competitor, Ethereum, has only $25B of market cap. This doesn’t even measure the true liquidity by looking at how much you could meaningfully sell before the price slips significantly. Liquidity drops exponentially as you go down the list of largest coins. The number 10 competitor to Bitcoin has 0.5% of its daily trading volume.
Liquidity is a snowball. Holding the most liquid money means other people want it, which begets more liquidity. By holding anything but the most liquid money, you actively punish yourself while waiting for everyone else to do the same. The economic incentives do not align in favor of liquidity shifting overnight to a competitor.
By circumstance, Bitcoin was allowed to grow from a worthless internet geek experiment that nobody cared about, to financing the purchase of a pizza for 10k BTC, to a peak price of $20k USD per bitcoin. It did all this relatively quietly, without anyone breathing down its neck. During this time, it built up a world-class immune system from years of attacks and grew the world’s largest network of hash power. For ten years, securing more than 100 billion dollars, it has been impossible to hack.
It is nearly impossible to launch a new cryptocurrency today quietly. The cat is out of the bag, and all the tricks are well-known. Let’s look at an alternative blockchain, EOS, worth about ~$10 billion at launch and nearly $2 billion as of mid-2020. It experienced a freeze two days after launch due to bugs in the code. These bugs were patched within hours with minimal oversight or review. Will you put $100B of value on a network like that?
EOS may be around in 10 years, but by then, Bitcoin will be 20 years old and securing trillions in value.
A new competitor has to survive attacks by existing hash power or use an algorithm with no specialized ASICs. If there are no ASICs, the system can easily be attacked by renting commodity GPUs, which are widely available. It also cannot start securing a large amount of value as EOS did on day one, which is reckless and a good way to get into centralized patching behavior. So that means they can’t raise money either, but rather do a fair launch similar to Bitcoin and grow slowly in value to build up their security model proportionally. However, if they’re growing slowly, they cannot catch up to Bitcoin’s user base and liquidity due to the passage of time.
A large part of Bitcoin’s security model comes from a high degree of decentralization. This means the protocol is hard to change and thus can be trusted to honor the properties promised in its code (fixed supply, etc.). This property was proven when many businesses and miners got together and wanted to push a change to the block size to steer the protocol in a particular direction. Their fork was rejected by users and failed spectacularly.
A competitor that’s highly decentralized rules out any companies or teams founded by known people, as that creates a central point of failure and coercion. It also rules out any coins willing to “move fast and break things” since you can only do that when you’re centralized. Any competitor is either moving fast and gets centralized or moving slow and can never catch up.
Much like Linux created a whirlwind of activity that prevented other *Nix-like systems from competing, so has Bitcoin. Every day this community grows, and new companies are built on top of Bitcoin, offering new services. A competitor has to steal developer mindshare from an exponentially growing nucleus which includes dozens of companies, educational programs, and conferences.
Hundreds of exchanges worldwide, hundreds of hedge funds and trading desks, and a network of people who already use Bitcoin as an alternative to failed currencies like the Venezuelan Bolivar. All these things would have to be built for a Bitcoin competitor to displace it.
Institutions like the Chicago Mercantile Exchange, which trades in Bitcoin futures, aren’t going to list every new competitor without tons of existing exchange volume to back it. You’d have to convince hundreds of businesses to accept this new competitor instead of Bitcoin. A competitor that is likely less secure, less liquid, has less competent developers, and by definition less adoption worldwide. That’s a steep hill to climb.
There is a gross misunderstanding that Bitcoin is supposed to be a fast and cheap way to send money. It clearly cannot be that based on its fundamental properties involving a worldwide replicated ledger. However, Bitcoin’s primary and actual demonstrated use case as censorship-resistant sound money is growing.
Anything else, such as making remittances cheaper, is a cherry on top. Most would-be competitors still think they need to solve the fast payment use case, which is already solved by dozens of centralized companies worldwide and solved reasonably well. And it’s also being solved by the quickly growing Lightning Network on top of Bitcoin.
Competing on the sound money front requires an above-all commitment to decentralization and properties that are truly hard to change and attack. Unfortunately, coins cannot compete on this front by virtue of the fact that they are typically built by centralized teams with a profit motive and not a happy accident of a slowly growing ecosystem that was created by cypherpunks.
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Yan Pritzker is the co-founder and CTO of Swan Bitcoin, the best place to buy Bitcoin with easy recurring purchases straight from your bank account. Yan is also the author of Inventing Bitcoin, a quick guide to why Bitcoin was invented and how it works.
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