Bitcoin versus other cryptocurrencies
It can be tempting to "diversify" into other cryptocurrencies besides Bitcoin, but any long-term investor should be wary of their differences.
Introduction
Most investors who venture into cryptocurrency are eventually drawn to non-Bitcoin cryptocurrencies for various reasons, such as perceived risk diversification, hopes of quick gains, or seeking the next 'big thing.'
However, it is crucial to understand that Bitcoin and other cryptocurrencies serve vastly different purposes. In short, Bitcoin is optimized to function as money and store of value, while other cryptocurrencies are designed to function as utility at best and gambling at worst.
For long-term investors, the most important factor for value accrual is an asset’s potential to serve as a store of value. At Fortis, we support investors who are looking for a reliable store of value mechanism, and the ideal asset that serves that purpose is Bitcoin.
In this article, I explore why Bitcoin is different from other cryptocurrencies in four sections:
Bitcoin is the Only Cryptocurrency Optimized to be Money and Store of Value
Why Alternative Cryptocurrencies are Utilities and Not Money
Additional Risks of Alternative Cryptocurrencies
Why There Cannot Be a “Better Bitcoin”
This article builds on concepts from earlier pieces about the fundamentals of sound money, now applied to the cryptocurrency landscape. While it includes some technical details such as blockchain, consensus mechanisms, and mining, only the essentials are covered to highlight Bitcoin's unique advantages.
There are plenty of resources that explain these differences from various perspectives, and I will reference a few at the end for those wanting to learn more.
1. Bitcoin is the Only Cryptocurrency Optimized to be Money and Store of Value
In this article, I show that scarcity is one of the most critical features that determine whether something can serve as a good store of value. Historically, societies have moved away from older forms of money like seashells, tobacco, and beads once they became less scarce (typically due to technological advances).
Before comparing Bitcoin to other cryptocurrencies, it's essential to have a high-level understanding of what a blockchain is and its limitations.
What is a blockchain?
By definition, a blockchain is:
a database,
maintained by a decentralized consensus mechanism,
operated by its nodes.
For simplicity, think of blockchain as a shared notebook passed around a large group. Every time someone writes in it, everyone checks to make sure the new entry is accurate and consistent with previous entries. Only when the group agrees is the entry added, and everyone keeps a copy of the notebook.
In this analogy,
the “database” is the information in the notebook,
the “decentralized consensus mechanism” is the group's collective agreement to verify new entries,
and the “nodes” are the people participating in this process.
In the cryptocurrency context, the blockchain is merely the technology that enables everyone to download a copy of the database to check the entries, and because public blockchain protocols are open source, there is nothing inherently valuable from simply using blockchain to create a cryptocurrency.
The limitation of blockchain technology
A major limitation is known as The Blockchain Trilemma. When creating a cryptocurrency, the designer can only optimize for two out of three qualities: scalability, decentralization, and security.
Decentralization means that the network operates without a central authority, relying instead on a large number of independent nodes to validate and verify transactions. This ensures that no single entity has control, making the network resistant to censorship or tampering.
Security refers to how well the network protects against fraud, hacking, and manipulation, ensuring that once transactions are verified, they cannot be changed or reversed. In blockchain, this is dictated by something called the consensus mechanism, and there are many types of consensus mechanisms.
To reuse the notebook analogy above, having everyone write and keep their own copy can be considered a type of consensus mechanism. You could have another type of consensus mechanism where only a selected few people can make changes to the notebook’s content.
Scalability is about how efficiently the network can handle an increasing number of transactions as more users join.
The challenge is that optimizing for one or two aspects weakens the third. For example, highly decentralized networks with many nodes may slow down transactions, reducing scalability. Similarly, networks emphasizing security can become resource-heavy and inefficient for scaling (like needing many people to check each entry in the shared notebook analogy).
With the understanding on blockchain and its limitations, we can now start to understand how the Bitcoin protocol was designed and why it is a form of a hard money.
Bitcoin’s Focus on Security and Decentralization
Scarcity is fundamental for a store of value, and Bitcoin emphasizes this through its theoretical limited supply of 21 million bitcoins. Maintaining this scarcity requires a secure and decentralized protocol. Without security and decentralization, Bitcoin could be manipulated—such as increasing the supply beyond the limit, which dilutes the value of existing bitcoins, or allowing double spending, which would undermine trust.
