The biggest mistake you can make in the ongoing Bitcoin bull market would be to get distracted with altcoins—all cryptocurrencies other than Bitcoin.
Many erroneously think that since there are thousands of cryptocurrencies, “crypto” is just another asset class like bonds or stocks, and they need diversification within that asset class.
As you’ll soon see, that would be like adding pyrite to your portfolio to diversify your gold holdings.
Few understand the simple truth that although there are thousands of cryptocurrencies, Bitcoin is the only one with fundamental value.
It’s essential to consider how Bitcoin and altcoins should be classified.
What exactly are they?
Are they money?
Are they equity?
Are they something else?
Here are three crucial reasons to stick to Bitcoin only. It will clarify the situation in a way that anyone should understand.
Reason #1: Bitcoin Is the Only One That Is Suitable As Good Money
A blockchain is just a database distributed among different computers.
The blockchain’s native currency pays for its security and incentivizes its users to maintain the network.
For example, Bitcoin miners help secure the network and are compensated only in Bitcoin. Full node operators—those who run the full Bitcoin software—run a full node because it gives them total sovereignty over their Bitcoin. It costs money and takes time to do these things, which are essential in keeping Bitcoin decentralized and secure.
These people are taking these actions and incurring these costs because of Bitcoin.
The situation is similar with every other cryptocurrency.
The point is that a blockchain’s native currency is an essential incentive to those securing and maintaining the network.
Running a blockchain necessarily has real-world monetary costs. The blockchain’s native currency must be viable as money, or it won’t be attractive for people to incur these costs. Nobody wants to be paid inferior money or spend better money maintaining inferior money.
That’s why all blockchains have an essential monetary function.
If there aren’t compelling incentives to incur the costs to run the blockchain, few people will do it, and the database won’t be decentralized, defeating the whole purpose. If the database isn’t genuinely decentralized, you might as well be using a more efficient centralized one.
That’s why the blockchain’s native currency must be a good money. It’s what incentivizes people to incur the costs to make the network decentralized and secure.
The problem for altcoins is that they are inferior forms of money.
Simply put, Bitcoin is different because nobody controls it.
Nobody can change Bitcoin—not even Elon Musk, Jeff Bezos, the Chinese government, the US government, or any of these powerful entities combined.
Even if Satoshi Nakamoto—Bitcoin’s anonymous Cypherpunk creator—returned after disappearing in 2011, he could not alter Bitcoin.
The fact that no individual, corporation, or government—or collection of them—can change the Bitcoin protocol makes it neutral and apolitical. It’s what gives Bitcoin’s monetary properties—namely, its total resistance to debasement—credibility.
For every other crypto from Ethereum on down, it is trivial for a group of insiders or developers to change the protocol, including the supply. For example, the Ethereum developers change the monetary policy about as often as the Federal Reserve.
Although it is highly improbable, the Bitcoin protocol can theoretically be changed.
It’s similar to saying that asteroid mining or nanotechnology could make gold as common as the aluminum foil in your kitchen drawer. Theoretically, that could happen, but it is so improbable right now that it is irrelevant to our investment decisions.
Understanding how difficult it would be to change the Bitcoin protocol is crucial to understanding the credibility of its monetary properties.
Satoshi Nakamoto once correctly said:
“The nature of Bitcoin is such that once version 0.1 was released, the core design was set in stone for the rest of its lifetime.”
To understand how to make changes to Bitcoin—and what makes it different from every other cryptocurrency—it’s essential to grasp the basics.
There are generally two ways a cryptocurrency implements changes and updates—a hard fork and a soft fork.
A hard fork is a significant change to the protocol and is not backward compatible, which means previous software versions will not function after the hard fork.
For example, suppose the developers of ABC cryptocurrency implemented a hard fork to update its protocol on April 15. After that date, anyone who didn’t update their software to contain the new compulsory changes cannot access their money.
In short, a hard fork means someone is in control and altering core aspects of the protocol.
On the other hand, a soft fork is a backward-compatible upgrade, which means the previous versions of the software are compatible and will still work after the soft fork. That’s because soft forks don’t contain fundamental changes that would render older versions unusable. Users who choose not to go along with the soft fork will still have access to their funds and can interact with the network.
