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Is Bitcoin the Best Cryptocurrency to Hold?
There is Bitcoin, and there is “crypto”… and they are two very different things.
Bitcoin is a solution to a broken monetary system, while crypto projects claim to be solutions to technical problems in the field of computer science. Yes, Bitcoin is a technical achievement, but more importantly, it is a monetary achievement.
Understanding the differences between Bitcoin and crypto from a monetary perspective is vital to understanding why bitcoin is the only digital asset to own.
The Problems with Crypto
Crypto takes the existing monetary system and puts it on a blockchain. Given the way these projects are founded and managed, they are “decentralized” in name only, and they put their project on a blockchain so they can create their own token.
It’s a mirage; proof-of-stake crypto blockchains can be centrally controlled by its overlords (founders & venture capitalists) in the same way that the fiat system is centrally controlled by its overlords (central bankers & politicians).
Crypto altcoin projects are actually companies. They have founders, investors, a governance board, a marketing team, etc. Their issuance of a “cryptocurrency”, in reality, is the issuance of a security that is not registered with the Securities and Exchange Commission (SEC).
There is bitcoin, and there are 20,000 unregistered securities trading as “cryptocurrencies”. The regulation around Bitcoin is clear: it is digital property, a commodity, and it is not a security. The regulation around crypto is anything but clear, and the Howey Test suggests they are all unregistered securities that will inevitably require proper filing with the SEC or they will be subject to legal action.
No single person or group controls Bitcoin. The authorities cannot go to Bitcoin Headquarters and tell a person or group that works there to shut it down. The authorities cannot order Bitcoin HQ to ban Person X or Country Y from using the Bitcoin network. The same cannot be said for crypto.
The pseudonymous nature of Bitcoin’s creator, Satoshi Nakomoto, is also paramount to its decentralization. The last that anyone heard from Satoshi was December 12, 2010. His disappearance is unequivalently crucial to Bitcoin’s decentralization and success.
Proof-of-Work vs. Proof-of-Stake
Bitcoin’s proof-of-work consensus mechanism, that is, how the decentralized Bitcoin network reaches agreement on transactions and how much bitcoin each participant owns, also contributes to Bitcoin’s decentralization and trustless nature.
Bitcoin is the only digital asset that uses a proof-of-work blockchain. All other digital assets use proof-of-stake blockchains. This technical difference has significant impacts on decentralization and network security, and which are vital for an effective, global monetary system.
Proof-of-work means the person with 1 million bitcoin controls the network no more than the person with 1 bitcoin. Again, this cannot be said for crypto.
A person with 1 million ETH has exponentially more say in the network than a person with 1 ETH.
Proof-of-work requires market participants to expend real world resources to get their proposed block of transactions added to the ledger. Proof-of-work does not care how many bitcoin the market participant owns, but only the amount of work the person does. Rules, not rulers.
Proof-of-stake requires a market participant to “stake” a certain amount of ETH they already own to effectively vouch for a block of transactions to be added to the ledger. A market participant must own a large amount of ETH to participate in this consensus mechanism. This is very similar to the existing fiat system where the ones who own the majority of the money can make and change the rules of the game.
The ability for stakers to coordinate reduces the permissionless nature of the given blockchain.
Bitcoin’s monetary policy is widely known, unchangeable, and beautifully simple. It adheres to a fixed and predictable supply schedule of new coin issuance that’s enforced by the Bitcoin protocol. Here’s a look at Bitcoin’s monetary policy:
And a graphical representation of how this policy dictates the supply of bitcoin over time:
Bitcoin is the first asset in human history to achieve absolute scarcity; there will only ever be 21 million bitcoin. Again, this cannot be said for crypto.
The monetary policy of most crypto tokens is not widely known and is vulnerable to changes made by its proof-of-stake overlords. Remember, the participants that own the most tokens in a proof-of-stake system determine the rules and can change the rules as they see fit.
Thousands of years of human history suggests that the person who makes the rules will design them in their own self-interest, or over time will alter the rules to best benefit their own self-interest. “Sovereign is he who decides the exception.”
