In May 2014 I wrote a report looking to find a few coins that were potentially useful and not scams. I couldn’t find many because of the premined, instamined problem.

Most coins follow a predictable pattern. A quick pump launched by a few preminers, big hype, big market cap, scam people to get on board. Dumped. Crash by 90% or more. Often a dead cat bounce, doubling or tripling from those 90/95% losses, then a steady fall towards zero.

Here’s how the coins I analyzed on May 27th 2014 have performed since:

Category 1: Disqualified From My “Ethical / Useful List”

Peercoin:

May 27th 2014: Market Cap = $51.7mill

July 1st 2016: Market Cap = $9.9mill

-81%

Blackcoin

May 27th 2014: Market Cap = $11.3mill

July 1st 2016: Market Cap = $2.6mill

-77%

Megacoin

May 27th 2014: Market Cap = $2.2mill

July 1st 2016: Market Cap = $0.7mill

-68%

Dogecoin

May 27th 2014: Market Cap = $31.9mill

July 1st 2016: Market Cap = $32.1mill

+1%

Freicoin

May 27th 2014: Market Cap = $0.3mill

July 1st 2016: Market Cap = $0.05mill

-83%

Ripple

May 27th 2014: Market Cap = $31.4mill

July 1st 2016: Market Cap = $245.6mill

+682%

Dash (Darkcoin at the time)

May 27th 2014: Market Cap = $51.2mill

July 1st 2016: Market Cap = $47.8mill

-8%

—————————————————————

Category 2: Legitimate / Potentially Useful Coins

Monero

May 27th 2014: Market Cap = $2.2mill

July 1st 2016: Market Cap = $19mill

+764%

Anoncoin

May 27th 2014: Market Cap = $1.1mill

July 1st 2016: Market Cap = $0.4mill

-64%

Namecoin

May 27th 2014: Market Cap = $22.4 mill

July 1st 2016: Market Cap = $5.9 mill

-74%

Counterparty

May 27th 2014: Market Cap = $7.9 mill

July 1st 2016: Market Cap = $6.4 mill

-19%

Key Points

Bitcoin’s market cap has grown from $7.3 billion to $10.5 billion, an increase of 45%

The Monero price has increased significantly

The Ripple price has performed surprisingly well

Counterparty and Namecoin disappointed

Then and Now: The Big 4 Cryptocurrencies

May 27th 2014

1, Bitcoin

2, Ripple

3, Litecoin

4, Peercoin

July 1st 2016

1, Bitcoin

2, Ethereum

3, Ripple

4, Litecoin

—————–

The top 4 positions have remained quite stable. The only changes are that new entrant Ethereum has burst on the scene with a massive $1 billion market cap and Peercoin has collapsed.

Litecoin and Ripple have retained their top 4 positions. To have that kind of stability over 2 years is a good accomplishment in such a fast changing turbulent market.

Bitcoin Dominance Index:

Bitcoin Dominance Index May 2014

Bitcoin Market Cap = $7.3 billion

Altcoin Market Cap = $0.7 billion

Bitcoin Dominance Index = 91%

Bitcoin Dominance Index Today

Bitcoin Market Cap = $10.5 billion

Altcoin Market Cap = $2.2 billion

Bitcoin Dominance Index = 83%

——————————————

Altcoins as a whole have had a good run (although the majority of that $1.5 billion increase in altcoin market cap is accounted for by Ethereum and the DAO which are facing existential threats after the events of the last few weeks).

ASSET A: DIGITAL CURRENCY COINS

In this report I’ve split assets into 2 categories.

Asset A – Digital Currencies

Asset B – Digital Assets / Platforms

First of all I’ll weed out and disqualify any scam or immoral coins and then look into the genuinely useful ones.

Finally I’ll make a portfolio suggestion.

1 – DISQUALIFIERS FOR CURRENCY COINS

Proof of Stake

Proof of stake is a disqualifier for a currency.

Proof of Stake, is heavily flawed, not an “upgrade”. In PoS, stakeholders are censors: They may arbitrarily censor transactions (fundamental to consensus), like miners. In PoS, stakeholders are gatekeepers. You must get your stake from an existing stakeholder. Central bankers baked in. Proof of Work is more permission-less, and features greater separation of powers. PoW has flaws, but it is not a closed system that suffers from costless simulation & other math-provable problems – Jeff Garzik

Immoral Coins: A Lack of Understanding About Economics.

