Will only bitcoin survive? Or will it stay the dominant cryptocurrency, with some room for altcoins to exist? And if so, how many altcoins will die, which ones and when? This blog is not going to provide an answer, but it is my first step in a process in which I want to try to find some answers for myself. And I will turn to scientific literature to help me.
A brief personal history
My first introduction to crypto was a long time ago. My interest in the subject waned and gained over the years, and I still consider myself a newbie. Being a Web editor I probably wrote my first blog on this 'new' thing called the blockchain for a customer on a retail blog somewhere in 2011. In 2013 me and some mates considered investing in a Prospero X-3 miner, but eventually didn't. Early 2016 my then-girlfriend gave me some bitcoin as a present, which I later that year withdrew to pay a speeding ticket (* sad trombone *). At the end of 2017, I remembered that I probably had some couple of thousand Satoshi's left sitting in a wallet, just to find out their value had grown considerably. In 2018 I followed the crypto-news irregularly on the MSM. It is only since a few months I'm back investing some new money in crypto. Not for quick gains, but because I believe cryptocurrency are a good long-term store of value. And like many others I am trying to find out, what strategy to follow.
The main question: are the bitcoin maximalists right? In my search for answers I turn to science.
Many experts agree maintaining a diversified portfolio is essential to any long-term investment strategy. On the other hand: if many - if not all - altcoins are going to disappear anyway, like some pundits say, why not only invest in bitcoin? In order to develop a meaningful strategy, I think it would be good to tackle the most obvious question first: is there any room for other cryptocurrencies in the long run?
To answer this question, I will be searching for relevant scientific articles. For me this is the best way to go. The information overload in the MSM, online podcasts, blogs, tweets and Youtube-videos is overwhelming. And who to believe? It is easy to find crypto OGs, whales, traders, devs and other knowledgeable content creators, making compelling arguments but reaching diametrically opposing conclusions on bitcoin maximalism. And often these conclusions, however well reasoned they may be, are not rooted in science but in the experience and knowledge of those experts. That doesn't make them worthless. But I, as a layman, have too little knowledge to separate the wheat from the chaff. So I will try to find answers in the realm of science. Offcourse I am aware that scientific literature is not the beginning and end of all knowledge. Two scientists working on the same question can get opposite conclusions. It is constantly changing and evolving. Science has a lot of blind spots and uncharted territory.
Unexplored territory
On Google Scholar you will find a lot of scientific papers on bitcoin, blockchain and cryptocurrency. Some students and scholars have tried to answer the question if the markets of cryptocurrency in general or bitcoin specifically are viable, with ever more governments and financial institutions trying to regulate.
But research on the topic of survival of alternative cryptocurrencies while bitcoin might survive is harder to find. I've tried search terms in Google Scholar like:
- viability of altcoins (or alternative cryptocurrency)
- altcoins (or alternative cryptocurrency) disapearance
- potential altcoins (or alternative cryptocurrency)
- network effect cryptocurrency
- winner take-all cryptocurency
These are the results I found so far.
Evolutionary dynamics of the cryptocurrency market
Year: 2017. Authors: Abeer ElBahrawy , Laura Alessandretti , Anne Kandler , Romualdo Pastor-Satorras and Andrea Baronchelli.
Main takeaway:
Here, we consider the history of the entire market and analyse the behaviour of 1469 cryptocurrencies introduced between April 2013 and May 2017. We reveal that, while new cryptocurrencies appear and disappear continuously and their market capitalization is increasing (super-)exponentially, several statistical properties of the market have been stable for years. These include the number of active cryptocurrencies, market share distribution and the turnover of cryptocurrencies.
The Rise and Fall of Cryptocurrencies
Year: 2018. Authors: Amir Feder, Neil Gandal, JT Hamrick and Tyler Moore
Main takeaway:
We study trading activity associated with 1 082 coins over
a nearly five-year period. We present evidence that the more frequently traded coins
experience the biggest price rises. They are also much less likely to be abandoned, that
is, to experience a drop in average trading volume to below 1% of a prior peak value.
Overall, we find that 44% of publicly-traded coins are abandoned, at least temporarily.
71% of abandoned coins are later resurrected, leaving 18% of coins to fail permanently. ... We conclude by examining the bursting of the Bitcoin bubble in December 2017. Unlike the end of the 2013 bubble, some alternative cryptocurrencies continue to flourish after the fall of Bitcoin
Can We Predict the Winner in a Market with Network Effects? Competition in Cryptocurrency Market
Year: 2016. Authors: Neil Gandal and Hanna Halaburda
Main takeaway:
We analyze how network effects affect competition in the nascent cryptocurrency market. We do so by examining early dynamics of exchange rates among different cryptocurrencies. While Bitcoin essentially dominates this market, our data suggest no evidence of a winner-take-all effect early in the market. Indeed, for a relatively long period, a few other cryptocurrencies competing with Bitcoin (the early industry leader) appreciated much more quickly than Bitcoin. The data in this period are consistent with the use of cryptocurrencies as financial assets (popularized by Bitcoin), and not consistent with winner-take-all dynamics. Toward the end of our sample, however, things change dramatically. Bitcoin appreciates against the USD, while other currencies depreciate against the USD. The data in this period are consistent with strong network effects and winner-take-all dynamics. This trend continues at the time of writing.
Preliminary conclusion / TL;DR
So far I found three scientific publications, which deal with the question 'is there any room for other cryptocurrencies in the long run?'. According to Abeer ElBahrawy , Laura Alessandretti , Anne Kandler , Romualdo Pastor-Satorras and Andrea Baronchelli there probably is. They found that the number of active cryptocurrencies is stable. But this paper was written before the 2018 cryptocurrency crash. Neil Gandal and Hanna Halaburda see changes over time. In the early days of altcoins there were no winner-take-all dynamics, but this changed dramatically towards 2016 (i.e. this is in support of bitcoin maximalism). Finally Amir Feder, Neil Gandal, JT Hamrick and Tyler Moore (2018) conclude that even after bursting of the Bitcoin bubble in December 2017, some alternative cryptocurrencies continue to flourish. This goes against the bitcoin maximalist view.
Dear reader, what are your thoughts?
This is only a first step in my quest for a good crypto investing strategy. I will proceed my investigations. I'm curious if you - dear reader - are aware of other scientific papers on the subject? Or do you have any advice to help me find new sources? Did I use the right search terms? Are there better places to look than Google Scholar? Or am I replicating work that someone else has allready done?
Please leave your comments below!
NB: please note I'm not a native English speaker, so let me know if some parts of this blog post are poorly written or unclear.