I've notice a few posts here and there where people were claiming that Bitcoin will lead the pack, keep it's dominance and remain a useful store of value for years to come. Some people seem to think that Bitcoin dominance, with better than 40% market share, is a good thing.
There are numerous problems with this position that I would like to review in this article, I believe that not only is Bitcoin dominance a problem, it is dangerous for all the other coins. It is, in my opinion, a single point of failure for the cryptocurrency market.
To me, the overarching problem with Bitcoin is it's perceived utility as the universal trading pair on all exchanges. Every major exchange uses Bitcoin as a trading pair on every other coin in the market. This provides worldwide, universal price support for Bitcoin as a trading pair, too.
For example, I want to buy STEEM, but to get it, I must buy Bitcoin on Bittrex (just ask Coinmarketcap.com). There are no other trading pairs on the exchange for STEEM, and even if there were alternatives, the price of Bitcoin can still influence the price of everything else. So Bitcoin must be purchased in order to get those altcoins. Yes, it is true that many coins have additional trading pairs, but there are no altcoins that do not have Bitcoin as a trading pair on the major exchanges, and they are thus subject to the influence of the price of Bitcoin.
Just as a side note, I noticed that on Open Ledger, some of the coins like Open.ETH and Open.LTC are not really ETH and LTC. They are just assets pegged to the price of their corresponding altcoin, but they are backed by Bitshares. I can't recall who said it, but I do recall someone saying that most of the other coins we see on the exchanges are really just an asset pegged to the price of the coin in question but backed by Bitcoin. They were also kind enough to point out that at least Open Ledger was being honest about what you're getting when you buy one of their Open.coins.
Knowing that there are "asset pegged coins" on the exchanges, I can't help but have the feeling that in order to "have" a coin like LTC, any coin other than BTC, you must have the wallet in your paws, in cold storage or on your computer, with your own address and a private key to which only you have access to. I just don't think it's practical for a massive exchange like Poloniex to keep a wallet for every single coin they offer.
It would follow then, that if most of the coins on exchanges are really just assets backed by Bitcoin, then the exchanges are holding a lot of Bitcoin and providing enormous price support for it. If I'm wrong on this point, please let me know, as I'd really like to be proven wrong on it. :)
Bitcoin is version 1.0 of cryptocurrency. It is the first iteration of the concept of digital currency reduced to practice. With every succeeding iteration of digital currency, we see improvements like higher throughput, smart contracts and proof of stake rather than proof of work. We are even seeing better governance models, given the recent debacles with Bitcoin, Bitcoin Cash and Bitcoin Gold. I would like to think that all of the cryptocurrencies have better governance systems than a few really old guys bent on world domination deciding who the winners and losers will be. You know, like, better than the dollar.
We also see an emerging effort to improve Bitcoin's carriage capacity with the Lightning Network, development of which is currently in progress. I suppose that the Lightning Network will address capacity issues, but eventually, it's going to run into the same bottleneck, the Bitcoin blockchain.
At least until all the coins are "minted", the same proof of work will still be required to process the transactions that are released by the Lightning Network when its work is done. It's kind of like using bigger gears on a small engine hoping to increase the top speed of the engine. Unless engine displacement is increased, you will not have a corresponding increase in power. Eventually, even the Lightning Network will get bogged down by the same blockchain, the same proof of work requirements, and the same ever increasing difficulty until all the Bitcoins are minted.
So for a short time, perhaps a year, the Lightning Network will work as advertised, but eventually, the Lightning Network will become saturated and will still have to wait until the original blockchain can process their pending transactions.
There is no question that Bitcoin will remain useful as a store of value for the foreseeable future. And I think that people will still continue to develop for Bitcoin. I'm not saying that Bitcoin is dead, or dying. I'm saying it's outnumbered by better alternatives.
Numerous market observers have expressed nearly unanimous support of Bitcoin, the most famous of which is John McAffee. McAffee says that a $1 million Bitcoin by 2020 is almost a certainty. Even if that were the case, do we want that kind of dominance by the first mover, Bitcoin?
We've seen what market dominance can do in a market. Microsoft is one of my favorite examples of market dominance. Microsoft managed to position themselves as the first mover in desktop operating systems. Then they developed contract positions with PC manufacturers that charged them for a Windows license for every PC that ships, whether it had Windows or not. It took a few decades of free software development to create a viable alternative to Windows, and Windows still dominates the desktop marketplace.