Think of the difference between a hard fork and a soft fork as the difference between a mandatory and voluntary change.
It’s not a trivial difference. It’s paramount, yet few understand the significance of the difference and how it relates to the credibility of a cryptocurrency’s monetary properties.
It brings up another fundamental question.
If someone is pushing hard forks (drastic, mandatory changes to the protocol), how can the crypto be considered apolitical or decentralized? How can its supply have any credibility when someone can change it?
The simple answer is that it can’t.
Here’s a helpful way to think of it…
Imagine there was a group of people who could hard fork gold. Let’s call them the Gold Cartel.
Suppose the Gold Cartel decided to hard fork gold to change its essential characteristics (what they would euphemistically call a “protocol upgrade”) but not the gold supply.
Then, suppose the Gold Cartel mandated a gold hard fork that would change gold from a solid to a liquid and from yellow to brown. But they decided that they would leave the gold supply unchanged this time.
They claimed they were making these changes to gold to upgrade its fungibility and that everyone must go along with them and their new and improved version of gold.
Then, suppose the Gold Cartel told everyone the gold hard fork would occur in two weeks and that everyone in the world must come to one of the Gold Cartel’s offices to exchange the old yellow, solid gold for the new brown, liquid gold.
After the Gold Cartel’s hard fork, the old yellow, solid gold would no longer be valid. It would no longer be gold and thus useless to anyone who didn’t exchange it for their newly mandated liquid brown gold.
Would gold be a neutral, apolitical, decentralized asset in such a situation?
Would its supply have any credibility?
That’s why hard forks are a big problem for the credibility of a cryptocurrency’s supply.
Aside from Bitcoin, when a cryptocurrency’s development team announces a hard fork, everyone usually goes along and implements their suggested changes. It’s not that different when Apple or Microsoft announces a software update. Users are forced to follow it regardless of whether they want to.
But sometimes, hard forks can be contentious. For example, certain people may disagree and refuse to implement the proposed changes. When that happens, the cryptocurrency splits into two totally different ones.
As a practical matter, anyone can hard fork any cryptocurrency whenever they want. All you have to do is take the open-source code—available to anyone—and make your desired changes to the protocol. But that doesn’t mean anyone will follow your lead or value your new cryptocurrency.
For example, I can easily make a hard fork of Bitcoin that changes the supply from 21 million to 22 million and call it “Bitcoin 2.0.” But that doesn’t mean I can inherit the monetary properties of the original Bitcoin, which are related to the credibility of its supply, which I’ve just undermined by changing the protocol. That’s why the market is unlikely to assign any value to Bitcoin 2.0.
In short, anyone can create a cryptocurrency in minutes. That’s the easy part. Making one that nobody controls is the hard part.
If someone wanted to propose a hard fork to change to the Bitcoin protocol, it would require the agreement of most of the over 19,100 full nodes that enforce the protocol. Otherwise, the only thing they would succeed in doing is creating an increasingly worthless knockoff.
Full nodes enforce the Bitcoin protocol and consensus rules—like its issuance and supply. The average computer can easily handle running a full node now and in the future, which is crucial for Bitcoin to remain decentralized.
Any desktop, laptop, Raspberry Pi—and even some cell phones—have the potential to become Bitcoin full nodes. Furthermore, as technology advances, running a full node will become even more accessible.
The fact that anyone can run a full node makes the enforcement of Bitcoin’s protocol decentralized. So it’s unlikely that any individual, corporation, or government—or groups of them—could get together to enforce their will on the network by coercing the full nodes.
The Blocksize Wars, which culminated in 2017, was an excellent example. That’s when an overwhelming majority of the Bitcoin miners—and other prominent insiders and large companies—tried to get together and change Bitcoin’s protocol by ramming through a hard fork.
Even though they represented most of the miners, some of the most powerful insiders, prominent influencers, and large corporations, the decentralized network of full nodes rejected their attempted hostile takeover and did not follow their hard fork.
