In this post, I’m going to be talking about how my understanding of the blockchain ecosystem evolved over the last few years.
“The Flippening” of Bitcoin to Ethereum
When I first began investing and learning about blockchain, I was very attracted to Ethereum. It was technology platform that made a great deal of sense to me, as it lended itself nicely to network effects (not unlike Microsoft Windows or the Apple iPhone ecosystem). Because of my fascination with this blockchain, it only seemed logical that Ethereum would rise to become the #1 blockchain by valuation.
My thought process went as such:
- Blockchain technology is going to be a major influential technology.
- Blockchain technology lend itself very heavily to network effects, meaning this is likely a winner-take-all ecosystem.
- Ethereum can do everything that Bitcoin can do and more.
- Therefore, Ethereum is going to maintain the most value.
Over the next year, Ethereum rose dramatically in value, much faster than Bitcoin or any other competitor during that time. In addition, Ethereum was adding new projects and platforms to support the the underlying platform (this was before even the ICO’s built on Ethereum began to take off.
I was a proponent, I would later find out, about a popular theory called ‘The Flippening’. This theory has a very zero sum view of blockchain valuation, ie, that if Ethereum is to rise, then Bitcoin must fall. I believed in the theory so staunchly that I knew that Bitcoin could not sustain its value. Eventually their investors would support another major blockchain (like Ethereum).
Why ‘The Flippening’ Didn’t Work
However, as 2017 progressed and we got to see how the market reacted to Bitcoin, Ethereum and every other blockchain was valued, the Flippening never materialized. Despite the massive valuation gains by the whole ecosystem and the new technologies, Bitcoin was doing better than ever, maybe even stronger than before!
This made me realize that I had been wrong about Bitcoin, Ethereum and the markets that each of these blockchains were competing in. “The Flippening” was a good theory, but one that did not stand up to the facts surrounding the market. Each blockchain’s value is supported by a set of value drivers that are hard to replicate and hard to take away. What I learned was that the value drivers behind Bitcoin may be the strongest in the ecosystem.
What Makes Bitcoin Resistant Against “The Flippening”?
Here’s a short list of the value drivers that make Bitcoin so strong.
Bitcoin is the most supported cryptocurrency in fiat-to-cruptocurrency exchanges.
After new investors and users begin holding any digital asset, it is a trivial process to exchange those tokens for another digital token. Eric Voorhees’ Shapeshift.io and services like Kraken and Poloniex made this process very easy.
However, most of the world still does not own cryptocurrency. Instead, they hold fiat currencies, like the Dollar, Yen, Pound, Euro, etc. These do not exist on any blockchains (yet!) and cannot easily be convert to cryptocurrency. Instead, the easiest way to convert from fiat to cryptocurrency is to go to an exchange like CoinBase.
This is where Bitcoin’s primary competitive advantage comes from today. Most major exchanges will only support a few fiat-to-cryptocurrency market pairs and of those, fiat-to-BTC is always available. Even if the exchange supports one or two others, BTC gets preferential placement on the exchange website by being the first listed and promoted.
When new traders enter the market to purchase cryptocurrency, BTC is displayed as the default. So naturally, just by being the most prevalent, people will purchase Bitcoin over other cryptocurrencies. Even if the trader’s purpose is to purchase an alt-currency like Monero, Dash or Litecoin, they will have to go through an intermediary token. BTC becomes the default transition token in these cases.
Bitcoin has the largest brand recognition world wide in the blockchain space.
From an internet search perspective, Bitcoin is by far the most searched term. Bitcoin is searched on Google more than “Ethereum”, “Cryptocurrency” and “blockchain” combined, despite the growth in people’s understanding of these particular terms.
This also translates to the real-world in my day to day dealings with new people in this space. I can’t tell you how many times I have told people that I work with blockchain to only get blank stares in return. After I clarify with a statement like “have you ever heard of Bitcoin?”, they understand what I’m talking about.
To most people, Bitcoin is the Cryptocurrency market. It does not matter how innovative or advanced other blockchains are, because the only one they have any working knowledge of is Bitcoin. When they enter the industry, they are most comfortable with the Bitcoin blockchain and, if so inclined, eventually learn about the others. But Bitcoin is the default.
Strong Community Support
And then we cannot overstate the support from the various community members in the Bitcoin ecosystem. Bitcoin has a diverse set of miners, developers and community members who feverishly support the technology.
Just to list a few statistics here:
- The Bitcoin Core project always has at least a dozen active contributors outside of the Bitcoin Core team, making improvements to the project
- The mining community contributes more than 500X the compute power of Google to create new blocks
- Reddit’s r/Bitcoin has over 250,000 subscribers, 2.5x more than r/Cryptocurrency and r/Ethereum.
BTC is heavily invested and supported by the community, and has been growing for almost a decade. This sort of support is not built easily and does not go away easily.
Bitcoin is likely going to be the highest valued blockchain for this generation. Things can always change, but Bitcoin has an important role in the blockchain community and will not easily be overtaken by newer blockchains.
As the next generation of blockchain applications start to be developed, including the various payment channels (Lightning, Raiden, etc) and applications built on top of blockchain networks (prediction markets, on chain exchanges, etc), there will be disruption to the ecosystem. However, until the next set of breakthroughs comes to disrupt the market, Bitcoin is here to stay.