I am not interested in a cryptocurrency market that is dominated by Bitcoin. I don't like to see that my altcoins go up and down with Bitcoin. I don't like the idea that Bitcoin, with it's claimed decentralization, can be subject to so much manipulation by Wall Street, China or Russia, just because of the news cycle. As someone I know once said, "Volatility is bad for business."
I guess that depends on which end of the volatility you're on. Wall Street loves volatility when they can trade fast on it. How will they feel about it when Bitcoin slows to a crawl? Surely, they must enjoy watching all of the altcoins track with Bitcoin with every news cycle.
I have gone from being afraid of cryptocurrency because I didn't know enough about it, to becoming a cheerleader for the hope that it brings me as I educate myself more and more about it. If ever there was an opportunity for economic freedom, cryptocurrency offers all that and more.
But for cryptocurrencies to truly reach mainstream adoption, we must break the dependence of all the other altcoins upon Bitcoin for price support. Wait. I think I have that backwards. We must remove the unearned, unrealistic price support of Bitcoin built into our trading systems by providing more alternative trading pairs. We must work towards diversifying market share so that altcoin prices move independently of Bitcoin.
There is no reason why a slow, outdated cryptocurrency should retain 40% or more market share well into the future. When Bitcoin first started, it had 100% market share. Then as other coins appeared, that dropped into 90% and it was all downhill from there to what now appears to be 40% market share.
There is no disputing that Bitcoin and even Ethereum are slow. Most sources I've found put Bitcoin at 3-4 transactions per second (tps) and Ethereum at 14 tps. Even Litecoin is slow. I did a transfer of Litecoin from Coinbase to Open Ledger and it took better than 10 minutes (I probably should have refreshed the page more often as I waited about 22 minutes before realizing that it was done). I was waiting for confirmations that seem to take forever to come and I was watching it happen from a blockchain explorer page for the transaction, from a link provided by Coinbase.
On the other hand, I used Blocktrades.us to send 10 Steem Based Dollars to Open Ledger and the transaction was done before I even knew it was done (I'm investing in Bitshares lately, buying into the dip). There was no waiting, no refreshing.
According to this "Still Waiting Promo" post on Steemit, the most recent average speeds show Steem at 3s, Ethereum at 14s, Litecoin at 150s and Bitcoin at 600s, and that's an average from the last 7 days.
Regardless of the coin of choice, I don't really see the point in cheerleading for market dominance of any single coin. We already have that with the US dollar and we all know how that worked out. The diversity in cryptocurrencies isn't just a good thing, it's a safety valve so that people can diversify their holdings or bail when things go south for one coin. We need alternatives not just to the dollar (and the Euro and the Yuan), but we somewhere to go when Bitcoin begins to lose it's luster.
Permitting every exchange to use Bitcoin as the universal pair for all other coins, and leaving the vast majority with no other pair is only asking for trouble, and it inflates the price of Bitcoin because everyone has to buy that in order to get what they want. We should be demanding alternative trading pairs, in addition to reliable ways to hold a cash position on an exchange so that we can bail when we need to and be ready to return to market when the bounce comes, and I'm not thinking of Tether.
Under the current market conditions, Bitcoin is the single point of failure for all other coins until the exchanges get serious about being an exchange for more than just Bitcoin. Bitcoin dominance serves the exchanges for the double fees it generates as the primary and often exclusive trading pair for every other coin. I guess the only way that is going to happen is when everybody decides it's better to keep their coins in a personal wallet than to keep them on the exchange.
Huh. 1800 words. I think I can stop now. I might even have repeated myself, but I feel like I can't emphasize the point enough. So I'll say it a little bit differently and wrap it up. Bitcoin dominance in the market is a lot like centralization in the market. And with centralization comes concentration of power. When power is concentrated, it becomes a giant lever that that works against everyone else who is on the business end of the lever.
I think we know which end of that lever we're on, and it's not on the good end, unless we decide to use our power instead of giving it to the exchanges. Maybe we could even start to express a preference for a completely decentralized exchange where everyone has their own wallet as a matter of practice and as a courtesy to the customers. Who knows, that might be a thing someday.