So in a previous blog post titled: Why You Wont Profit From Crypto (The Anatomy of a Crypto Cycle), I mentioned my belief that putting Bitcoin and altcoins in the same basket, when considering investment decisions, is inaccurate.
There is a common association between the two, so much so that the phrase ‘Bitcoin and crypto’ just rolls of the tongue at this point, but I’d like to point out that this may not be the correct way of seeing things. To put Bitcoin in the same basket as altcoins because they both contain decentralisation, is to put gold in the same basket as computers because they both contain metal… the metal is different, the purpose is incomparable and the association is a fallacy.
Okay, so I’ve made my argument, now you’re probably going to want a little more meat on the bones, so I will use Ethereum as an example, the second largest crypto by market-cap.
A common misconception about ethereum and by extenstion, many other altcoins, is that they are finished products, people often belive that the altcoin they’re investing in is going to be the exact same product with the exact same investment signature as it had when they first invested, but that’s not the case. Ethereum is a perfect example of this but to understand why, we have to understand where exactly the value proposition of a cryptocurrency lies: the protocol.
Take, for instance, Bitcoin… the entire value proposition of Bitcoin resides within the Bitcoin protocol, a large part of which being the distributed consensus mechanism put in place by Satoshi Nakamoto known as ‘proof of work’. Proof of work is an idea, the Bitcoin protocol is its implementation, and the value proposition of any investment is dependant on how good the idea is, and how well it excecutes upon that idea… Bitcoin takes a great idea, and makes it work in reality.
Now for contrast: Ethereum. Ethereum is an exponentially more complex investment, the idea contains many sub-components, to name a few; clould computing, dApps, smart contracts, NFT’s and ERC-20's… and so naturally the execution of the protocol is more complex too, so complex in fact, that years into it’s life cycle (after already undergoing a hard fork in 2016) its entirely changing its protocol.
Altcoins as IP:
The move to ETH 2.0 is largely a switch from proof-of-work to a proof-of-stake consensus mechanism… something that allows for block verification not with a random ‘block lottery’ as it were, but rather affords that right to the highest bidder.
Once ETH 2.0 goes live, it will be an entirely different investment to what it is today.
And so my point lies here, investing in Bitcoin is buying digital real estate upon the Bitcoin blockchain, the future of which will be decided by us…. investing in altcoins is buying a promise to fulful upon a development roadmap, an idea.
Now… both gold and computers are both brilliant invesments, and if my previous analysis seemed to be throwing shade at altcoins, it wasn’t. Altcoins can be brilliantly high reward investment opportunities at the expense of higher risk, but I think we need to stop considering them to be in the same investment basket as Bitcoin.