Bitcoin is #1 in market cap and always has been. But should it always be so?

Bitcoin is a cryptocurrency of anonymous origins with a limited supply, a Proof of Work (PoW) consensus model, decentralized control, immutability, and a reputable history. Bitcoin has been the dominant cryptocurrency for about a decade and it’s price can commonly be viewed as a proxy of sorts to the overall crypto markets. Being the first successful and widely adopted cryptocurrency has been a huge advantage as has the fact that modern digital currencies and blockchain networks stem from Satoshi’s original protocol.

If you need background or foundational info on blockchain or digital assets, see “Blockchain Basics… ish” and “Digital Asset Revolution”. Assuming this content is known and understood, we proceed…

Origins

Bitcoin was created by a person or persons who goes by the name of Satoshi Nakamoto. There was a whitepaper released through a cryptography mailing list entitled “Bitcoin: A Peer-to-Peer Electronic Cash System” in 2008. In 2009, the code for the Bitcoin network was released as open source software. Satoshi Nakamoto’s anonymity has served Bitcoin well. Satoshi was around for the first few years as a guide of sorts for the project through forums and working on the network and such but then dropped off and hasn’t been heard from since. This has required the network to be sustained in a fairly decentralized manner for the majority of it’s existence. The solidity of the code, theories, and concepts that Bitcoin brought to the world has been proven to be reliable and secure and this makes Bitcoin the current boss of blockchain.

The Mission

Satoshi’s mission for Bitcoin was to create a peer-to-peer digital currency that operated on a decentralized, permissionless network. This means that there would be no central entity to operate or govern the network but rather the network would continuously run on it’s own through many unconnected individuals and groups around the world. No one would ever have to ask for permission to use or support the network. It would be truly open to all.

This aspect of Bitcoin’s mission is highlighted in the first transaction to occur on the network, from Satoshi to a cryptographer involved in the community. Along with the bitcoins that were sent, this message was attached to the transaction:

“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”

This message highlights the fact that Bitcoin was being released in the middle of the financial crisis of 2008/2009. It also gives insight into the reason for Bitcoin. Fiat money, government interference, and corporate greed have failed the people of the world time and time again. It’s time for a new currency that exists and transacts outside of this corruption and gives power back to the individual.

Creation of Blockchain

Although there had been digital currencies and peer-to-peer networks before, some even successful in their own rights, the structure of the Bitcoin network was a new creation. This structure, called blockchain, is what enabled Bitcoin to be immutable, trustless, and decentralized. As has been mentioned, it is assumed you know about how blockchain works so we’ll focus on the aspects of this structure that add to the uniqueness and superiority of Bitcoin specifically.

The fact that Bitcoin was the first implementation of blockchain is definitely a plus for the currency. It has been around longer than any other cryptocurrency on the market today. Most cryptocurrencies aren’t only younger and more immature but also were created as derivatives of Bitcoin. Some are direct forks, or splits, from Bitcoin where the open source code for Bitcoin was modified slightly. This modified version of the network isn’t a part of the “true” blockchain and therefore a new chain has been started, AKA the new “fork” or coin. Other cryptocurrencies took the principles and partial code segments and merged them with their own ideas and software to create currencies with different qualities and abilities. Coins of these natures, with different degrees of separation, include Litecoin, Bitcoin Cash, Dash, Bitcoin Private, Zcash, and Bitcoin Gold.

The point is that Bitcoin is so secure, tested, trusted, and stable (from a structural perspective at least) that all these other projects and many more have built directly off it’s foundation. Even other blockchain projects with different goals, features, and direct origins such as Ethereum, Cardano, and Monero are based on the original blockchain structure created by Bitcoin. There are coins such as Komodo that use the Bitcoin chain to further secure their own blockchain networks by posting their own chain status onto the Bitcoin blockchain for a permanent, immutable record on this reliable and base network.

The Bitcoin blockchain has never been hacked. It has never failed or been shut down. The validity of it’s transactions has never been creditably disputed. This is the core strength of Bitcoin. There are many weaknesses that we’ll come back to later but the status as the original and uncontested representative of cryptocurrencies to the world currently belongs to Bitcoin and this may always be so.

