The guest commentary below was written by Sam Callahan of Swan.com. This piece does not necessarily reflect the opinion of Hedgeye.
Bitcoin is a brand new technology that differs from anything else that has come before or after it. It’s a decentralized monetary system that is controlled by rules instead of rulers.
This innovation is radically different from our traditional financial system and people can typically understand this difference easily. But where beginners run into confusion is in how Bitcoin differs from other cryptocurrencies.
New investors often get lured by the false promises and deceptive narratives of altcoins. They get duped into selling their bitcoin for scams and inferior systems that claim to be better than Bitcoin in some way.
The running joke in the Bitcoin community is a newcomer first buys bitcoin, then finds altcoins, then loses money on altcoins, only to eventually return back to only investing in bitcoin. This is colloquially known as the “Altcoin Cycle”.
The reason why new investors go through this Altcoin Cycle is that to avoid it requires a deep understanding of the underlying technology, the game theory, monetary economics, and network economics that reveal why there is only one Bitcoin. Failing to know all this makes one vulnerable to being unable to choose the best option.
The goal of this series is to break the Altcoin Cycle.
The only way to do that is through educating beginners about what makes Bitcoin unique compared to all the other cryptocurrencies. There is Bitcoin and there are altcoins - and here’s why.
1) Bitcoin Is Decentralized, Altcoins Have Management Teams
Bitcoin solved a problem that plagued humanity throughout history: the need to create a system of money that could not be captured and corrupted by anybody.
Throughout history, this problem has led to the fall of nations and empires.
How Satoshi solved it was ingenious. The solution involved not just the system’s design and code, but the manner in which it was introduced to the world. Whoever Satoshi is or was, he was not after personal fame, power, or wealth. In contrast, the names of all of the founders of all major altcoin projects are publicly known.
Those founders hold tremendous power over the participants in their projects. Only Bitcoin has a founder, now disappeared, who wields no power over the protocol nor the people who use it, which is when you think about it, a prerequisite to incorruptible and uncapturable money.
Since Bitcoin has no active founder, foundation, or consortium that created or controls the coin, it has no single point of failure. There is no one to target, manipulate, or coerce. There is no one who is tempted by greed or self-interest, that can affect the operation of the system.
This lack of central authority makes it exceedingly difficult to make changes to the rules of the protocol and thus makes Bitcoin an extremely reliable store of value. Since Bitcoin is truly decentralized and censorship-resistant, no one can change it unless everyone in the system voluntarily agrees to the change. You never have to trust a group of individuals to keep their word in Bitcoin. Code is law.
By contrast, the network design of Ethereum, the altcoin with the highest market cap, is centralizing over time, both in its current proof-of-work form (where now almost no one can run a node, and that gets harder all the time) and in its future proof-of-stake form being planned by Ethereum management.
It’s safe to say that Ethereum is centrally controlled today despite claiming otherwise. It is decentralized in name only. Ethereum’s centralization makes it easy for the management team to make changes to the rules of the protocol.
We saw it take place with yet another Ethereum hard fork recently and these events take place regularly, often benefiting the management at the expense of the community.
Consider the charts below — Bitcoin’s monetary policy is hard to change because it’s decentralized and leaderless. So hard in fact that it has never changed. As you can see its monetary policy is predictable and machine-like because Bitcoin is truly run by math, not people.
Now compare the chart above with the one below and notice the stark difference.
Ethereum’s monetary policy is controlled by humans, not computers, and thus its issuance reflects the unpredictability of human nature.
Due to its changing nature, Ethereum’s long-term issuance schedule is impossible to predict, whereas Bitcoin’s issuance is knowable with certainty for the rest of the time. With Ethereum, you are trusting people to responsibly control the money which historically has been a losing venture.
Recall that this was the whole problem Bitcoin set out to fix.
If you have to trust that some oligarchy won’t change the rules of the protocol then you can’t trust the monetary policy will stay the same. If you can’t trust the monetary policy then you can’t trust the scarcity of the asset. Which begs the point, why do you have to trust anyone or anything at all?
And here then is the big difference between Bitcoin and every imitator: besides Bitcoin, none of them have created anything new if their token is not decentralized and immutable.
If you buy those tokens you are simply trading your centrally controlled dollars for another centrally controlled token— trading one group of rulers for another group of rulers with the power to manipulate the money at their will.
Only Bitcoin has proven to be sufficiently decentralized and censorship-resistant over its history. Bitcoin’s monetary policy and scarcity are programmed and predictable. This is because its monetary policy relies on predictable code, not unpredictable humans. Rely on Bitcoin, do not trust altcoins.
2) Bitcoin Is Scarce. Altcoins Are Abundant
There will only ever be 21 million bitcoin. The fixed supply and issuance schedule of bitcoin was programmed in from the very beginning.
It can never be altered without all of the nodes on the network agreeing to the change. This programmed scarcity is verifiable by every user of the network and knowable into the future because of the predictable nature of the monetary policy.
As touched on previously, this predictability is made possible due to the decentralization and immutable nature of the Bitcoin protocol. It is these properties that ensure Bitcoin’s fixed 21 million scarcity remains intact.
Bitcoin is the first time in history that we have a provably fixed, scarce asset that we can rely upon to continue to be scarce. In other words, Bitcoin is the invention of absolute scarcity because its supply will remain fixed regardless of increased demand.
Digital scarcity can only be invented once. This invention occurred with Bitcoin. The cost of creating imitators with slightly different variations in the code is zero, given Bitcoin’s open-source nature.