Instead of forcing a destructive change on Bitcoin—as they desired—they just created an increasingly worthless knockoff known as Bitcoin Cash. Recently, the market cap of Bitcoin Cash (BCH) was less than 1% of the real Bitcoin’s (BTC) and is trending towards 0%.
The effort to change Bitcoin’s protocol during the Blocksize Wars was a spectacular failure.
Afterward, it became clear that nobody controls Bitcoin, not even the vast majority of its most powerful insiders. It became apparent Bitcoin was genuinely neutral and apolitical.
For more on this incredible story and pivotal moment in Bitcoin’s history, I suggest you check out the book The Blocksize War: The battle over who controls Bitcoin’s protocol rules.
Here’s another way to think of it.
Imagine someone wanting to change the rules of chess so pawns could move backward. Of course, anyone could do so anytime, but that doesn’t mean people will follow the new rule. Of course, nothing is impossible, but it would be so improbable that such a move would gain traction that it’s irrelevant.
In my view, getting the consensus of the full nodes to change the Bitcoin protocol with a hard fork—to say, alter the fixed supply of 21 million—is even less probable than successfully changing the rules of chess.
It’s important to emphasize that Bitcoin is resistant to change not just from technical and economic standpoints but also from social and cultural ones.
Most people running Bitcoin full nodes have a deep conviction in Bitcoin’s potential as a hard money resistant to debasement. So they wouldn’t want to undermine that essential attribute by agreeing to change the protocol, which would undermine the credibility of its monetary properties—the entire value proposition of Bitcoin.
On a cultural level, the only scenario in which I can see the Bitcoin community agreeing to a hard fork would be in a genuinely existential situation.
To summarize, Bitcoin developers do not have the power to “push” updates and hard forks that change the protocol to the full nodes. There are no automatic or forced software upgrades. Bitcoin updates can only be accepted voluntarily by the full nodes and must be backward compatible.
It’s a crucial part of an ingenious system of checks and balances that keeps a global system—that settles many trillions of dollars in value— running flawlessly without anyone in charge of it.
Here’s the bottom line.
The sovereignty in Bitcoin is not with the developers, the miners, insiders, influencers, large holders, or any individual or group. It’s with the globally decentralized network of full nodes, which anyone can operate.
For every other cryptocurrency, the opposite is true.
With altcoins, the sovereignty is with the developers and insiders. It is trivial for them to perform a hard fork and change the protocol.
That’s why almost every crypto aside from Bitcoin performs hard forks as part of their routine upgrade process. The developers tell everyone they need to upgrade, and there is no choice as everyone goes along with it—much like when Apple or Microsoft mandate software upgrades.
In short, altcoins perform hard forks all the time. That means someone is in charge and can push through significant changes to the protocol—like the supply. They may choose not to for now, but they can.
Here’s why it relates to the credibility of a cryptocurrency’s monetary properties…
For example, what will the Bitcoin supply be on January 1, 2030?
With the highest confidence, I can say that it will be 20,484,246.
By contrast, what will the supply of Ethereum—or any altcoin—be on January 1, 2030?
It could be 120 million, 500 million, 200 billion, 2 trillion, or more. It’s anyone’s guess as to what future changes the developers and insiders will make to the protocol with hard forks.
In short, that’s why altcoins have artificial scarcity.
Artificial scarcity is not a desirable monetary property and disqualifies altcoins as good money.
That’s why Bitcoin is different.
The ability to enforce—and potentially change—the protocol (including the supply) is truly decentralized and not under the control of anyone.
That’s what gives Bitcoin genuine scarcity and credible monetary properties, which in turn make Bitcoin suitable as good money.
Reason #2: Altcoins Are Not Like Equity or Investing in Start-Ups
Once people realize altcoins are not good money, they often fall back on the claim that they are like equity or investing in tech start-ups.
When you invest in the equity of a start-up, you have an ownership stake. It’s a legal claim to the assets of the business and its future cash flows.
However, altcoins do not represent any ownership stake or legal claim on any asset or cash flow whatsoever. That’s why they are nothing like equity, despite what many believe.
Mistaking an altcoin for equity would be like mistaking arcade tokens or airline frequent flyer miles for an ownership stake in the underlying airline or arcade business.