Limited Supply Economics

One revolutionary aspect of Bitcoin is the fact that it has a limited total supply. No more than 21 million bitcoins will ever be created. This eliminates inflation as we generally experience it completely. Since inflation is the leading cause of loss of value for a currency, this is a pretty big deal. Not only does this keep the currency from loosing value in the long run but the deflationary nature actually will increase the value over time theoretically. Once all the bitcoins have been created, the only way to attain them outside of mining (or technically just “validating and processing” since nothing is being “mined”) will be through trade and exchange on open markets which will then lead to the currency being used more as a store of value, investment, or safe haven. Assets of this nature are not traded without premiums and will in the long run cost more and more to acquire.

Going back to the creation of bitcoins, let’s review the process in simplified terms. Anyone in the world is able to use their computer to help run the network. In exchange for this energy consumption and computational power, the individual is rewarded newly created bitcoins. Since the only way to create these coins is through the process of investment and “work”, it is referred to as mining. This alludes to the similar way metals are attained- through investment in the mine and work to mine the metal. Another advantage of this method is that bitcoins always carry a sort of intrinsic value. This is the value of the cost to create. These coins aren’t just magically brought into existence or printed out by a government but rather are made through bought hardware, used electricity, and computer processing power. The value of these endeavors is the intrinsic value of the coin. This is to be taken as just a general rule however and due to the nature of free markets, bitcoins could be valued much higher or much lower than this intrinsic value for extended periods of time if the markets price it thus.

Once all the bitcoins are created, the participants running the network will be paid strictly through transaction fees. This could play out many ways. Maybe fees get high enough to keep transaction volumes low. Maybe adoption is such that the volume is so high, fees can still remain low and miners can still be rewarded well enough through sheer volume. Maybe the fees rise and this causes the value of the coins to rise in unison. Although we don’t know exactly how this will play out, we at least know that Bitcoin will not suffer the same tragedies that fiat has suffered in the past few decades.

PoW Consensus

To secure the network and incentivize participants, a system is employed in Bitcoin called Proof of Work (PoW). Transactions on the network are grouped into blocks. To decide who gets the right to mine the next block, the network sends out a complex algorithm that all the miners of the network must compete to solve. The first to solve the equation and prove the answer get’s the ability to process the block and is rewarded the associated newly minted bitcoins as their reward as long as the rest of the network confirms and validates that the proof of work is correct and the transactions in the block are valid.

The requirement to perform the work and prove the solution ensures that participants are valid and invested in the network. If one was to attempt to alter a block once they won the right to mine it, the block they release would not match other blocks of transactions and the discrepancy would be traced to the source. At this time, the altered block would be deemed invalid and only the true transactions would be left. The attacker would then have wasted the time, energy, investments, etc. that they spent trying to cheat the system since they won’t be receiving any bitcoin for processing an invalid block.

Just the required investment in order to mine bitcoin is such that it will incentivize only those with pure intent to participate. Anyone with invested capital, especially of a relatively long term nature, will want said investment to yield stable, profitable results. This will only happen if they process for the network honestly. Since millions of computers are all competing and processing blocks, they are also keeping each other honest through the validation process of processed blocks. It’s also hard to collude together with total strangers around the world to cheat and possibly destroy a network they are all invested in.

The way to accomplish a “hack” of the network would be to gain control of 51% or more of the network, mine a block with altered transactions, then use your majority stake of validators to confirm that this altered block is actually valid. Although theoretically possible, a 51% attack would cost millions just to attempt and if unsuccessful, it would be a huge investment to loose. If it were to be successful, then the network would be compromised and therefore the value of the coins would become worthless. Bitcoin is worth nothing if it isn’t secure and immutable. At this point, what does the attacker gain if their ill gotten gains have been made worthless through the act off attainment?

Governance

If the Bitcoin network is decentralized then how are decisions and updates made? Decisions for the network are made with difficulty and controversy. In fact, some of the before mentioned splits, notably Bitcoin Cash, stem from disagreements over governance decisions that were so contested they split the network into two. The basic rule of Bitcoin governance is simply that whatever the majority of the network implements happens.

Bitcoin has a few groups that hold sway in the network. Miners process transactions and secure the network. Users transact on the network. Developers build, maintain, test, and upgrade the network, and icons either leave peaceably or leave contentiously, but generally don’t hang around. The last shall become first and we will discount icons for our review. Although there have been many influential individuals in the Bitcoin community over the years, there generally isn’t one person rallying support of the whole community and making big decisions. This is by design to ensure decentralization and the few good leaders of note, Satoshi then Gavin Andresen, both relinquished their leadership roles early and voluntarily to promote this aspect of the network.

