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Please don’t pay any attention to this posting. It is not for you… *

This graph presents indisputable fact: It compares US dollar growth as reported by the US government and Bitcoin growth (for all time), extrapolated by pure math.

I wish that this would put to bed the fake news, conspiracy theories, and “nothing backs it” nonsense. Unfortunately, seismic shifts in architecture or process take time for society to understand and accept. Early adopters will be the fortunate buckos. Timid or clueless denizens will complain bitterly about the unfair advantage of those who wise up before it hits a 6 figure exchange rate. Eventually, comparisons with legacy currencies will be utterly meaningless. It will become the currency. It will be the gold-pressed latinum of universal recognition and intrinsic value.

15 years from now, some will look back on our era and claim that the Winkelvoss twins were lucky. Risk, patience and an understanding of economics is not ‘luck’. They have the gift of prescience.

Bitcoin cannot be manufactured. Despite it being open-source and easily copied, it is very unlikely to be displaced by an altcoin or ICO. The fact that there will never be more than 21 million original bitcoin presents incredible opportunity to the frugal and wise—for a short time.

* Hopefully, few people will heed the siren call. Investing is Bitcoin might be good for you, but it is bad for the community. How so?! The more that individuals or institutions hoard, speculate or invest in Bitcoin—as opposed to driving adoption by actually using it—the longer it will take to gain traction as a functional payment instrument, or as the money itself.

So, this article is not for you. Move along. These aren’t the droids you’re looking for.

Philip Raymond sits on Lifeboat’s New Money Systems board. He co-chairs CRYPSA, hosts the Bitcoin Event, publishes Wild Duck and is keynote speaker at global Cryptocurrency Conferences. Book a presentation or consulting engagement.

Credit: (title & image): Peter Bergstrom
Did you catch the omage to both Star Trek and Star Wars? Look again

Today, I was asked to answer this question at Quora:

“What sets each cryptocurrency apart from the others?”

“Cryptocurrency” is a broad term. It refers to payment coins, of course—such as Bitcoin and Litecoin. But, because most tradeable tokens attain an asset value, the word is often used to refer to smart contract devices, such as Ethereum, a host of other blockchain based tokens, functional Internet-of-Things tokens, and even ICOs (Initial Coin Offerings). Since people treat ICOs and IOT tokens as investment instruments even if they are useless as a payment mechanism, they all fall within the realm of a cryptocurrency.

So, before addressing the question, let’s distinguish between Altcoins and ICOs. I assume the question refers to Altcoins, and not ICOs…

ICOs are almost all scams. A very few of these are designed to function in a well-defined IOT role (Internet-of-Things). But, any ICO that you are likely to hear about share one or more traits described here.

But Altcoins are different. These are typically forked from Bitcoin or another established blockchain-backed coin. They are created because developers feel that they have solved one or more of the problems that limit the growth or appeal of Bitcoin. For example, Bitcoin has (or recently had) all these problems or perceived limitations:

  • Transaction Malleability (Recently solved with activation of SegWit)
  • Speed of transaction (Now being addressed by Lightning Network)
  • Cost of transaction (Also addressed by Lightning Network early 2018)
  • Very high electrical demand by miners (Still a major problem)
  • Fairness of and speed of distributed governance process (a big problem)
  • Finding a validation incentive after mining runs out (a long term issue)
  • Deep privacy features. These are inherent to Monero and Zcash. (Bitcoin will soon support onion routing transactions to enhance privacy)
  • Disparate goals of miners, developers, vendors and users (still a problem)
  • Limited Smart Contract mechanism (Ethereum is the current king in this realm, with slick methods of administering and executing contracts. Bitcoin will eventually acquire these features & benefits.
  • Like ICOs (these are almost all scams), some Altcoins (not scams) address specific IOT applications. This is a legitimate and non-payment use of blockchain technology. It represents a promising evolution. It is not yet clear if Bitcoin can eventually adopt these features and function in a non-payment, IOT capacity. The intrinsic, stored value aspect of Bitcoin would make it difficult to use in such applications.

One big problem facing Bitcoin is that the distributed consensus mechanism that makes it a trusted, peer-to-peer mechanism is based on Proof-of-Work (POW). Coupled with a mining incentive that increases dramatically with exchange rate, Bitcoin is—quite simply—untenable. With consumption topping 33 terawatt hours in December 2017, it already consumes more power than some countries. If even 2% of the world’s payment transactions were settled in Bitcoin, the mining would consume more power than is generated throughout the world. This just cannot continue!

Fortunately, developers and armchair inventors have proposed or demonstrated clever POW alternatives to achieve a fair distributed consensus. Some of these use a Proof-of-Stake mechanism, while others add a limited central-authority nexus to facilitate governance and scaling. Some are built on a modified blockchain that weaken several pillars of a true decentralized, p2p network. Of course, researchers are concerned that these systems deteriorate the decentralized nature of Satoshi’s original blockchain.

But, other systems may allow for a fully distributed and democratic trust platform, such as BFT Replication (IBM) or Distributed Objective Consensus, which was proposed by an amateur mathematician.

In reply to the title question, Altcoins are set apart by their claim to address the above problems & limitations, or to add features.

Will an Altcoin Triumph over Bitcoin?

Perhaps, a few altcoins will thrive, due to specific niche advantages; features that Bitcoin chooses not to address, such as deep anonymity or with a novel utilitarian feature that facilitates a specific Internet-of-Things process.

