Currently, one of the most heated discussions in the cryptocurrency space revolves around utility.
While BTC proponents argue Bitcoin’s value comes from its security (immutability), altcoin enthusiasts claim higher utility will foster adoption and therefore boost price appreciation.
Even though there is some truth in both arguments, I personally believe “Bitcoiners” are correct on this one. The reason is simple.
Assuming investors and traders can make more money by diversifying into altcoins, said money is usually stored in either Tether or Bitcoin.
This means that although it is true that the price of some altcoins will eventually skyrocket, over 95% (perhaps 99%) won’t have enough liquidity for most holders to exit.
In this article, I will discuss the value proposition of both BTC and altcoins, such as Ethereum and Ripple, with the goal of explaining how each coin derives its value.
An overview of the cryptocurrency market
Let’s start with the basics. Why is any cryptocurrency valuable?
To understand how any cryptocurrency grows in value, we must initially assume markets are irrational. Value derives from many different places, and any cryptocurrency can be worth billions.
During the market peak in late 2017/early 2018, a plurality of projects that were able to raise substantial amounts did not actually have fully working products. Some, like EOS, were still in their predevelopment stages.
This shows how irrational the market is.
If we look at the summer of 2017, and then again at early 2018, Bitcoin’s dominance was about 30% to 35%. This means people were betting heavily on altcoins. Some of them, like Ethereum, almost “flipped” with Bitcoin.
However, when the crash came, people shifted again to the most secure cryptocurrency: Bitcoin.
Why? Let’s discuss below.
Bitcoin’s value proposition
To understand why investors and traders see Bitcoin as the store-of-value (SoV) cryptocurrency, we must take a few steps back.
Essentially, Bitcoin’s value comes from the following attributes:
- Limited and known supply (hard cap)
- Hard and costly to attack (immutable up to 99.99%)
- Easy and cheap to move (can be used as a unit of account or medium of exchange)
Because BTC possesses the above attributes, investors and traders see it as an SoV cryptocurrency. The only SoV competitor Bitcoin currently has is Tether. USDT is perceived to be a “stablecoin” as the altcoin is pegged to the value of USD.
Of course, Bitcoin has been gaining value versus USD, meaning storing value in Tether might not be the smartest choice. But that’s a conversation for another day.
The fact of the matter is, BTC has increased in value vs USD every year (with one exception in 2014), which shows BTC is in fact a long-term SoV coin.
Moreover, as discussed here, for any asset to become currency, it must initially be seen as money and act as a store of value.
Therefore, I personally find it hard to believe that there will be long-term adoption of altcoins competing directly with Bitcoin (even though I absolutely appreciate their existence).
Alternative projects implement multiple versions of the Bitcoin protocol. By experimenting with alternative parameters, we can quickly find out what works and what doesn’t.
Purely in terms of Bitcoin, there will always be underlying utility to altcoins, such as:
- To find how alternative parameters could improve/destroy Bitcoin
- To foster the adoption of the best functionalities in the core Bitcoin protocol
- To teach investors and traders about long-term SoV
The value proposition of altcoins
There are plenty of arguments to support altcoins, much like the ones I’ve stated above.
Of course, the most important factor that drives adoption is price appreciation. And if Bitcoin has some degree of volatility (I’m being nice here), altcoins are even more explosive.
Ethereum (ETH), for instance, has already recorded a higher ROI than Bitcoin (measured in USD terms). This means, in terms of price appreciation, altcoins are king – even if the only utility of altcoins is to teach investors and traders about the importance of the SoV mechanism.
Having said that, altcoins have a different purpose than Bitcoin, as I stated in the introduction.
Ethereum, EOS, NEO, and Tron are building decentralised networks for applications to run on top of. That gives users privacy and ownership of their data and assets.
Stellar, Ripple, and other cryptocurrencies are building more permissioned networks to help foster adoption in the enterprise space.
The utility of these tokens comes from the need to run decentralised applications on top of these protocols.
Through smart contracts, users can create multiple assets on top of these cryptocurrency protocols, meaning they now have the ability to store value in decentralised digital assets (like shares, deeds, or collectibles).
My only concern is that these tokens were mostly bought by investors and traders (speculators). Therefore, how will these tokens reach the hands of people who are, in fact, building stuff on top of these protocols?
Because most ICOs and IEOs focused on raising money and not allocating tokens to the right folk, I fear there could be issues in the future with some cryptocurrencies.
I can imagine a few scenarios where adoption just stalls because there aren’t enough tokens for devs and companies or because tokens become prohibitively expensive.
My point is, as an investor, your biggest concern should be how token allocation has taken/is taking place, and if there’s a relevant percentage of tokens being distributed to whomever is building on top of said protocol.
Bitcoin or altcoins?
To conclude this opinion piece, I would like to underline the following:
- Both Bitcoin and altcoins have a purpose in the cryptocurrency space
- It’s impossible to predict which altcoins will survive and which won’t
- The best SoV cryptocurrency has been Bitcoin
- The best cryptocurrency for price appreciation is usually the one with the largest short-term adoption
Essentially, markets are irrational, and price appreciation depends on the perceived long-term value of an asset and on the short-term network effects.