Bitcoin is stagnating. There seems to be no consensus on how to scale bitcoin. Bitcoin blocks are almost full. Transactions are slow. On the regulation front, it’s possible that the traceability will be used to enforce blacklisting or whitelisting. Mining is centralized, this can lead to governments forcing mining pools or big mining farms to filter certain suspicious transactions.

Will bitcoin lose its monetary characteristics due to these issues in the long run?

If you answered this question with a “definitely not”, you are in denial. This is a threat to the future of bitcoin as money. There is always a chance that Bitcoin becomes obsolete. We saw Digicash, e-gold and Liberty Reserve also ceased to be money. So, my advice would be to find a good hedge for your BTC position.

What characteristics are needed for a good crypto hedge?

1. No Bitcoin copy

Most of the altcoins are forks of bitcoin with a minor tweak. Litecoin was popular in the past because the mining algorithm was GPU-friendly, and thus decentralized. Since scrypt ASICs exists, this unique selling proposition is gone. LTC is a very bad hedge against BTC because most of the code is identical.

LTC is exposed to the same issues as BTC: problems with scaling, a possible error in the BTC codebase, traceability of transactions, etc.

2. Unique features

The hedge should have some use case. If the only demand for the coin is to function as a hedge, then it probably won’t succeed because there is no market demand, unless BTC is in trouble. Once the issues are resolved, the value of the hedge would drop dramatically. There are some coins with a decent market cap who fit rule 1 and rule 2:

Ether: decentralized smart contracts

Ripple: different consensus model (note: almost dead because no use case and considered a scam by many because not really decentralized)

Maidsafe: decentralized cloud storage

Peercoin: first Pow/PoS hybrid

Factom: notarizing on the bitcoin blockchain

NXT: decentralized asset exchange

3. No apptoken

However, most of these coins, with the exception of Peercoin, aren’t “coin-like coins”. They are apptokens and it is very likely that all features can be implemented with bitcoin as currency in the future (on a sidechain, or maybe just on top of bitcoin itself). There is a chance some of them (maybe Ether?) will survive on their own if the development is strong and the userbase is solid.

But even if an appcoin can stand on his own legs, this isn’t a guarantee that it will be valuable because there will only be demand for using the apptoken when using the application. There won’t be monetary demand., incentivizing to store a portion of your net worth in it. This gives these coins a very questionable long term value proposition, again with the exception of Peercoin (maybe).

Monero

I intentionally left out Monero. Currently it has a market cap above 10 million USD and I think this is the perfect hedge for your bitcoin position.

Why, you ask?

Monero has a different codebase: it is based on the “cryptonote protocol” and is building a lot of additional functionality, like RingCT (Ring Signature Confidential Transactions)

resulting in default untraceable and unlinkable transactions. This makes monero real fungible and anonymous eCash. Browse this website for more information on this subject.

resulting in default untraceable and unlinkable transactions. This makes monero real fungible and anonymous eCash. Browse this website for more information on this subject. Monero uses a different elliptic curve. If the BTC curve is broken, the XMR curve could still be solid (and vice versa).

Monero also has a scaling solution baked in the protocol: it has a dynamic block size limit. If the demand for transactions goes up, the block size limit will scale. For this to work, it is necessary to have a “tail emission”. When the initial emission of 18.4 million moneroj runs out, a minimum block reward of 0.6 XMR / 2 minutes will be given to the miners. This ensures long term incentives for the miners, even if a fee market doesn’t develop.

The mining algorithm is a different hashing function that is written to be CPU-friendly. The performance gap between CPU and GPU mining is small. A features called “smart mining” will probably generate more decentralized mining.

Last but not least, Monero isn’t an apptoken: it’s highly unlikely that the properties of Monero will be implemented in Bitcoin. Bitcoin is transparent by default, monero is private and fungible by default. Implementing ring signatures as a sidechain for example, isn’t sufficient: the sidechain would function as a mixer, but transparent bitcoin transactions are still possible. Regulation could force services to only accept traceable bitcoin transactions, miners could be forced to not process anonymous bitcoin transactions, blacklisting of coins would still be possible, etc. If raising the bitcoin block size limit is creating a consensus problem, then changing the core functionality of bitcoin transactions will not happen. It’s highly unlikely that bitcoin ever will be private and fungible by default.

So if you are looking to hedge your bitcoin position, maybe research Monero. The number of BTC and XMR in existence are comparable, so if you decide to buy a similar amount of XMR as you currently own BTC, you are hedged. Why not take a small insurance policy for you precious bitcoins? You can start researching here.