In other words, Bitcoin’s value today is only possible because the protocol focuses on security and decentralization over scalability. These features make it a trustworthy long-term store of value, ideal for saving and wealth preservation over time.
Importance of the Proof-of-Work consensus mechanism in Bitcoin
Bitcoin’s security is enabled by its Proof-of-Work consensus mechanism, whereby substantial computational resources are required to validate transactions and maintain the Bitcoin blockchain. Here is a simple explanation of what Proof-of-Work entails:
Computers (miners) solve complex math problems to validate transactions and maintain the Bitcoin blockchain. This process, called mining, is power-intensive, measured in hashes per second.
An exahash is 1 quintillion (1,000,000,000,000,000,000) hashes per second. The current Bitcoin network operates at hundreds of exahashes per second, meaning enormous calculations happen every second to secure the network.
Proof-of-Work gave the Bitcoin network two unique properties that make it valuable today:
Proof-of-Work consumes significant energy and computational power, meaning that as the network grows and more computational power is added to the network, the cost of hacking Bitcoin increases exponentially.
By requiring (electrical) energy to run computers and maintain the network, Proof-of-Work ties Bitcoin to reality and the laws of physics, because no one can magically create more bitcoins out of thin air unless you “do the work” and run computers to solve the complex math problems.
For a valuable protocol that is worth more than $1 trillion USD in 2024, it is highly lucrative to hack Bitcoin, but no one has successfully done that. There are both practical and financial reasons as to why this is close to impossible:
Practically, it is nearly impossible for an attack on the Bitcoin network to happen from both a hardware perspective and an energy requirement perspective, as explained in this article.
Financially, if the attacker(s) intention is financial gains, any successful attack on the network would cause Bitcoin’s value to plummet as the confidence in its ability to be a secure form of money gets destroyed.
The Role of Difficulty Adjustments
Bitcoin’s difficulty adjustment ensures new bitcoins are created every 10 minutes, regardless of how much computational power is used. This ensures that even with increasing mining resources, bitcoins can only be created at a steady pace. This design mirrors gold’s historical reliability as a store of value, where increased mining efforts have historically only raised gold's supply by about 1.5% annually.
If you'd like a deeper dive into Proof-of-Work and difficulty adjustment, I recommend this video by Jack Mallers, founder and CEO of Strike, a Bitcoin-only exchange.
2. Why Alternative Cryptocurrencies are Utilities and not Money
Bitcoin is the first cryptocurrency that was launched in 2009. Since then, there have been over 10,000 new cryptocurrencies. Even so, why is Bitcoin still the most dominant cryptocurrency in terms of valuation and market capitalization? Shouldn’t new technology that is better and more efficient eventually displace Bitcoin as the most valuable cryptocurrency?
There are two main reasons.
First, other cryptocurrencies are designed for specific use cases other than money.
On Ethereum:
Ethereum set out to develop a decentralized platform that would encourage the developer community to build upon, what was at the time, new technology with Smart Contracts and Dapps, which offer greater blockchain possibilities.
On Solana:
Designed to scale, Solana is purpose-built for blockchain applications to reach millions of users. Instead of worrying about optimizing for the blockchain layer, developers can focus on building their applications to reach product market fit.
These cryptocurrencies are utilities, and the value of any utility depends on how much productive work it generates, similar to physical commodities like copper or oil. However, utilities are poor store of value for investors, which I covered in this article. If resources like copper or oil became increasingly expensive, economies would suffer. Utilities should naturally be deflationary, driven by competition and innovation—whether physical goods or digital services like social media.
Therefore, utility-focused cryptocurrencies (everything besides Bitcoin) are not ideal for long-term investment.
Second, in order for a cryptocurrency to have high utility value, scalability needs to be optimized.
This means sacrificing either security or decentralization, and this often means shifting away from the Proof-of-Work mechanism.
Take a look at the top 10 cryptocurrencies by market capitalization as of August 2024:
Notice that outside of Dogecoin (which was literally created as a joke, and has no supply limit which removes the scarcity feature), no other notable cryptocurrency uses the Proof-of-Work mechanism. These cryptocurrencies adopt mechanisms that trade decentralization and security for scalability.
Here are two examples:
Ethereum’s Proof of Stake (PoS) system secures the network by having validators lock up a stake of the Ethereum token (ETH) to propose and validate blocks, with their chances of selection increasing based on how much they’ve staked. PoS is more energy-efficient than Proof of Work and allows Ethereum to scale better, but it introduces risks of centralization, as wealthier participants with more staked ETH gain more influence over the network.
