“There can be only one”

Why network effects are really the tailwind behind Bitcoin’s rise, as the leader of crypto-currencies…

It’s no secret that I’m a Bitcoin bull, and as a result, the company I c0-founded, Gyft, has been accepting Bitcoin as a payment option since May 2013 and was one of the first major acceptors of Bitcoin. We have really made Bitcoin usable at over 100,000 retail locations across the USA by tapping into the gift card infrastructure that already exists. We have avoided accepting any other alt coin for many reasons, and we have embraced and endorsed Bitcoin as a secure payment alternative to credit cards.

I also often encourage other entrepreneurs to just focus on Bitcoin in building their crypto-related businesses for many of the reasons I will outline below.

For some history if you haven’t heard what I have had to say about Bitcoin previously, it should be noted that I predicted the recent sideways trading earlier this year, predicted the run-up to over $1,000 last year and I argued with a room full of Bitcoin bulls of whom 99% believed emphatically that the price would almost certainly breach $2,000 this year, back at the CoinSummit conference in March 2014.

I’m convinced of Bitcoin as a platform with amazing potential, regardless of the price, which I believe will continue to be rangebound for a while longer. Bitcoin still dominates the market caps of all crypto currencies by a staggering 90% in relative terms, if you factor in slippage, it’s probably 98%.

I’m often asked the question: “Why will Bitcoin succeed and why not Litecoin, Dogecoin or some other alt coin?. Other than the obvious first mover advantage that Bitcoin has, there are various publicly voiced opinions and mathematical reasons given for why Bitcoin is already the de facto winner. They key driver I believe, is because of the impact of Metcalfe’s law, as we have witnessed from the winners in other online industries such as Facebook, Google, Snapchat, Pinterest, etc.

Metcalfe’s law states that the value of a telecommunications network is proportional to the square of the number of connected users of the system (n2).

Given that there are already millions of Bitcoin wallets & users, and over 100,000 merchants already accepting Bitcoin, the network effect has become too strong for an alt coin to emerge, without it having a fundamentally different and greatly improved value proposition.

Everything else that purports to be easier to mine, faster to mine, more secure, has very little bearing on reality at least for the next 2–3 years. It reminds me of the early days of the search engine wars about15 years ago — where Google was rising against thousands of search engines all claiming incrementally better features and functionality and we all know how that turned out. Granted, Google was not first to market in the search wars, but it was not in a space where Metcalfe’s law was very applicable either and there were natural network effects that needed to be in place first. The point is that incremental technology improvements by other search engines did not result in a better search engine for them and Google won out.

I’m not saying there aren’t any benefits in using alt coins in certain cases, but the majority of them are essentially just Bitcoin clones that are way less secure and creates more confusion in the market.

There are notable exceptions — special purpose coins such as Filecoin (Disclosure: I am an investor in the company developing it), Namecoin, Primecoin, Ethereum and similar coins. These have special use cases and are thus different networks. They don’t need to beat bitcoin at payments in order to be successful.

In the early days of Bitcoin c. 2009 — 2011, the price and volume traded of Bitcoin were not high enough to warrant much attention from anyone outside of the core and passionate users who were building the network, mining, trading and developing first generation Bitcoin companies. Network difficulty was low and as a result, almost anyone could mine Bitcoin using a standard CPU, GPU or FPGA (Field Programmable Gate Arrays).

Fast forward 3 years and the only people who can efficiently mine Bitcoins are those using ASICs (Application Specific Integrated Circuits). These are companies like 21E6 or Bitfury, which are typically venture backed and treat mining like a business and have significant advantages in doing so.

In order to actually mine Bitcoins in today’s world, you need to high powered chips which are not in the hands of the average bitcoin miner. This is a subtle but important point, which leads me to the crux of my discussion point for this post.

Given that Bitcoins can no longer be mined by conventional hardware, the likelihood that a new coin originated from a suspect source (like stolen hardware, hacked hosting accounts, malware or the like) is economically improbable. As a result, hackers are not writing viruses to use botnets to mine Bitcoins.

What is happening however, is that there are a lot of unscrupulous players out there mining alt coins using these unethical sources of coin generation and then trading those in for Bitcoin by using the many crypto currency exchanges that exist.