Unfortunately for altcoins, all coins require public trust and transparency. For this reason, they are open source, permissionless, without licensing, without patent protection and with a fully disclosed pre-mining history. And for that reason, Bitcoin is free to steal any clever advantage that works. It’s all up for grabs and no one can be sued.

In effect, each altcoin as a beta test platform for Bitcoin. Now that Bitcoin is finally addressing the problems of scalability and fair/speedy governance, there is little doubt that it will continue to dwarf other coins.

Philip Raymond sits on Lifeboat’s New Money Systems board. He co-chairs CRYPSA, hosts the New York Bitcoin Event and is keynote speaker at Cryptocurrency Conferences around the world. Book a presentation or consulting engagement.

Titles are chosen by editors and not journalists or experts. I fought my editor over the above title. Yes, I address the teaser—and I explain a solid altcoin investment model. But, that comes after the break. The first part of this article should be titled “Why would anyone quote cost or value in Bitcoin?”. The subjects are highly related, so bear with me…

Today, a reader asked this question:

Some financial sites discuss value in Bitcoin terms, rather
than dollars or Euros. Why would I calculate the value of a
new car, my rent or an investment in this way? It’s hard to
understand how much money I need!

Answer: Your right! It’s difficult to estimate the value of a car or your rent in terms of Bitcoin. You are paid in dollars or Euros—and your landlord quotes rent in the same currency.

On the other hand, it’s natural to gauge the value of something by comparing it to a commodity that you earn and spend at a steady or predictable rate. Therefore, your assumption that it makes more sense to determine value on a dollar-basis is absolutely correct. No one determines the value of a new car by comparing the cost with a government’s national debt—or the number of donuts you would need to sell (unless you are a donut maker).

But, this assumption is transitory. It is based on a historical paradigm that is gradually changing. We are entering a bold new era. A big debate is shaping up over How gradual is the change? But make no mistake: This change is occurring in our lifetimes…

That change will eventually lead you to estimate, earn, spend and value things in Bitcoin or a similar cryptocurrency. One day soon, fluctuations in the value of the US dollar or Euro will cause you to wonder “What is happening with the dollar?” rather than shake your confidence in Bitcoin. Bitcoin (or something similar) will integrate into your mindset as the exchange medium, rather than fiat currency of a nation state.

Naturally, a series of dominos must fall, before you realize that Bitcoin is the money. I predicted this four years ago, and the process is already occurring. It is retarded by two unfortunate events, but these are both temporary setbacks:

  • Today, more people are hoarding and speculating rather than accepting or spending Bitcoin for goods and services. This delays the day that it can act as a useful, functional currency.
  • Miners, users, vendors and developers are chasing different goals. This makes it very hard to agree on necessary changes that will address several critical technical problems (i.e. transaction cost, speed, electrical demand, replay issues, etc).

Both of these problems have solutions, and we have already seen the solutions at work in altcoins. Think of forks and altcoins as beta tests…Bitcoin will fold in the best of these technical improvements and will very likely continue to inch toward becoming the world’s de facto currency.

Revenue Neutral Investing

To answer the question in the title, let’s look at this from a completely different angle. The individual who asked the original question went on to ask this:

Cryptocurrency sites compare and track the cost of altcoins in
terms of Bitcoin rather than dollars. What’s with that?! Do they
assume that we will all be selling Bitcoin to buy the new altcoin?

It actually makes sense to value altcoins in terms of Bitcoin—even today. How so?…

This growing trend provides very useful information. This method of quotation helps the reader to determine the relative change in value between the two currencies and compare it to fundamentals that they learn from news and research. The information can then be used to hedge an investment or even craft a revenue-neutral investment strategy. Allow me to explain…

I am long on Bitcoin. This is not likely to change. So I keep a significant fraction of my wealth in this form.

But, I also understand that the use and market for cryptocurrencies is young and very immature. A very few other forks and altcoins are the real deal. They have solved some major technical flaws with Bitcoin and they have the potential to become a credible, functional currency. This isn’t the place to explain my favorite coins, but the strategy is relevant.

Since I already have a substantial position in Bitcoin, I wish to avoid further exposure in the market. Therefore, I invest long and short at the same time (for example, using puts and calls)* on certain coins that are likely to perform better than other coins. This reduces risk, by leaving me without a loss, if the entire market rises or falls. The only way I might lose is if I get it exactly wrong! That is, if the coins that I believe are scams do better than the ones that I feel are well-designed and with a solid adoption trend. (Remember: The risk reduction strategy is to invest on the difference between an overvalued dog and an under-performing beauty).

To avoid the downside scenario (i.e. getting it exactly wrong), focus on fundamentals and not the cost of a unit, short term trends, emotional zeal, or other technical issues. Don’t follow the crowd! Bet on value and bet against hype. (TIP: The take-away, here, is to do both at once!). Investors who consider only asset cost and trends are in a craps shoot. The smart money determines which coins are likely to be a better functional instrument than other coins and then sticks with a dollar cost averaging plan for months at a time.

Want to learn more? Want to know which coins I admire? Reach out. Let’s talk. I don’t bite.

* A regulated financial exchange for puts and calls does not exist for altcoins. But, with a little research, you can create an nearly equivalent futures contract or options instrument. You may need to be a bit creative.

Philip Raymond co-chairs CRYPSA, publishes A Wild Duck, hosts the Bitcoin Event and kicked off the Cryptocurrency Expo in Dubai. Click Here to inquire about a live presentation or consulting engagement.