Bank coins, gov coins, inflationary coins, centralized coins. Last time this ruled out Dogecoin, Freicoin, and Ripple.

Maybe some of them are not scams outright, but it’s not helpful to shift money away from bitcoin to support projects like this.

Inflationary Coins: Lack of a Sane Monetary Policy

Bitcoin has the perfect monetary policy.

It was incredibly bold for Satoshi to put the inflation rate at 0% ultimately. Inflationary altcoins are undesirable compared to bitcoin’s strict and limited issuance.

2 – NOTABLE CURRENCY COINS

Litecoin

May 27th 2014: Market Cap = $315.5 mill

July 1st 2016: Market Cap = $194.6 mill

-38%

Lindy Effect

Litecoin was released in October 2011 and was launched fairly, no premine.

It seems to have nothing really going for it, no merchants, no excitement, but somehow it’s stuck around since 2011.

Litecoin has been in the game for a long time and has had a big market cap for much of its existence. Every day that litecoin survives and functions as it’s supposed to is a good day for its reputation.

Litecoin as a Backup Blockchain

Ideally we’d have 1 currency (to maximize the network effect) but the market might desire a level of comfort by having 2 decent sized crypto currencies (2 completely separate, well tested blockchains).

Merchant Adoption / General Enthusiasm

Merchant adoption hasn’t really picked up.

Purse.io integrates shapeshift so you can spend litecoin at Amazon, but there’s very little direct merchant adoption or enthusiasm about accepting it.

Overall

Litecoin has failed to keep out ASICS (which are now the primary method for mining). This was a misguided policy anyway so it doesn’t hurt the currency today.

In Jan 2014 bitcoin was 15x bigger than litecoin by market cap. Now it’s 55x bigger so litecoin is historically cheap. High bitcoin to litecoin multiples may be a good buying opportunity for litecoin.

Litecoin is a functioning blockchain which doesn’t suffer from catastrophic security failures or double spend incidents. It has some sort of network effect, as small as it is, and brand recognition. It’s a tradable liquid asset and the market cap has been high for years so it’s not a newcomer.

Importantly, it has a limited supply like bitcoin, so eventually the inflation rate will be zero.

The Dominant Anonymous Coin

Litecoin may be minimally useful as a backup blockchain, but it would make more sense for the number 2 digital currency in the world to be an anonymous coin.

A strong, dominant anonymous coin taking the number 2 spot with litecoin 3rd would seem like a sane world.

Privacy improvements in digital currencies are needed and although I’d prefer it to see it happen in bitcoin, I don’t mind seeing separate currencies working on it too.

Spending bitcoin through mixers is still the most popular way to pay for products on dark markets, but altcoins are accepted on some sites.

At the moment Dash is the most dominant anonymous coin by market cap, and Monero is the most technically advanced.

After years of hype, the anonymous coin Zcash (formerly Zerocoin and Zerocash) is scheduled to be launched on 26th September 2016 (although they have missed all of their previous milestone so further delays wouldn’t be surprising).

Dash

Dash (Darkcoin at the time)

May 27th 2014: Market Cap = $51.2mill

July 1st 2016: Market Cap = $47.8mill

-8%

Dash is ranked 7th on coinmarketcap.com and is currently the world’s biggest privacy focused altcoin (by market cap).

Apparently it’s the most active community on the BitcoinTalk forum.

Unfortunately Dash had a scam launch and serious doubts remain over how effective it is at protecting user privacy.

DREADz: If you were to buy $100 of one anon coin would you choose Dash or Monero or another I’m not aware of? Peter Todd: Without a doubt I’d choose Monero over Dash – the latter is snakeoil, the former genuine crypto. – Sunday 26th July 2015

CryptoNote Coins

CryptoNote is an open-source technology that allows the creation of supposedly anonymous cryptocurrencies.

CryptoNote coins are generally regarded as the most advanced in the privacy area (at least until ZCash is launched).

In July 2014 Bytecoin was number 1 ($8.2mill market cap), almost double the value of 2nd place Monero ($4.4mill market cap).

Over the last couple of years Monero has performed very well compared to the premined Bytecoin scam and is now the number 1 CryptoNote coin with a market cap of $19mill compared to Bytecoin’s $7.4mill.

Unfortunately there are suspicions of scams surrounding many of the CryptoNote coins (although not Monero).