For the other members of the network, they all have a say in decisions for the network. The miners are the ones who ultimately choose what to implement when they mine blocks. To an extent, they ultimately choose whether or not to implement a change. At the same time, nothing new will exist without the developers creating it and they have their own beliefs, incentives, and desires. Ultimately, if users disagree with a decision and choose not to use the Bitcoin network then it’s all for naught and none of it matters anyway. This is the nuclear option and would devastate the network.

The one common goal for all parties is to maintain Bitcoin’s status, mission, and competitive advantages. Since, as you can guess, there are usually many different ideas and proposals for how to accomplish this, the decision and implementation process is generally not very smooth. Bitcoin is slow to adapt and moves incrementally. This also means that changes are generally liked by all parties and all parties have incentives to keep the others happy. This beautiful dance is what enables Bitcoin to stand on it’s own as a decentralized, leaderless network. A similar system was set up when America was founded in that the founders intentionally made government very inefficient and laws difficult and slow to change. This was all to prevent governmental tyranny, a populist dictator, instability in the rule of law, etc.

Evolution

Although Bitcoin has no leader or governing body, the network can and does still evolve and update. As mentioned, this is a slow and interesting process but the key to remember is that Bitcoin is always evolving. Over time, Bitcoin will be different than it is today. This may just involve minor, background tweaks or may involve major additions or overhauls. Either way, Bitcoin can’t be judged strictly for what it is today but rather must also be given credit for it’s potential.

Many other cryptocurrencies stemmed from taking a protocol designed for Bitcoin and implementing it on a new separate network. This happened with many privacy protocols such as Monero’s ring signatures and Dash’s coinjoin. Other concepts for scaling, transaction speeds, contracts, etc. have been designed as well. The point is that there are many protocols out there right now that could be implemented by Bitcoin if the community desired. Maybe as time goes on and these protocols are tested, Bitcoin will adopt some of the “best” privacy protocols. Maybe not. Maybe there will be smart contract optionality. Maybe sidechains, atomic swaps, or the lightning network will relieve any pressure from scaling an expanding network. Bitcoin isn’t a finished product, it’s an evolving network. We just don’t know what it will evolve into.

Weaknesses

The biggest criticism of Bitcoin is that it doesn’t truly fulfill any broad category. Typically, the use cases for Bitcoin are debated between a currency, a store of value, a blockchain network, or a combination of these. Bitcoin transactions are currently not fast or cheap enough for it to be a widely used currency. The price and value of Bitcoin isn’t stable enough to be considered a safe store of value. The Bitcoin blockchain doesn’t have anywhere near the functionality, options, or features that other blockchain networks have. Then what is Bitcoin good for? Investment? Speculation? Nothing?

The deflationary model or Bitcoin gets some hate as well. Having a deflationary currency as a widely adopted money would not be a smooth transition and may not be very feasible at all. We can look at wages for an example. Wages for jobs general stay constant or rise. If a deflationary currency was being used as payment, this wouldn’t work the same way. Workers would be getting constant raises for nothing just through the increased value of their paychecks. Especially in a world with multiple currencies, a worker would essentially have to have different pay scales for their one job depending on which currency they want to be paid in and these scales would be constantly adapting with deflationary currency salary rates going down and inflationary currency salary rates going up and all this relative to each other and to the degree that each currency differs in it’s degree of inflation or deflation. Very complicated and messy.

Also, having a currency that raises in value over time encourages users to keep their money, not spend it. This either keeps Bitcoin from being a widely used currency or has harmful effects on the economy in general through decreased spending and increased saving and hoarding. From a practical perspective, it just would be a pain to keep changing the amount of Bitcoin needed for transactions. For example, today 10 bitcoin may buy a car. Fast forward and 1 bitcoin will buy a car. Continue forward in time and eventually 0.000000001 bitcoin will buy a car. How many zeroes are needed to buy a pack of gum? Yes, the amounts can be shown in different representations but you get the concept.

The Proof of Work consensus model is thought by many to be wasteful and unnecessary. Proof of Stake models use drastically less energy with arguably equal or greater security. Climate change activists are not happy about all this wasted energy. Others just hate the inefficiency of solving arbitrary, computationally intensive, useless math problems over and over just to get the possibility of mining a block. On the flip side, why isn’t all the associated energy, resources, and capital required to mine gold considered a waste? Although there are other options for storing value, we still choose to spend millions and burn through resources to mine gold out of the ground. Not exactly the same but a defensible counter from some perspectives at least.

