Bitcoin Cannot Be Replaced
Bitcoin currently trades at $37,500 per coin. All of the Bitcoins that currently exist are worth more than $700,000,000,000. That’s $700 Billion Dollars.
Bitcoin is a revolutionary new type of asset, a digital asset. Before Bitcoin, this concept of a scarce digital asset with no counterparty risk did not exist. It was not possible to create a scarce purely digital asset, like a physical gold bar on the internet.
Since Bitcoin is such a marvel new concept, many people have yet to grasp its meaning and utility. One common misunderstanding is that Bitcoin may be “replaced” by a new coin. This is impossible as it would be like replacing the idea of the number zero. Let me explain.
Bitcoin is Unique
First, let’s clarify that Bitcoin is in fact a unique digital asset. Meaning there is a difference between Bitcoin, xCoin, yCoin, etc. This idea becomes very clear when you run the Bitcoin Core software.
Bitcoin Core is what validates the Bitcoin blockchain and reviews all blocks and transactions on the network. When running the software you can verify that the Bitcoin you receive and store in your wallet are “real” Bitcoin. If you attempt to send xCoin or yCoin, you will not receive it in your Bitcoin Core wallet, as that is not Bitcoin.
Some people still attempt to argue that “Bitcoin is not scarce because you can create other digital assets.” This is like saying “as Venezuela prints more Bolivars, it devalues US Dollars.” Both are forms of paper currency run by a central bank just like Bitcoin and xCoin are digital assets.
It’s also like saying “as more silver gets mined, it devalues gold.” Both are precious metals, but they are different forms of base metals on the periodic table.
Looking deeper into the idea, it is in fact easier to verify that you received real Bitcoin than it is to verify you received real dollars or gold. To verify the authenticity of your Bitcoin, you simply run software. The tools that enable you to trustlessly verify both dollars and gold are very expensive.
Now that we’ve clarified that Bitcoin is in fact unique, let’s look deeper into the utility that Bitcoin is providing to Bitcoin users (Bitcoin savers).
Bitcoin’s Real Utility
Bitcoin fulfills the need of having the certainty that your share of the total supply cannot be diluted. Meaning Bitcoin is perfectly scarce. Since Bitcoin was the first asset that succeeded at creating a credibly fixed supply, we can be assured that the market will focus on only one asset (Bitcoin) to satisfy that need.
This is no different than the market focusing on pure gold and disregarding or adjusting down the price of gold alloys and other precious metals.
You cannot fool the market by changing the definition of pure gold just like you cannot fool the market by changing the definition of pure Bitcoin. The market will keep focusing on pure gold to satisfy the need of no share dilution.
[Above was paraphrased from @ManuelPolavieja]
Since Bitcoin’s key value proposition is its credible perfectly fixed supply, its replacement would have to improve upon this notion, which is impossible. You cannot create something more scarce than perfect scarcity.
Like the invention of the number zero, “Bitcoin is a path-dependent, one-time invention; its critical breakthrough is the discovery of absolute scarcity — a monetary property never before (and never again) achievable by mankind.” — Robert Breedlove, The Number Zero and Bitcoin
The current technology that Bitcoin is built on is important but not essential. Meaning the “blockchain” is not what gives Bitcoin value. What gives Bitcoin value is its credible absolute scarcity. The Bitcoin blockchain is only the technology that enabled the discovery of perfect scarcity.
The technology itself has changed and will continue to change. This includes adding new features like SegWit and taproot (scalability and privacy). But the important thing to remember is that Bitcoin’s utility is its credible scarcity which is inherently linked to its “Number Go Up” Technology.
But Other Digital Assets?
If Bitcoin is truly the best and final form of money that cannot be replaced, then why do other digital assets have value at all?
First, most other “cryptocurrencies” are not attempting to be global money. For example, Ethereum is trying to become a platform that powers decentralized applications. The third largest coin is Tether, which is simply a stable coin that is pegged to 1 USD. The fourth largest coin is XRP which is trying to be a settlement layer for banks. Almost all other coins are not trying to be decentralized global money with a credible fixed supply.
Second, Bitcoin’s monetary gravity is incredibly strong. For an asset to grow from $0 to $700,000,000,000 in slightly more than a decade with no CEO and no marketing team, it is likely a transformational technology that will also happen to bring additional capital into the “industry” even if the other players within the industry are not competitive.
Last, if you look at price charts of alt coins denominated in BTC, you will notice a very common downwards trend. Most Bitcoiners have already recognized this, but new people entering the space have not and “sophisticated” investors think it is important to “diversify”. Diversification may be a good idea in the credit and equity markets, but it is a terrible idea in the market for monetary goods. Unfortunately for them they should have simply bought Bitcoin.
$ETH is down -72% from its BTC denominated all time highs.
$XRP is down -74% from its BTC denominated all time highs.
$ADA is down -85% from its BTC denominated all time highs.
$BCH is down -95% from its BTC denominated all time highs.
$XMR is down -86% from its BTC denominated all time highs.
TLDR: Bitcoin cannot be replaced.
Written by Joe Burnett (@IIICapital), Research Analyst at Mimesis Capital.