Much like fiat currencies, the majority of crypto tokens do not have a fixed supply and are therefore vulnerable to debasement that ultimately diminishes their purchasing power over time.
Satoshi’s Genius… and Premines
Bitcoin is a disinflationary monetary system. Its inflation rate decreases over time until it reaches 0% inflation when all bitcoin have been issued in the year 2140. Approximately every four years, the rate at which new bitcoin enters the supply is halved.
Satoshi’s choice to issue the total supply over a +100 year period demonstrates astonishing foresight. Had all the bitcoin been issued on the first day that the project launched, the 10 people that knew about it would have acquired all the coins and the project would have been killed.
While early Bitcoin adopters benefit disproportionately to late adopters (which is true of any emerging technology), a prolonged supply distribution over many decades grants laggards the same opportunity to acquire bitcoin in 2085 as the early adopters. Now, let’s contrast this system with crypto.
It is common for crypto projects to do what is called a “premine”, which is the process of creating coins for an inside group prior to the crypto token being made available to the public. Some crypto projects do a 70% premine, meaning 70% of the supply is held by the founders and VCs before it ever lists on a crypto exchange for the public to buy.
It’s unlikely for a money to become the next global money when 70% of it is held by the 10 known people that created it.
Also, Satoshi’s intentions, versus the intentions of founders conducting premines, is telling. Satoshi designed a system with a fair distribution of opportunity with +100 years in mind, whereas premine-token-founders design a system that disproportionately benefits them and their investors with Coinbase-exit-liquidity in mind.
The Importance of Bitcoin’s Predictable Supply
The predictability of new supply is key for a sound monetary good.
A monetary good with an unpredictable supply issuance distorts the value of the existing stockpile of the good, and is less suitable as money than a good with a predictable supply.
Sporadic supply shocks to the supply of the base money prohibits humans from thinking too far into the future because they cannot be certain that their purchasing power today will have the same purchasing power tomorrow, or next week, or a year from now. A society that must disproportionately focus on the present relative to the future is significantly limited in its ability to advance its standard of living, technology, productivity, etc.
Thousands of years of human history suggest that society always seeks out the harder money to store their purchasing power, that is, the money that is harder to debase. This is known as Gresham’s law: an economic principle that “bad money drives out the good” as time passes, meaning that people want to hold the hard money and are more inclined to part ways with the less hard money.
Bitcoin & Gold, Fiat & Crypto
Gold was the best monetary good for thousands of years because it best satisfied the known characteristics of hard money. It was scarce, and more importantly it was difficult to create more gold, which prevented its existing stockpile from being debased and allowed for it to maintain and grow its purchasing power overtime.
However, Bitcoin perfects the monetary properties that gold approximates. It’s more scarce, more verifiable, more transportable, and more divisible, among other important qualities of money.
The following graphic created by Vijay Boyapati shows how Bitcoin, Gold, and Fiat compare to one another on the basis of monetary properties:
Source: The Bullish Case for Bitcoin
A fourth “Crypto” column would receive similar letter grades as fiat, but would arguably be worse in the categories of fungibility, verifiable, established history, and censorship resistance.
As previously mentioned, crypto takes the existing fiat system, with all of its problems, and puts it on a blockchain.
Understanding why Bitcoin, and not crypto, ultimately requires consideration of the question “what is money?” This essay has only scratched the surface on the answer to this question, but hopefully it has addressed some of crypto’s weaknesses in this regard.
To be fair, most crypto projects are not trying to be sound money. The critiques of crypto shared in this essay are not intended to entirely dismiss the technologies that crypto projects are working on.
Instead, the critiques are intended to highlight the glaring differences between Bitcoin and crypto.
Asking “Bitcoin or crypto” shows neither understanding of the former or the latter.
This article is for informational purposes only, and it is not intended to be investment advice. Read our editorial guidelines and cryptocurrency research methodologyto learn more about how we researched Bitcoin and crypto.