A major factor when valuing traditional businesses is evaluating their competitive advantage - sometimes referred to as a “moat”. What that means is: how easy it is for another business to replicate their business model and take market share away from them.
There are many different ways that businesses can create a competitive advantage - they can create vendor lock in, like Apple does, they can build out infrastructure that’s hard to replicate like cable or cell phone companies, or they can even just have really strong brands like Coca Cola.
But enough about these boring, traditional companies - the point of this post is that I believe we can value cryptocurrencies and the blockchain platforms on which they operate in a similar way. The following is my quick take on the competitive advantages (or lack thereof) of some popular cryptocurrencies. Everything that follows is only my opinion. Nothing is to be taken as fact nor as financial advice.
Bitcoin
I believe that Bitcoin has the largest competitive advantage of any cryptocurrency at the moment and for that reason I have recently increased my investment in it. It is definitely not a currency yet, and even with things like the lightning network it’s unclear if it will ever really take off as a currency, but it still has immense potential as a store of value or, as some call it, the “new gold”.
The most important thing in being a good store of value is that everyone agrees that it is valuable. Pretty much everyone in the world agrees that gold is valuable. Similarly, an ever-growing number of people agree that Bitcoin is valuable.
Then the question becomes - how easy is it for another cryptocurrency to replace Bitcoin as the best digital store of value? I submit that it will be VERY difficult to do that. Bitcoin works perfectly well as a digital store of value. Its scalability issues only matter for its potential use as a currency. As a store of value, or “digital gold”, few hour confirmation times and $50 transaction fees aren’t really a big deal at all.
It’s super easy to fork Bitcoin as we all know, but those forks offer no real additional benefits as far as being a store of value is concerned, and it’s unlikely that they will be able to surpass the global recognition of the original.
Ethereum
I don’t feel that Ethereum has a very strong competitive advantage at all, and that’s the main reason that I’m not as bullish on it long-term as many others seem to be. I do own some Ether however, for full disclosure.
Ethereum’s, or more specifically Ether’s, value comes from the DApps and ICOs that run on its platform. We see a lot of competitors to Ethereum coming out, and many offer significant advantages to DApps and ICOs over what Ethereum currently provides. There’s also not very many DApps that have any material amount of use on Ethereum right now and there’s not a high cost of switching platforms either.
All it will take is a couple of popular DApps and/or ICOs to start up on another platform to take a lot of the thunder out of Ethereum’s sails, so to speak. Being the first and the most recognized doesn’t provide much advantage for Ethereum like it does for Bitcoin because DApp users just want the best experience from the apps and don’t really care about the underlying platform on which it runs.
Steem
I believe that Steem has a much stronger competitive advantage than Ethereum but still much less than Bitcoin. Steem’s competitive advantage comes from the network effect and what I like to call the chicken or the egg problem.
There certainly can be, and likely will be, competitors to Steem that are better than Steem in a lot of ways. But when they start out their token will have little value because they don’t have many users and it’s hard to get new users because the token has little value. This is what I call the chicken or the egg problem.
Steem has overcome that problem by being the first. People used it because there was no alternative way to earn cryptocurrency by posting content. Now it’s built up a nice and growing user-base so the token has more value which helps bring in more users and creates a virtuous cycle or positive feedback loop.
I’m not saying it’s not possible for a new competitor to overcome that and overtake Steem, I’m just saying that it will be difficult. As time goes on it will get progressively more difficult and so far I haven’t seen anything that is even coming close.
I’m aware that Dan has said he plans to build a competitor to Steem on EOS. That will be a long time out (if he even follows through with it at all) and I think at that point it will be quite difficult to overtake Steem - even for its original creator.
Other Cryptocurrencies
Unfortunately I don’t have much time to learn about other cryptocurrencies in any great detail, but as far as I can tell most of them seem to have little to no competitive advantage at all. That said, a couple that I’m keeping an eye on are:
- Monero - This seems to be the #1 privacy oriented crypto at the moment which is definitely a valuable niche.
- Binance Coin - Binance is one of the top exchanges and no other crypto can provide reduced trading fees on it!
What do you think?
Like I said above, everything here is nothing more than my opinion and should not be taken as fact nor financial advice. Additionally I’m not an expert in investing or finance by any means - I just think about this stuff a lot and these are some of the thoughts I’ve had to help guide my own investment decisions.
I would love to hear what the rest of the Steem community thinks about the competitive advantages of the various cryptocurrencies. Do you agree/disagree with my thoughts on Bitcoin, Ethereum, and Steem? Are there any other cryptocurrencies that you feel have a strong competitive advantage that I might not be aware of?
Let me know in the comments - I always try to make sure to reward good, value-adding comments with a nice upvote!