Monero

May 27th 2014: Market Cap = $2.2mill

July 1st 2016: Market Cap = $19mill

+764%

Monero was forked from Bytecoin. Unlike most CryptoNote coins it was not premined.

Monero is a slightly inflationary currency (below 1%, eventually settling at 0.37%). This is low enough to not be a major concern (and the rate of loss of the currency will probably offset the slight inflation)

Technical innovations include Monero’s invention of RingCT, which allows for Greg Maxwell’s Confidential Transactions scheme to work with Monero’s ring signatures, effectively hiding all amounts in Monero transactions.

I probably should get around to finally buying some Monero. xmr.to is a pretty clever service. We’re going to find out the hard way that Bitcoin will get outcompeted by currencies like Monero and Zerocash if we don’t act to get better anonymity and privacy into Bitcoin itself – Peter Todd

Monero as a Backup Blockchain

Monero is an independent fallback for Bitcoin that is created in much the same spirit as Bitcoin: an anonymous creator that disappeared after the community took it over, pure PoW with no crazy nonsense like overly complex PoS schemes, an alternate EC curve to Bitcoin’s secp256k1, and specific differences (like the PoW and the minimum block reward) Let me clarify that I am a huge believer in Bitcoin, and I’m not implying at all that Bitcoin will ever fail, but it’s comforting to know that in the event of a major, massively disruptive break in Bitcoin there is something else out there.” Monero is a truly fungible, truly private cryptocurrency, that is constantly trying to build on and improve its privacy. – Riccardo Spagni, Monero Developer

Conclusion

Monero has many flaws and limitations compared to bitcoin like lack of network effect and relative security disadvantages. However, it is the number 1 ranked legitimate anonymous coin in the world.

Bytecoin

As the original CryptoNote coin Bytecoin is technically interesting, but disqualified because of the premine scam.

There’s no reason to invest in Bytecoin over Monero.

DigitalNote

A CryptoNote coin that changed its name from duckNote to DarkNote, and is now currently DigitalNote.

Complaints about its distribution method and links to the Bytecoin scam rule this one out for consideration.

3 – CONCLUSION FOR CURRENCY COINS

Disqualified Coins:

Dash

Bytecoin

DigitalNote

Legitimate Coins:

Litecoin

Monero

Will Altcoins Succeed Over Time?

Bitcoin’s network effect is too powerful, so probably not. It’s an uphill battle for these coins and they have many disadvantages, such as weaker security.

Improvements and extra privacy can also be built into, or on top of, bitcoin. Hopefully the privacy efforts going into bitcoin will ultimately make anonymous coins unnecessary.

Conclusion: Focus on Bitcoin, Don’t Get Distracted

Don’t let speculative experiments at the margin distract from the most mind-blowingly awesome monetary system mankind has ever seen – Bitcoin proper – Erik Voorhees

Bitcoin was a one-time thing where it had a clean launch and crept under the radar for so long. It’s amazing and deserves to be appreciated more.

The opportunity cost of not focusing on bitcoin is massive. The infrastructure is orders of magnitude more powerful than its competitors. There’s no brand recognition in the mainstream for any other digital currency. Bitcoin is way too far ahead, now is the time to accumulate and hold.

Bitcoin is a remarkable experiment. Despite having 7 years to create a better model, most competitors have failed to balance the tough problem of allocating a coin in a sustainable way. Even after 7 years, nothing comes close to bitcoin in integrity and utility.

ASSET B: DIGITAL ASSET / PLATFORM COINS

NOTABLE ASSET / PLATFORM COINS

Ethereum

Nothing of Use Has Come From It

The whitepaper was published in January 2014, so we’re well into year 3 now and still nothing of use has come from it. Compare this to how much value bitcoin added in the real world at this stage. It just hasn’t happened with Ethereum.

There are big question marks over the blockchain’s integrity and immutability, and the project is open source so faces competition from Counterparty who are porting it (and also Rootstock, a sidechain which has plans for smart contracts on the bitcoin blockchain).

A $1 billion valuation is hard to justify, especially when considering that Counterparty is valued at around $7 million. It wouldn’t be a big surprise to see Ethereum’s market cap can crash 90 – 95% from here.

