What differentiates Bitcoin from altcoins

Non-Maxi's Take on Bitcoin in 2021

In this note, I lay out my reasons for holding 90% of my portfolio in Bitcoin as a non-maximalist. I will update my thesis and investment risks as more info is available. I will gladly accept corrections for anything I've written. Feel free to leave feedback 🙏

TL;DR 

1. Bitcoin has unique qualities that altcoins can't replicate: path dependence, maximum social scalability enabled by the biggest PoW blockchain, missing founder, stability of the base layer, ideologically driven community. Bitcoin is in its own league. 

2. The unique qualities differentiate Bitcoin from altcoins by making Bitcoin the military-grade Shelling point for libertarians and sound money proponents.

3. In 2021, all the other crypto protocols are in the beta phase. It’s impossible to know what they will look like in 3-5 years. Even Ethereum suffers from the same stability issue.

4. The intentional layered design of Bitcoin keeps the base layer stable and predictable, allowing institutions to plan long-term projects on top of Bitcoin.

5. Most people don't understand smart contracts are possible on Bitcoin layer two. The layer two solutions are thus underappreciated and not priced in. 

6. The endless money printing and the massive fiscal spending won’t stop anytime soon. With the rapid technological and social adoption of Bitcoin, Bitcoin is getting derisked every year. 

7. Bitcoin presents one of the best asymmetric opportunities, 100x return in the next 10 years. 

Long-term Issues with Bitcoin

1. It's unclear whether Bitcoin's narrative is more socially scalable than Ether's narrative. Ultrasound-productive money with no carbon footprint is a batshit powerful meme. What if the market wants a more centralized—governed—cryptoasset?

2. The digital gold narrative needs some update but the Bitcoin maximalist culture is keeping VCs and developers from making Bitcoin useful. All the capital that could have made Bitcoin useful has gone to the Ethereum ecosystem instead. (Bitcoin is missing out on the DeFi trend bigly. DeFi matters, because the higher the transaction fees paid to miners, the higher the security budget of a protocol. )

3. If people can start paying for goods with their tokenized stocks (Mirror Asset), it could severely limit the TAM of Bitcoin. 

Bitcoin is the most socially scalable SoV technology we have. 

Bitcoiners believe that global reserve currency must have maximum social scalability. With decentralized governance and the Proof of Work, Bitcoin was designed to make future modifications to the consensus rules difficult without a near-unanimous agreement. Its design protects the protocol from the influence of charismatic leaders, even if their name is Barack Obama or Satoshi Nakamoto. 

By keeping the block size to 1MB in 2017, Bitcoiners doubled down on the decentralization. Anyone with access to a $300 computer and internet connection can validate Bitcoin transactions and defend the protocol against malicious actors. For instance, the Taproot update requires 90% of votes for activation. While the 90% threshold seems execessive, this keeps the protocol stable and predictable. Predictability matters as it allows institutions to do long-term planning. Institutions can’t plan long-term initiatives on other protocols as they are still in the innovation stage. Even the second largest crypto network Ethereum suffers from the same issue.

Many people don't understand the path dependence moat of Bitcoin. An altcoin project needs a visionary founder and sizable VC support to outpace the technological and social adoption of Bitcoin. But the artificial bootstrapping often taints the narrative of the project. And it's impossible to coordinate billions of people without a socially scalable narrative. In contrast, Bitcoin had an organic adoption and its founder still remains anonymous (likely dead).

In short, Bitcoiners are not some idiots who want to get rich quickly. They are betting that the Bitcoin protocol has the best social scalability and will win in the long run. It's uncertain what the price will be in the next 6-12 months. But given the endless money printing and the massive fiscal spending, there is no reason to believe the price of Bitcoin will stop going up.

Bitcoin Maximalism is a unique and valuable feature of Bitcoin.

Epsilontheory: "owning Bitcoin has been an authentic expression of identity, an extremely positive identity of autonomy, entrepreneurialism, and resistance to the Nudging State and the Nudging Oligarchy. Bitcoin is elegant and beautiful fashion, sitting at the intersection of art and commerce". 

Bitcoin is more than art. It is a religion of people who believe Bitcoin is one of the greatest inventions for humanity. Many Bitcoiners genuinely believe in the value of individual freedom and that Bitcoin maximizes individual’s freedom. Hardcore Bitcoiners think Bitcoin is their hill to die on and will hodl their coins all the way down to $0. The ideological aspect of the community makes Bitcoin unique and the most robust religion in the crypto space. 

With the QE craze and the worldwide government failures, more people are starting to think that maybe we should separate money and state. We can track the strength of religion by looking at the number of most devout believers. The number of Bitcoin hodlers with little history of selling has been steadily rising. And according to an on-chain analyst, Willy Woo, "next 4 years on current path will bring Bitcoin users to 1b people". Islam has an estimated 1.8 billion believers or more than 24% of the world population. When Bitcoin hits 1b users, it will be nearly impossible to kill Bitcoin.

Bitcoin is not a dumb pet rock.  

Today, we have Wrapped Bitcoin on Ethereum, but it's not trustless and not as decentralized as Bitcoiners want. Many Bitcoiners stick to just hodling. But when they have access to decentralized financial services, they will want to do more with their Bitcoin.

