Bitcoin is the first and the oldest of the cryptocurrencies. It has already been a decade since its inception, but no other cryptocurrency has come close to toppling it from its dominant position. In this piece, we examine how – and why Bitcoin has continued to remain so strong.
First among (mostly) equals
It is hard to believe that it has already been a decade since the word bitcoin was first used, and harder still to think that it is today the metonym by which cryptocurrencies have come to be known.
In a report made earlier this year, the Bank of America admitted that the “widespread adoption” of cryptocurrencies posed a danger to its business model as it would “require substantial expenditures to modify or adapt…existing products and services.”
The success of that revolution subsequently spawned numerous copycats. These “altcoins,” as they came to be known, were largely created to ride on the coattails of Bitcoin as a means of getting rich quick while paying lip service to the ideals of the revolution. A nice portmanteau of “alternative” and “coin,” altcoins have attempted – with varying levels of success – to improve on Bitcoin by adding features that the original did not already have.
These features include “smart contracts,” whereby the altcoin’s blockchain secures contractual terms, and “privacy” over and above that of the inherent anonymity guaranteed through the use of cryptocurrencies.
Bitcoin Dominance Index
The Bitcoin Dominance Index shows how Bitcoin continues to remain the most popular cryptocurrency in spite of dips over the years.
At any given the time of day, Bitcoin’s dominance can be measured with the appropriately named Bitcoin Dominance Index.
It tracks dominance as a percentage of total market capitalisation, and over the last five years of Index data gathered it is clear to see that Bitcoin has remained supreme in spite of the rise of the rest.
Bitcoin’s popularity has resulted in what is known as the “network effect.” Commonly abbreviated by tech industry watchers to just “nfx,” it describes the increase in the value of a product or service as more users take to it.
A commonly cited example is that of Facebook, which became the world’s most widely used social media website as a result of nfx.
With Bitcoin being the world’s most widely used cryptocurrency, the resulting nfx may “create a moat protecting it from the onslaught of other cryptocurrencies.”
That is because other cryptocurrencies are rendered irrelevant in comparison when fewer people are using them – regardless of any features that may make them better or more useful than Bitcoin.
The nfx of Bitcoin has also had several knock-on effects that continue to reinforce its popularity. The most popular trading pairs on exchanges have consistently relied on Bitcoin, which is responsible for over 30% of all trading pair volumes worldwide.
The prevalence of such trading pairs allows for greater entry and exit, as that would otherwise force traders to rely on other trading pairs to do so – and incur hefty fees in the process.
An example would be trading in a less popular cryptocurrency such as Dash: to purchase Dash, traders would have to first buy Bitcoin with US dollars – then buy Dash with Bitcoin.
That process would rely on two trading pairs of Bitcoin-US dollars and Bitcoin-Dash, and two sets of transaction fees instead of one with just Dash-US dollars. It is, therefore, cheaper and more convenient to merely deal with Bitcoin instead of the less popular cryptocurrencies.
As mentioned above, it has also resulted in Bitcoin becoming a byword for the cryptocurrency industry – as well as the positive and negative associations that accrue accordingly.
At any rate, Google has to date had more searches for “Bitcoin” than “Blockchain,” “Cryptocurrency” and “Ethereum” combined: in fact, more people will intuitively understand Bitcoin when it is referred to in a conversation than the blockchain technology that underpins it. For them, Bitcoin is the blockchain as well, however inaccurate that may be.
What of altcoins then?
At any rate, none of this is to say that altcoins are worthless or useless in comparison: some that do have additional features are not only significant improvement over Bitcoin but also represent a step in the right direction for the further development of cryptocurrencies.
Further, all 21 million Bitcoins will be mined someday entirely. With only a finite and fixed supply of Bitcoin available, the logical result would be to create alternatives that have decidedly improved on the original as well.
Perhaps there may even be a single cryptocurrency that will consolidate all these improvements, and be considered worthy by the community to continue as well as build on Bitcoin’s storied legacy.
Until then, however, Bitcoin will continue to remain dominant as it always has through sheer popularity alone. Many altcoins will continue to try to overtake it and even supplant it, but it will be a long time before they can even come close to doing so.