With no cost to produce a copy, this led to an explosion of altcoins all trying to recreate their own version of Bitcoin. But what no single one of them can recreate is being first.
Bitcoin’s organic adoption and the grassroots growth of its mining ecosystem cannot be (and therefore has not been) replicated in this world where digital scarcity already exists.
When some group creates an altcoin, one must ask:
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What does your new cryptocurrency offer to a world where Bitcoin exists, and what does it sacrifice that Bitcoin actually has?
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Can you guarantee that the monetary policy is credible?
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Can you ensure the distribution of money is an equal opportunity and fair?
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Is this new cryptocurrency decentralized? How?
Typically there are no answers to the hard parts of these questions because the true answers are that this is simply a group trying to get personally rich by issuing some new money, giving themselves a lot of it early on, and staying in control of its issuance and rules.
Since the cat is out of the bag with digital scarcity, nobody can credibly create a new cryptocurrency without it being more centralized, more unfairly distributed, less credible, and less secure than Bitcoin.
With decentralization and censorship resistance being the key to maintaining the credibility of a cryptocurrency’s monetary policy and subsequently its scarcity, we can conclude that an altcoin is less scarce and less credible than Bitcoin because they fail to be the first cryptocurrency, which only Bitcoin can ever be, and also because they all fail to address these questions with satisfactory answers.
Only Bitcoin is the invention of digital scarcity. It is optimized for credible scarcity due to its decentralization and censorship resistance. Everything else that came after it is hopelessly trying to re-invent the wheel when the wheel we already have is working flawlessly.
3) Bitcoin Is Backed by Energy. Altcoins Are Backed by Promises.
Energy is the currency of the universe. In order to get anything done, you need to transfer energy— you need to put in the work.
Energy is something that can’t be faked, that can’t be created, but that can only be transferred. This is the first law of thermodynamics and it sits at the core of the Bitcoin Proof of Work consensus algorithm.
Bitcoin’s “miners”—those who perform the Proof of Work to discover the new coins and secure the history of transactions—have no way around using energy With Proof of Work, they must comply with the laws of the universe by transferring energy in order to mine a block and get rewarded. This allows us to view the immutability of the Bitcoin blockchain objectively as truth. We can know with certainty that real energy was transferred by miners when they include valid transactions in a block and secure the blockchain. Therefore we can know with certainty that the ledger’s history of transactions is honest.
The real innovation of Bitcoin is by utilizing the honest nature of energy, a perfectly competitive and auditable environment is created where market participants of a distributed network can come to a consensus in a manner that is trustless and maintains integrity.
Other consensus algorithms like Proof of Stake rely on someone else (a staker) to subjectively say that the ledger is valid and true. With Proof of Stake, you are trusting the word of another person to confirm the immutability of the blockchain instead of counting on the unbreakable laws of nature.
Proof of Work is backed by energy and finds the truth by bridging the real world with the digital world whereas Proof of Stake is backed by nothing but what someone else tells you is true. What’s the value of a promise when compared with the value of certainty?
Another benefit of Bitcoin’s energy use is it makes Bitcoin hard to produce, thus providing its scarcity. We touched on this topic earlier when we discussed how there is zero cost to produce copycat altcoins.
What sets Bitcoin apart, is there is a real external cost to produce new bitcoin in the form of electricity. If you decide to shift that energy cost to something else that utilizes fewer resources like Proof of Stake, then you just made the money easier to produce. Said differently, you took hard money and made it easy money that is more susceptible to being inflated, making it an inferior store of value.
Bitcoin utilizes the honest nature of energy to come to a consensus, rather than using people’s promises to do it.
This allows it to be a system that is orders of magnitude more secure, more scarce, and more censorship-resistant than every other cryptocurrency in existence today. Bitcoin’s energy usage is a feature, not a bug, and it’s a major reason why Bitcoin stands alone.
4) Bitcoin Can Be Imitated, But Never Duplicated
Bitcoin is radically different from every other cryptocurrency project in existence today. Its killer feature is the long-term credibility of its monetary policy.
Bitcoin keeps its promises. Since the Genesis block, Bitcoin has kept its commitments: there will only be 21 million bitcoin, anyone can verify the ledger, and you can’t spend what you don’t have.
It accomplished this because Bitcoin is sufficiently decentralized in that no one can control it, censor it, or change its rules. This resistance to change has allowed more and more people to recognize Bitcoin’s scarcity and reliability. This cannot be replicated by altcoins because it cannot be created by altcoins.
Altcoin promoters are either ignorant to all of the above or understand these concepts and push their wares on newcomers anyways. This is why the altcoin industry is a cesspool of fraud and scams.
They are all desperately trying to justify their existence because they are building fundamentally broken solutions to problems that don’t exist. Only Bitcoin brings incorruptible money and absolute scarcity to the world.
Only Bitcoin is leaderless. Only Bitcoin is energy-backed money. Only Bitcoin is honest. For all these reasons and more, Bitcoin has already won.
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EDITOR'S NOTE
Sam Callahan is a Bitcoin Analyst and educator at Swan Bitcoin. He graduated from Indiana University with degrees in Biology and Physics before turning his attention toward the markets. He writes the popular "Running the Numbers" section in the monthly Swan Private Insight Report. Sam's analysis is frequently shared across social media, and he's been a guest on popular podcasts such as The Investor's Podcast and the Stephan Livera Podcast.