An example: BNB (Binance Coin) operates on a Proof of Authority (PoA) consensus mechanism. In PoA, only a select group of pre-approved validators are allowed to process transactions and secure the network. These validators are typically well-established entities or individuals with a high level of trust within the system. While this makes transactions fast and efficient, it also makes BNB highly centralized compared to Bitcoin. The validators have significant control over the network, meaning it's not as resistant to censorship or manipulation.
When a cryptocurrency moves away from Proof-of-Work, it becomes more of a utility than a store of value. As a result, it is better suited for short-term usage rather than long-term investment.
For those interested in deeper analysis, John Pfeffer’s article highlights why utility protocols are inferior for long-term value. To preface:
Clearly, scaling solutions such as proof-of-stake, etc. are bullish for adoption/users but bearish for token value/investors.
In summary, alternative cryptocurrencies are, at best, digital utilities. And since utilities are deflationary by nature, they do not support value accrual over time, making them unattractive for long-term investors.
Next, we will examine the risks associated with alternative cryptocurrencies and why many of them amount to little more than gambling.
3. Additional Risks of Alternative Cryptocurrencies
Lack of Decentralization Which Usually Benefits Founders/Insiders Over Investors
Alternative cryptocurrencies generally function as utility tokens, meaning the technical team can make rapid changes to the protocol. These changes often bring uncertainty that may negatively impact token value.
A notable example is Ethereum’s 2022 shift from Proof-of-Work to Proof-of-Stake, a decision driven by scalability concerns that made Ethereum much more centralized. While centralization can offer benefits like innovation speed and economies of scale in certain industries, in the cryptocurrency space, centralization is bearish for long-term investors. Ethereum’s network is now controlled by a small minority, incentivized to act in ways that benefit themselves.
As this article summarizes:
The deep-pocketed backers or in-the-know developers are pushing for centralization because they desire the most of the pie.
Uncertainty in the Value of "Technical Innovations" of Alternative Cryptocurrencies
Most new cryptocurrencies claim to solve certain problems that other cryptocurrencies face, but investors should question what issues they’re solving. Technology only adds value if it increases productivity or addresses societal needs. Bitcoin solves the need for a portable, divisible, secure store of wealth that cannot be manipulated.
By contrast, Ethereum, the second most popular cryptocurrency, is still focused on decentralized finance and speculative trading. As Jimmy Song notes, these “technical innovations” create little value because they don’t address a significant market need, relying instead on effective marketing by insiders to attract investment.
Misaligned Investment Horizons Among Alternative Cryptocurrencies
In this paper, Eric Yakes summarizes the issue with non-Bitcoin cryptocurrencies:
Token investments are often immediately liquid to some degree, or they are liquid on a much shorter time horizon than a typical venture capital private capital investment. This is both good and bad.
Good in the sense that we believe free markets are the best environment for removing capital inefficiency.
Yet bad in the sense that information asymmetries between producers and consumers can be leveraged to extract zero-sum value unsustainably. The ability for projects to issue a token often incentivizes marketing and manipulation above building sustainable economic value.
This problem has been exacerbated by capital allocators that pressure their investments to manipulate their token price in hopes of providing rapid distributions to their limited partners.
Success in this market often requires insider knowledge, significant venture capital, or speculative trading expertise. Many alternative cryptocurrencies experience pump-and-dump cycles where insiders profit early through a public sale, leaving late entrants with devalued tokens. This is more akin to gambling than strategic investing, and most new cryptocurrencies eventually trend towards zero in value.
The graphic below from Messari illustrates how well-known cryptocurrencies heavily favor insiders.
By contrast, Bitcoin never went through a public sale. Its anonymous creator, Satoshi Nakamoto, released the protocol to the public in 2009 and has not been involved since 2010. While Satoshi does own roughly 1 million bitcoins, it has never been spent. Most importantly, Satoshi’s actions have no impact on how the Bitcoin protocol operates today. For all the reasons covered above, Satoshi has no ability to change the Bitcoin protocol to anyone’s benefit.
4. Why There Cannot Be “A Better Bitcoin”
Bitcoin’s code is open source, meaning anyone can replicate it if desired. So why hasn’t anyone created a “better Bitcoin” with improvements?