Another disadvantage of PoW is that miners have so much power. Since miners are usually only in it for the money, should they really have so much power over the network? Yes, they are incentavized to grow the value of the network to increase profits but they are not always incentavized to do what’s best for the network as a whole and in the long run. The 51% attack possibility is uncomfortable as well. Currently, a large portion of Bitcoin mining is being done in China. What if the Chinese government secretly nationalized these miners, brought others online, and gained the needed 51% of the network. They could try to cheat the system and get rich. They could go the opposite way and sabotage Bitcoin to destroy it. Theses are extreme examples but they show the worries some have over the centralization of mining groups.

Fees and transaction speed can be prohibitive with Bitcoin as well. There have been times when fees were over $20 per transaction which would definitely make buying a cup of coffee with Bitcoin unwise. Even at 10 cents per transaction, this can’t compare to Nano’s free transactions or the minuscule charges on the Dash, Stellar, and PIVX networks. Fast confirmation times for many types of transactions are necessary as well and waiting for multiple minutes just isn’t good enough. No one wants to wait for 5 minutes at the check out counter before they can walk away with their purchase or awkwardly stand beside another individual for a few minutes while you both wait to make sure the transaction is validated before considering it finished and parting ways. Again, Dash, Stellar, and PIVX are all easy examples of networks with the ability for near instant confirmed transactions. Bitcoin just doesn’t compete.

Governance in Bitcoin is a weakness and strength. As mentioned, it’s good to have a stable network that doesn’t change at the whims or demands of one individual or group. However, these aspects can be achieved without the clunkiness and controversy that the Bitcoin network goes through every time a new update is debated. The DAO, Decentralized Autonomous Organization, model is a great example where there is a formal governance structure but still within a decentralized model involving the whole community or specifically selected groups. Cardano, Dash, Horizen, and PIVX among others are good examples of this.

Transparency in Bitcoin is two fold. It adds security and immutability to the network but all transactions are public record. Do you want all of your financial, or even just investment, information to be available to anyone with an internet connection? There have already been governments that have tagged certain bitcoins that they believe were involved in illegal activity. These tagged coins aren’t accepted in some places and are now tracked and tainted despite the possibility that the current and future holders may have nothing to do with the previous history of their money and weren’t aware of the background. Also, many individuals were prosecuted from the Silk Road which was an online black market for drugs, weapons, and just about anything. The U.S. government was able to track users and transactions through the Bitcoin blockchain which didn’t end well for many. Although Satoshi’s original plan was for an anonymous currency, as technology has progressed, the privacy in Bitcoin was found to be severely lacking.

Overall, competition is the biggest weakness of Bitcoin. There are other projects and currencies that are better in many ways than Bitcoin. Some are faster, some cheaper, some more advanced, some more private, some have all of these and more at a greater extent than Bitcoin. If these competitors dethrone Bitcoin, it would be hard for Bitcoin to stay relevant. There will always be die hard fans and collectors but if we’re being realistic, there is always a chance that Bitcoin was the beginning but will not be the end.

Opinion

Despite it’s weaknesses, Bitcoin still reigns supreme. The short comings with the protocol should all be overcome in time as the network slowly upgrades and grows. The status as the original cryptocurrency and the proven reliability and security make Bitcoin the obvious default crypto. If someone is investing in crypto markets, Bitcoin will likely hold a dominant position in the portfolio and rightfully so. If someone wants to hodl a proxy for the crypto markets as a whole, Bitcoin is again likely a solid option. Even as a currency or store of value, Bitcoin isn’t so lacking as to make it a horrible option and I would argue it’s still better than fiat and gold in many ways despite not being able to hold up in some respects against some other cryptocurrencies currently. Full disclosure, Bitcoin is in my portfolio but I also hold a few other cryptos that I believe outshine Bitcoin in specific areas.

If you are interested in an audio format, the podcast Our Foundations did a series on blockchain and cryptocurrencies (Episodes 41–46) that hits on similar topics. It can be found on any podcast player or through the website: https://ourfoundations.podbean.com/

TLDR; Conclusion

Bitcoin is the boss of the blockchain. Yes, it has scaling issues, fees can be high, a formal governance system is lacking, and markets are volatile but Bitcoin isn’t in it’s final form. It is still evolving and protocols such as the lightning network and privacy solutions could bring Bitcoin up to the performance level of other cryptocurrencies. The volatility is a consequence of the intentionally free and open markets. The lack of formal governance was intentionally chosen as well. Bitcoin is a proven network, has first mover advantage, and is trusted as the base crypto on the market. To quote Thriller podcast, “Buy Bitcoin, save the world.”