Complexity is the Enemy of Security

Some of Ethereum seems like needless re-engineering (like creating a new proof-of-work or a new currency). And in general, I suspect they’re trying to do too much– “complexity is the enemy of security”– and will end up either radically reducing the scope of what they’re trying to do or will get tired of playing whack-a-mole with security and DoS vulnerabilities. – Gavin Andresen

Ethereum seems like a broken project with many vulnerabilities.

Getting smart contracts functioning securely is going to be a multi-year endeavor. The race is long and there are many competitors. I wouldn’t be surprised if they have to rip out most of it, put it on pause and rebuild for a year or two, if that’s even possible.

Ripple

May 27th 2014: Market Cap = $31.4mill

July 1st 2016: Market Cap = $245.6mill

+682%

Price / Market Cap

Ripple has had a high market cap for years and has had a spectacular price gain since the last report I wrote in May 2014. The market cap hasn’t been below $100 million since August 2014.

Despite this impressive price performance, Ripple is disqualified for the 2 reasons below.

Lack of Principles: Too Involved with the Banks

I’m not enthusiastic at all about banking integration. The kind of people involved in Ripple are not the kind of people I want to be allocating money towards by investing in their project.

Centralization: The Big Disqualifier

FinCEN fined Ripple for bank secrecy violation acts in May 2015. The settlements dictated that “certain enhancements” to the Ripple Protocol need to take place “to appropriately monitor all future transactions”

This was utterly predictable and a known fatal weakness. Bitcoin can’t be “Rippled” like this –Andreas Antonopoulos

Namecoin

May 27th 2014: Market Cap = $22.4 mill

July 1st 2016: Market Cap = $5.9 mill

-74%

It’s Just Not Going to Happen

In theory this should be a great project. Even Satoshi supported it in the BitcoinTalk forum. Julian Assange said it could be the most important development for freedom of speech.

At this stage it seems like a dying project with pretty much zero adoption and complaints about usability. It’s just not progressed. It’s gone nowhere and there’s no momentum coming from anywhere.

Dan McArdle: Why haven’t .bit TLDs taken off at all yet? Mainstream takes a long time, obv, but I’d expect a little use in the Bitcoin community at least Justus Ranvier: Because there’s no reliable way to integrate a .bit resolver into a DNS stack. All the software that claims to do this sucks.

Counterparty

May 27th 2014: Market Cap = $7.9 mill

July 1st 2016: Market Cap = $6.4 mill

-19%

Counterparty is a functioning decentralized asset platform. There was no monetary scam when issuing the XCP tokens.

In 2014 I was very excited about Counterparty, but the progress has been disappointing (although it’s up around 4x so far in 2016). A big part of this is the lack of useful assets been issued on the platform.

Reliability

Counterparty uses the bitcoin blockchain. They’ve had several security audits and it’s been around a while with no major vulnerabilities exploited. It does what it claims and the developers are legit.

Counterparty Adding Ethereum Functionality

A port of the Ethereum Virtual Machine, bringing full Ethereum functionality to bitcoin, is scheduled for August 2016.

It’s crazy how the Ethereum market cap is 150x higher than Counterparty’s. I expect this multiple to fall. There’s no sane reason why Ethereum should be worth 150x more than Counterparty. I trust the Counterparty platform to function better than Ethereum.

Despite the price disappointing since 2014 I still think Counterparty is the most interesting digital asset platform and has a bright future.

CONCLUSION FOR PLATFORM COINS

Disqualified Coins

Ripple (Centralized. Working with banks)

Coins with Too Many Problems

Ethereum (Too complex and insecure)

Namecoin (Hasn’t functioned well or got anywhere after many years)

Legitimate Coins

Counterparty

CONCLUSION: SUGGESTED PORTFOLIO ALLOCATION

A) Digital Currency Fund

Bitcoin 99%

Monero 1%

——————-

It really is all about Bitcoin. It’s just phenomenal compared to the alternatives. The opportunity cost of investing in something else is so high.

Monero is a worthy small addition as the most advanced privacy altcoin. Also, look to add a very small amount of Litecoin (smaller than Monero) when the price is historically low.

B) Digital Assets / Platform Fund

Counterparty 100%

——————————

This fund is completely separate to the main digital currency fund (and should be much smaller). It’s incredibly speculative and is more like a stock trading account.

Altcoin Buying Opportunities

Buy at 6 Month Lows

Buy at 90% Fall from Previous or All-time high

Buy When Bitcoin Dominance Index Strengthens to over 90%

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