There are two key reasons:
First, it is extremely difficult to replicate Bitcoin’s network effect
Lyn Alden analyses the importance of Bitcoin’s network effect here. An example used in her article is the TCP/IP protocol:
The internet runs on a set of protocols known as TCP/IP. This was developed in the 1970s, four and a half decades ago, and yet it continues to be the foundation of the internet with no signs of that network effect weakening anytime in the foreseeable future.
If a bunch of big tech companies put $5 billion into developing a better protocol, it would probably still be unable to replace TCP/IP (because there is so much existing infrastructure and applications that are already built using TCP/IP). The critical mass of international consensus in order to change everything for a new protocol, would be immensely difficult.
This is why the internet analogy has been occasionally used to explain Bitcoin’s value.
I will also paraphrase Robert Breedlove’s simpler analogy, where he uses chess to explain the importance of Bitcoin’s network effect:
Anyone can go and modify chess with a new set of rules. But how do you campaign and get enough people to learn and play the game based on that new ruleset?
Second, it is impossible replicate the way Bitcoin was created.
Bitcoin’s creation is often referred to its “immaculate conception.”
Recall as I mentioned above, thanks to Bitcoin’s proven success in the cryptocurrency space, the insiders of new cryptocurrencies are incentivized to enrich themselves by allocating a sizeable amount of coins to themselves before selling sizeable amounts of their coins to the market.
However, Bitcoin was created very differently. Bitcoin was the very first cryptocurrency created, meaning there was zero track record of any success in this space. Dan Held explains Bitcoin’s immaculate conception well here, and I summarize the most important points below:
Bitcoin’s inventor, Satoshi Nakamoto, gave everyone a 2 month heads up before mining the Genesis block (the first data block in the Bitcoin blockchain), reaching out to the only other people who would possibly be interested in experimenting with a sovereign digital currency at the time.
This proves that Satoshi did not allocate any amount of bitcoins to anyone before the network started operating.
Satoshi started mining because the network required a miner to begin running (someone had to start the process). Satoshi stopped mining when there was a stable network the original mining power (thereby stripping the inventor’s ability to have any impact on the network).
Bitcoin’s market cap was ~$0 for nearly a year and a half. The early miners were wasting money on hardware and electricity to mine, with no guarantee that the bitcoins they received would ever have value.
As Dan Held explains:
The early pioneers were the ones crazy enough to take the financial, temporal and social risks to participate in the Bitcoin project, keeping it alive and acting as arbiters of the system in its early days.
Conclusion
The fundamental differences between Bitcoin and other cryptocurrencies extend far beyond technical specifications. Bitcoin stands alone as the only cryptocurrency truly optimized for storing value, backed by its unique combination of genuine decentralization, proven security through Proof-of-Work, and its immutable monetary policy.
While other cryptocurrencies may offer various utilities and continue to be innovated upon, they ultimately sacrifice the core properties that make Bitcoin valuable as a long-term store of value. The trade-offs they make for scalability, whether through alternative consensus mechanisms or centralized control, fundamentally alter their nature from potential money to mere digital utilities.
For long-term investors, understanding these distinctions is crucial. Bitcoin's network effect, coupled with its immaculate conception and genuine decentralization, creates a moat that cannot be replicated. This makes Bitcoin uniquely positioned to serve as a reliable store of value in an increasingly digital world.
For investors seeking to understand where to place their capital in the cryptocurrency space, the key takeaway is clear: while other cryptocurrencies may serve various utilities and potentially offer short-term trading opportunities, Bitcoin alone possesses the necessary attributes to function as a long-term store of value.
Additional Readings
I recommend these three articles for different perspectives on what makes Bitcoin unique:
An (Institutional) Investor’s Take on Cryptoassets by John Pfeffer - arguably the most complete paper that reasons through why alternative cryptocurrencies are not compelling investment, and how success for Bitcoin may look like if it emerges as the dominant store of value. Offers a simple but effective framework in valuing cryptoassets.
On Altcoin Valuation by Jimmy Song - this article offers storylines of how alternative cryptocurrencies were conceived, the myth of innovations they claim to offer, and how marketing plays a big role in this landscape.
An Economic Analysis of Ethereum by Lyn Alden - this article offers a blend of technical and economic analysis on Ethereum and why it is ultimately not a compelling investment for an investor with an approach that is similar to the author’s.
Disclaimer: The information provided in this publication is for informational purposes only and does not constitute financial advice. Readers are encouraged to do their own research and consult with a licensed financial advisor before making any investment decisions.