Bitcoin 101 - How does bitcoin compare to other cryptocurrencies?
If you’re new to the world of cryptocurrencies, you may have heard friends and family talk about thousands of different cryptocurrencies. “Did you hear about this new project yet? They’re going to revolutionize X, Y, Z.” This is a common trap, and in this blog post, we’d like to warn you about these pitfalls!
The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations.
Digital scarcity can only be created once
Back in 2008, Satoshi Nakamoto discovered bitcoin, a person (or group) who to this date remains to be anonymous. The environment in which Satoshi was releasing bitcoin into the wild was utterly different than the world we live in today. Every prior attempt at virtual money had failed, and their proposal was the first that worked.
The word “blockchain” or “cryptocurrency” did not exist yet, and very few people on earth were monitoring this space (mostly the cypherpunk mailing list and bitcointalk.org). People worldwide quietly worked on bitcoin, as they introduced slight improvements over the next few years as it gradually took on more attention. Around 2011, when bitcoin gained a certain amount of maturity, its creator(s) decided to remove themselves from the picture and leave bitcoin to the world to develop further and improve.
Nowadays, the cryptocurrency industry is full of people (scammers) who want to take advantage of uneducated investors. They have seen the potential of bitcoin and want the same for themselves. Since the bitcoin codebase is entirely open-source, creating a copy and creating your cryptocurrency is easy. However, building the network effect as bitcoin has will be much more difficult. How do you make other people believe your token is better than bitcoin? Why would they buy a token that you (the creator) already have a certain percentage allocated to yourselves? If you’re the “famous” token creator, how does that fit in with decentralization? Why would I trust the security of your token more than the most secure network in the world (bitcoin)?
While multiple precious metals exist in the traditional financial system, a market process of about 5000 years has established a dominant role for gold as money. Investors can still buy other precious metals, such as silver, palladium, and platinum, but this will not substantially improve the investor’s diversification. They all belong to the same asset class and move similarly in the market. However, an investor would never like to buy “a copy of gold,” i.e., the investor wants to buy real gold. Likewise, in the cryptocurrency industry, there is only one gold, and this is bitcoin. It has been around the longest; it is the most secure; it is the most decentralized, and in general, it has the most adoption.
But my cryptocurrency does all these extraordinary things that bitcoin can’t do...
Some of the most intelligent people in the world work on improving bitcoin; their discussions happen mostly via the bitcoin mailing list, the bitcoin core Github repository, and occasionally in IRC chats. As the development of bitcoin is open-source, anyone in the world can write a proposal to improve bitcoin. The bitcoin development cycle is a continuous and never-ending process.
While anyone can propose changes, it’s rather hard to integrate them into the bitcoin software as your proposal will have many critical reviewers. Bitcoin developers are very risk-averse as they work on the future global financial system. Therefore, if you propose controversial changes that tremendously impact the bitcoin network, these changes will generally not be included. The only thing left to do is fork the bitcoin code and start your own cryptocurrency.
Despite the rejection of your proposal, you now start your cryptocurrency to implement your idea and successfully launch your token and gain some traction. Great! However, you will face either one of the following two fundamental problems:
- either your proposal does not work, and in the long run, the value of your token goes to 0;
- your proposal does turn out to be a good idea, and now it is implemented on bitcoin (or a secondary layer of bitcoin). Once again, in the long run, the value of your token goes to 0 as the market will converge back to the most stable, decentralized, and secure network rather than your sub-optimal network.
So, why bitcoin, not shitcoin?
Next time you’re friend or family asks you, “Have you heard of this new cryptocurrency?”, you will have the right questions to pose back after reading this blogpost:
- Is the creator known? (If yes, it’s probably not decentralized) Did s/he launch this to enrich themselves? (If yes, it’s probably a scam)
- Does it promise to be the next bitcoin? (That’s not possible because the world has changed, and we already have bitcoin. As digital scarcity can only be created once, you can’t recreate bitcoin)
- What does it do better / different than bitcoin? (If it’s a good idea, it’ll be added to bitcoin eventually, if not, that’s the reason it’s not in bitcoin).
More Bitcoin 101
We hope you’ve enjoyed our sixth blog post in the series “Bitcoin 101 - What is bitcoin?”. If you want to know more about the bitcoin mining process, stay tuned for the next blog post! We’ll be publishing one blog post every week answering many of the questions we’ve heard from our Stekking users who are new to bitcoin:
- What is bitcoin?
- How and where can I buy bitcoin?
- How and where can I use bitcoin?
- Where should I keep my bitcoin stored safely?
- How does a bitcoin transaction work?
- How does bitcoin mining work?
- What are the advantages and disadvantages of using bitcoin?
- What is a blockchain and how does it work?
- How does bitcoin compare to other cryptocurrencies?
- Why should I want to have bitcoin?