Alt Coins: An Introduction to Bitcoin's Dwindling Competition

It shouldn’t come as much surprise that following the invention and subsequent success of Bitcoin, others soon followed its technological lead. The result is a huge number of alternative coins known as “alt coins”, each with their own proposed value proposition.

The best place to check out the full spectrum is the site coinmarketcap.com and the screenshot below shows the current top 5 coins at the time of writing.

Screenshot of the top 5 coins at www.coinmarketcap.com

That’s only the very tip of the iceberg however. There’s a total of 2320 coins listed in total. That’s a HUGE number of alternatives! and begs the question, where did they all come from?

The ICO

2017 saw the huge rise of a fundraising method called the Initial Coin Offering or ICO (as per the below chart from that period). That's the method by which these coins came into existence. They were issued to ‘investors’, who paid real money to receive them. This wasn’t like investing in the equity of a company, coin holders own no rights to future profitability, dividends or voting power. They simply own a token that allows the network to function in the hope that its price will appreciate as the network grows and demand increases (as has been the case with Bitcoin).

A lot of people had big ideas for the blockchain and an ICO was an innovative way to raise capital to fund their projects. A lot of people also wanted to put money into the space in the hope of finding the "next bitcoin". The two came together and created an issuance boom.

Some projects were solid ideas and still have good teams working on them. Importantly however, the ICO was an almost entirely unregulated process and studies show that around 75% of coin offerings conducted in 2017 turned out to be scams. More still have become failed projects. Be very wary! The other term for "alt coins" is "💩 coins" for a reason.

Note that exchanges such as Coinbase and Kraken screen the coins they allow to be traded on their platforms, so you’ll only find a small selection are available if you use those sites. That’s a very good thing. Due diligence in this space is key. Be extremely careful when you look outside the top 10-15.

Lets Look at the Top 5

We still haven’t looked at what these coins bring to the table, so let's start with a quick run through of the top 5 (excluding Bitcoin which is #1)….

Number 2 on the above list, Ethereum. If you’ve read my past posts, you’ll know that Bitcoin was designed to use the blockchain as a system for payments. This was the first use case for the blockchain. Ethereum took the same underlying blockchain concept but goes to the next level by creating a software platform enabling developers to build and deploy decentralized applications know as ‘dapps’. An app store for blockchain apps? Sounds complicated and it is. There’s very few dapps (debatably none at all) that have any real traction, so the idea is yet to be proven a success. More on Ethereum and its specific competitors to follow in a later post.

Number 3, XRP is a centralized blockchain operated by a US company, Ripple Labs Inc. It’s made for facilitating global transactions between financial institutions at much faster speeds and at lower costs than traditional mechanisms. 

Number 4, Litecoin is a copy of Bitcoin and doesn’t pretend not to be. It shares many characteristics but is made to be quicker transactionally. It has kept its position as one of the most popular alt coins due to being a first mover in the space and having a loyal community.

Forks

Last but not least Bitcoin Cash, Number 5. This is a very important one to describe as it's clearly easily confusable with Bitcoin. Why do they share the same name? Here’s why...

Bitcoin is now "open source" software. Development didn’t stop with its initial release to the world from Satoshi. Anyone can contribute to the ongoing development of the project and if you’re that way inclined then you can get involved here.

This is where it gets slightly complicated. Occasionally, a split forms between groups of developers regarding how to move the software forward. In the case of Bitcoin, this led to a smaller group deciding to move in a different direction regarding a technical detail on how to scale the network. This led to the creation of an entirely new blockchain called Bitcoin Cash.

These splits are known as "hard forks". If you own Bitcoin, you’ll also own the same number of Bitcoin Cash after the fork. It doesn’t dilute your holdings, it just creates a new chain with a new direction. Forks are an annoying but inevitable part of the lifecycle of a decentralized and open source currency. 

What’s Not Cool However

Bitcoin remains Bitcoin after the fork. Bitcoin Cash is a new coin entirely. There’s an argument to be made that the Bitcoin Cash community is trying to make the line deliberately blurred for newcomers, in the hope that they may buy their asset rather than the original and more prominent core Bitcoin. However, it's not working as can be demonstrated by...

Dominance

Bitcoin remains the most prevalent coin by some margin. If you look at the market cap numbers in the first image on this page, you'll notice it's worth over $216bn, significantly higher than Ethereum ($33bn) and Bitcoin Cash ($7bn).

I've added below a chart of bitcoin dominance, i.e. the % of the entire crypto market it makes up. That number is currently 63% (vs Bitcoin Cash at 2%), as per this chart.

You'll notice that dominance (orange line) fell sharply during the ICO boom of 2017, however the trend has since reversed. This year alone the dominance of Bitcoin has risen substantially, the takeaway being that alt coins are now losing market share. Think about it logically... the small relative sizes of many alt coins and hence their lower liquidity, make them too small to be relevant to the larger financials institutions that are currently getting involved in the space.

Right now, the best trade is to simply own Bitcoin. It's the "general", the market leader and where the smart money is flowing. That may change if the dominance chart above reverses and I’ll be sure to post about that when / if it happens. 

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