Smart contract solutions on Bitcoin are underway. For instance, RSK is EVM compatible Bitcoin sidechain that has many capabilities of Ethereum. Stacks is a layer one chain that brings smart contracts to Bitcoin and requires no trust in the federation. But it has its own STX token, which Bitcoin Maximalists disapprove of. They are new and haven't seen much activity yet but developers have a strong incentive to build dapps on Bitcoin, which will likely outlast other protocols. Given the rising interest in DeFi on Bitcoin, we will see the Bitcoin narrative changes from digital gold to programmable SoV that can absorb any innovation happening on alts.

Long-term Issues with Bitcoin

"Ultrasound money with no carbon footprint is a batshit powerful meme" - Eric Wall 

Bitcoiners expected a state-level attack to come in 3-5 years, but I believe the ESG is a state-level attack wrapped in the environmentalist argument. 

Eric Wall had a great tweetstorm explaining the gist of ESG FUD.

1. In the same way, it matters not if 100% of bitcoin's energy came from excess Sichuanian wet season hydropower. As long as Greta Thunberg says bitcoin's TWh/year is equal to Ireland's, people will look at/invest in coins with a PoS-future. It's all memes. Memes all the way down.

2. Reject the meme. Dismiss the meme. Debunk the meme. But never underestimate the meme. Think only "how good is this meme?" and never "how correct is this meme?" when assessing your opponents' power level.

The ESG meme will not only slow down institutional adoption of Bitcoin, but institutions could also replace their Bitcoin balance with greener PoS tokens like Ether, causing Ether to engulf the liquidity of Bitcoin. And if Ether surpasses Bitcoin by market cap, some Bitcoin holders who believe coordination is broken will cash out.

When does the maximalist culture become counterproductive?

quote from Austin Hill: 

1. the bitcoin community have embraced labels like 'toxic,' 'maximalist' and turned them into badges of honor celebrating meme culture and, at times, hostility as a community immune response to attacks

2. At what point do these responses become lie a cytokine storm prematurely alienating potential allies or people at many different stages of their learning looking for nuanced debates?

I believe another existential threat to Bitcoin could be the Bitcoin maximalists themselves. Many maximalists believe that altcoin should not exist because they are morally objectionable. Bitcoin can do everything altcoin can do, so why do we need altcoins? 

While that might be technically true, the altcoin speculation does bring more capital and developers to the ecosystem. But because of the maximalist culture, all the capital that could have been invested into the Bitcoin ecosystem has gone to the Ethereum ecosystem instead. There are now more engineers, scientists, VCs, and more startups on Ethereum than on Bitcoin.

Many Ethereans argue that Ethereum has an even more socially scalable narrative: ultrasound-productive asset without the carbon footprint. And I don't think that's an exaggeration. Most people hold stocks, but only a few hold gold. Millennials and GenZ don't even buy gold anymore. If Bitcoin's narrative can't adapt to the new market demands, Bitcoin will lose. I do think that Ethereum has limited social scalability due to the plutocratic governance. The “Rich gets richer meme” is fatal to anything that wants to become a global reserve currency. But we never know how the future will unfold. 

Whether having shitcoins on Bitcoin layer two is a net positive for Bitcoin price long-term is in the realm of speculation. But given the real institutional rotation from Bitcoin to Ether, the maximalist thinking seems to be causing more harm than good. The more diverse experiments we have on Bitcoin layer two, the more likely Bitcoin will become the new world reserve money. I believe something like Stacks does increase the probability of Bitcoin becoming the world reserve currency. For that simple reason, I am okay with having shitcoins on Bitcoin layer two. 

Will tokenize stocks obsolete Bitcoin? 

Imagine people can start paying for goods with their stocks. Not only do the stocks have lower volatility than Bitcoin, but they are also productive assets with a long history as SoV. It makes sense to use the stocks as money. The only thing holding it back is taxation because every transaction using stocks will be a taxable event.

If stocks were tokenized, it would be very easy to use stocks as money. A crypto wallet can automatically issue loans using your stocks as collateral and pay for the goods in stablecoins like USDC. The transaction doesn't trigger capital gain taxes, and people don't need to sell their stocks. If Coinbase or Robinhood had seamless loan issuance for tokenized stocks, we would have already seen more people directly buying goods with their stocks.

We already have something like tokenized stocks. Mirror Asset (mAsset) tracks the price of real-world assets and it’s built on decentralized Mirror Protocol so governments can't easily regulate them. Today, mAsset is mostly used for price speculation but I believe mAsset is one of the most underexplored competitors to Bitcoin.

One issue with using mAsset as a medium of exchange is that governments can still regulate the underlying assets. And the governments are very creative when it comes to regulation.

Final Thoughts 

I quote Daniel Krawisz: 

"Bitcoin the protocol is like a great work of engineering. Its pieces are all adapted to its function. It is not the technology, but what the technology enables, that is most interesting. The blockchain as a concept had no reason to escape the esoteric circles of developers and engineers. Yet when people looked at Bitcoin, the only terms by which they knew how to understand it was as a new technology. But Bitcoin is more like a new tradition than new technology. It is as if a small section of the crowd in a packed stadium has started to do the wave, and you can bet on whether the wave will eventually fill up the entire stadium." 

Will it eventually fill up the entire stadium? I am not sure. But will Bitcoin die? I think not. If you think Bitcoin going to zero is near improbable and the price can go up 100x in 10 years, then holding some Bitcoin is a no-brainer.