But suppose altcoins did represent an ownership stake. They would then undoubtedly meet the definition of a security under the Howey Test, which means their founders and developers must register and file disclosures with the Securities and Exchange Commission (SEC).
I think the SEC should have been abolished yesterday, but flaunting them is stupid.
Practically no altcoins have registered as a securities, yet most of them probably are indeed securities—even though they offer no legal claim to ownership.
Given their statements, it’s clear that the SEC views almost all altcoins as unregistered securities, making them vulnerable to enforcement actions.
This brings up another relevant point. Most altcoins would cease to exist if the SEC went after them, which illustrates that, despite the marketing claims and technobabble, altcoins are not decentralized.
Bitcoin, on the other hand, is the only cryptocurrency that is unambiguously NOT a security.
The US government has been clear that it views Bitcoin as a commodity—a much more favorable designation—under the purview of the Commodity Futures Trading Commission (CFTC) and the Commodity Exchange Act.
Bitcoin is a commodity because it is an asset without an issuer.
Similarly, gold, silver, copper, wheat, corn, and other commodities have producers but do not have issuers.
Every other cryptocurrency other than Bitcoin has an issuer. They also have identifiable founders, central foundations, marketing teams, and insiders who can exercise undue control.
On the other hand, Bitcoin has none of these things—just as copper or nickel has no marketing department or founder.
Here’s the bottom line…
When you buy altcoins, you get the worst of both worlds. You get the regulatory and legal risk of owning an unregistered security without any ownership stake.
Altcoins are nothing like equity.
Reason #3: Altcoins Are Tokens
If altcoins are not good money and not equity, what are they?
They are tokens.
What are the characteristics of a token? Think arcade tokens and frequent flyer miles.
A centralized issuer creates tokens. There is no limit on the supply, and they give you no ownership stake.
Ask any altcoin promoter for a coherent answer on why someone should buy a token. Their answers will not be satisfying.
You’ll quickly learn that the answer to the fundamental question of: “Why do you need a token?” is always: “You don’t.”
The only reason you’d need a token is for the token’s creators to extract seignorage from the token holders—the same scam central banks pull with fiat currency.
For argument’s sake, let’s presume an altcoin project builds something useful, and you need to use their token to use their platform. Then, you would buy the token when you need to use the platform, much like you buy an arcade coin when you want to play at the arcade. Only a fool would invest or save in arcade coins.
Now, that doesn’t mean you can’t make a lot of money speculating or gambling on altcoins. You certainly can if you buy before a token gets pumped and dump it before everyone else—or before the SEC shuts it down.
For example, people made fortunes with Dogecoin, a dog-themed altcoin.
Dogecoin is openly a joke with no practical use case. Still, its market cap peaked at over $88 billion, which is roughly comparable to multinational computer maker Dell Technologies’ recent market cap.
Dogecoin’s market cap is an indication of the enormous amount of air that had been pumped into the altcoin bubble and how something that serves no useful purpose can skyrocket in an irrational mania, much like what happened with Beanie Babies or Tickle Me Elmo.
Here’s the bottom line.
With altcoins, it’s a rigged game of hot potato with fundamentally worthless digital tokens, not investing in the next Steve Jobs.
Maybe you’ll get lucky in the altcoin casinos, but it’s more likely you’ll get wrecked.
Consider this.
In the history of altcoins, only three have ever made new highs in BTC terms after their initial pump. One of them was Dogecoin because Elon Musk pumped it. The proof is in this article.
Practically every altcoin has the same chart as the one below over the long term.
To summarize, here are three crucial reasons to stick to Bitcoin only.
Reason #1: Bitcoin Is the Only One That Is Suitable As Good Money
Reason #2: Altcoins Are Not Like Equity or Investing in Start-Ups
Reason #3: Altcoins Are Tokens
The real secret in the crypto space is that although there are thousands of cryptocurrencies, Bitcoin is the only one that matters.
Understanding this is essential to avoiding the siren’s call of altcoins as the ongoing Bitcoin bull market takes off in earnest—which could happen imminently.
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