Many of these miners are disenfranchised former Bitcoin miners who cannot make money mining bitcoin anymore from traditional hardware and due to the cost of ASICS, have resorted to mining alt coins and promoting these new alt coins as the “new” thing. As much as I feel for the Bitcoin miners who initially supported the rise of crypto currencies by pouring their conventional computing power into Bitcoin, the fact that they cannot profit from it easily anymore has led to a surge in alt coins.

In reality this just leads to market confusion and the proliferation of over 500 “alt” coins over the past year. I’ve seen how this story ends!

The key advantage that Bitcoin has right now is that the production of new Bitcoins are generally accepted to be from secure sources (professional mining outfits).

Here are the key considerations for in determining why I believe that Bitcoin has a major edge over the other alt coins in the market:

Stolen computing power

Given that the difficulty index for Bitcoin mining is so high right now, there is zero incentive to hack into a customer’s Amazon or Google Cloud or Azure account and run mining software on those machines trying to mine Bitcoin. Regular machines are so inefficient as mining Bitcoins you would churn through $100,000 in computing power with little to show for it. On the flip side, you could use these machines to mine an alt coin and effectively steal computing power and convert it into an alt coin to be traded for Bitcoin on an exchange.

Viruses/Malware

For the same reason as the previous point, writing viruses and malware to infect consumer devices to mine Bitcoin is pretty pointless.

Price pressures

The slide in the Bitcoin price has meant that many marginal miners who were operating profitably at the $1,000 price point have switched from mining Bitcoin to other alt coins because they are easier and more profitable to mine, especially when there is a bit of hype attached to new alt coin.

This results in alt coins being mined and then being traded for Bitcoins which I believe has actually contributed to the slide in the Bitcoin price as those miners then use Bitcoin to purchase hardware and reinvest in their alt coin businesses.

This in turn means those Bitcoins are sold on the open market and produces more selling pressure. This is a classic arbitrage — mine coins which are easier to mine and sell them into the marketplace for Bitcoins, although this cannot continue forever and does not work in large volumes due to slippage in each of the new coins.

I spent a lot of time explaining how pricing pressures would keep the Bitcoin price subdued in my previous Medium post 8 months ago, and I still believe we’re probably going to be range bound ($350-$550 as per my previous post) until mid next year, but this is Bitcoin and nothing is really predictable for long periods of time..

Pump & Dump Schemes

The classic reason these days to launch an alt coin is to relieve some well to do crypto-enthusiasts of their hard earned Bitcoin and get them to buy this “hot new” alt coin, only to ceremoniously have the price crash hours or days later. Classic stock market pump and dump, playing out in the alt coin world. Bitcoin is far too liquid for pump and dump schemes but many alt coins trade at the margin.

Difficulty

The difficulty index in Bitcoin makes it almost (at least economically) impervious to a 51% attack . That said, if a large enough part contingent of Bitcoin miners moved over their computing power to most of the alt coins, they could double spend those coins pretty quickly. Bitcoin double spends are exceptionally difficult to pull off.

Sidechains

I think that the work that the Blockstream team are doing in developing sidechains serve as an alternative to much of the alt coin market. The good news is that this is being developed on the Blockchain so it will further keep Bitcoin placed as the de facto winner. This is a great example of how developers can utilize an open source technology like Bitcoin and any improvements of the protocol itself can be integrated into Bitcoin instead of starting a whole new currency with no computing power/security. Fred Wilson provides a great explanation of why sidechains are a better alternative to alt coins.

Consensus

Crypto is really about building trust and consensus between multiple nodes, which facilitates concepts such as smart contracts. By having multiple alt coins and a lack of consensus between them, we are splitting global crypto & computing efforts and in doing so, weakening to some extent the power of a single trustless platform such as Bitcoin.

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One of the largest criticisms that I think I will receive for this post will be concerns of a 51% attack and the single reliance on Bitcoin for all things crypto. Time to turn to Moore’s Law, which is nicely summarised on Coindesk. Essentially, even though the hashrate has been parabolic in recent years, it’s going to slow down to a geometric progression. I believe this will be enough to help distribute the computing power across more miners and mining pools over time which should alleviate the risks of centralization.

So for those, and many other reasons, I choose Bitcoin…

Special thanks to Juan Batiz-Benet, Matthew Tagg, James Hong, George Favvas, Yurii Rashkovskii, Roger Ver, Sean Percival & Jaron Lucasiewicz for helping to proofread, edit and provide feedback on this piece.

Disclosures: I have a number of investments in bitcoin related companies and funds and as I have already declared, I am very bullish on Bitcoin!