Altcoin for Innovation Not Investment

Preface

Cryptocurrencies are also known as Altcoins, as in, not Bitcoin.

To be clear, Altcoin development is a very good thing.  Intensive Altcoin development is a powerful force of expansion for the world and Humanity.  I can’t wait to see the people and ideas that come of it.  Oh, what this world will look like in 20 short years.

With this article and others, I want you to slow down and consider different angles before you throw your money at cryptocurrencies as an investment.

Bitcoin and Altcoin Design Considerations

Even though total Altcoin investment is presently shrinking and moving into Bitcoin, there is still plenty of room for growth in Altcoins and plenty of fuel for the fire.  While Bitcoin grows because it extremely valuable to everyone throughout the world in many different ways, Cryptocurrencies will swell with speculation.

The real bubble will not be in Bitcoin, but in Cryptocurrencies.  This is where the most crypto money will be lost.  Over the long-term, most cryptocurrency money will be made in Bitcoin.  

Compared to Bitcoin, Altcoins are young, untested and perhaps not as well thought-out.  Many of the design “improvements” they boast over bitcoin are based on short-term benefits with serious long-term vulnerabilities.

For example, Altcoin developers have tried to improve on Bitcoin’s Proof of Work consensus algorithm because solving it consumes a lot of natural resources.

The Proof of Work algorithm is responsible for Bitcoin’s security, so if it is redesigned for a new coin, the security protocol for that new coin is changed.  These are experimental dynamic systems and the slightest tweak or oversight could have dramatic impacts in the future.

Many Altcoins propose an easier Proof of Work, so it’s not as challenging for the Miners, it consumes fewer resources and is more environmentally friendly.  Those stupid Bitcoin Core Developers forgot to consider Bitcoin’s Environmental Impact.  Those heartless coders don’t care about the environment.  They should all try stepping outside some time!

The fact is that stiff competition is the basis of Bitcoin’s security mechanism.  Mining Bitcoin is purposefully designed to consume a lot of resources and have high competition so that the network will be naturally tough and able to withstand concerted attacks by consortiums of nation-states.

Mining competition pitts honest against dishonest and enforces it with rules of consensus by offering a reward proportional to the risk.  As Proof of Work gets easier, the cost of mining a BItcoin goes down and the cost of attacking the network drops.  This means there’s less incentive to play fair and more incentive to cheat.

When it’s easier to mine a coin, there’s less of an incentive to play by the rules and more of an incentive to try and hack the system.  When it’s very hard to mine a coin, it becomes profitable to play by the rules and not profitable to cheat.  That’s the purposeful incentive structure that provides Bitcoin’s security.

With every decision, there is benefit and sacrifice, short and long-term considerations.

It seems like the sacrifice made in this long-term decision is the environment.  Bitcoin does sacrifice the environment in the short term in order to allow long-term benefits which far outweigh the short-term consequences.

What is often not considered is that this extremely competitive environment is designed to reward the most efficient Miner.  Because efficiency is rewarded among strong competition, there is a strong push toward ever-higher Mining efficiency.  When Bitcoin grows into worldwide transactions, the cost-per-transaction will be far less than today’s existing worldwide payment system.

And what about the Altcoins with easier Proof of Work?  Have they come up with alternative designs to compensate for the reduced security?  Always look deeply into a coin’s security mechanisms.  How is security naturally incentivized?

Some versions of the Proof of Stake consensus algorithm are very promising.  With the implementation of the Segwit soft fork (not segwit2x), in effect, Bitcoin becomes Proof of Stake upon Proof of Work.

If a few cryptocurrencies do grow like Bitcoin has or faster, what will happen at scale?  Will the management process fail because billions of dollars are at stake and people are people?   Will they be able to withstand attacks of all kinds, with $100 Billion as the reward?  In what ways could it become centralized?  We don’t want centralization anywhere in a cryptocoin.

Bitcoin Design Process

Another great example of short-term inefficiency for long-term gain is the Bitcoin Core Developer Design Process.

Among other things, the Bitcoin Core Developers are Long-Term Visionaries.  Every small design decision is critical and must be executed flawlessly.  Their design consensus mechanism is purposefully made to be inefficient, difficult, frustrating and long.  From the outside, it looks chaotic and unstructured, but the result is robust, secure code that is flawlessly implemented with long-term vision in mind.

The more centralized the design decision process becomes, the faster it gets and worse decisions are made more often.  Demands from centralized structures are often focused on short-term improvement at the expense of long-term viability and almost always have the Dictators’ interests in mind without regard for other necessary players in the game.

Pre-Investment Considerations

With Altcoins, long-term design consequences must be taken into account and are too often ignored for short-term gain.

I wonder how many altcoin developers have considered why Bitcoin uses a resource-intensive Proof of Work and why the parameters are set as they are.  How many have taken a hard look at the tough decisions that made Bitcoin the robust and resilient system it has proven itself to be, at scale in the real world?

How many developers have approached their Altcoin design with an attitude of, “That’s stupid.  Just do it this way and the problems are solved!” with no thought of why or of future consequences?

How many Cryptocurrency Hedge Fund Managers will take a hard look at the long-term security mechanisms of their underlying Altcoin Assets.  How many explore where the weaknesses are, what might go wrong?  Does your Crypto Hedge Fund discuss what they’re NOT seeing, as Ray Dalio has taught his employees at Bridgewater?

How many Cryptocurrency Individual Investors will throw far more money than they can afford to lose, into empty hype and baseless promises?  Even if the Coin has a great use-case, powerful backers and smart leaders and developers, all with the best intentions, if they come up with their own security mechanism, new, unknown risks manifest, and the system as a whole weakens.  

Altcoin’s weaknesses often won’t become apparent until the Coin grows.  That’s when it really matters, and often, it’s too late.

My advice is to buy and hold Bitcoin, and get your adrenaline rush watching it grow.

Quentin Danziger

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