Does Bitcoin Lack Competitive Advantage Over Other Cryptocurrencies?

By Ron Stefanski

Bitcoin BTC/USD was launched in 2009, and at that time, the digital currency didn't have much competition in this newly minted realm. 

However, by 2011, a mere two years later, there were dozens of other new types of cryptocurrency that started to emerge as competitors began to adopt the same blockchain technology that Bitcoin was built on in order to launch their own currencies and platforms. 

And just like that, the race was on to create new and better cryptocurrencies.

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Although there are now dozens of cryptocurrencies to choose from (known as Bitcoin alternatives or altcoins), Bitcoin remains the world’s largest cryptocurrency. 

Having said that, many people are debating whether or not this popular cryptocurrency now lacks a competitive advantage over other cryptocurrencies. 

This is a question that has been debated by countless people over the past few years. But, before you can make up your mind whether or not this coin is better than other crypto coins, you must gain a better understanding of why Bitcoin is different, what its advantages are, and why it's so highly valued. 

But first, let’s take a look at what we mean by “competitive advantage”.

Definition of Competitive Advantage

The decision for whether or not you invest in Bitcoin or any other cryptocurrency comes down to your investment objectives and risk tolerance. 

It's no different than any other high-risk investment in terms of practical application. But, it helps when you can understand the competitive advantage one offers over the other. 

A competitive advantage, in this sense, refers to the factors that allow Bitcoin to remain ahead of present or potential competitors. 

For the most part, a competitive advantage can be achieved and maintained by evaluating the weaknesses and strengths of your rivals in order to find opportunities to fill in gaps, step up, and improve. 

When looking at cryptocurrencies, however, the competitive advantages and disadvantages may not be so obvious. The technology is very complex, and trying to understand how it works can be very difficult. 

Thus, we have to first try to understand things like distributed ledger technologies, consensus algorithms, and scalability before we can really evaluate where Bitcoin has a competitive advantage and where it does not. 

Primary Features of Bitcoin vs. Other Cryptocurrencies

These days, there are thousands of different types of cryptocurrency to choose from, and the total market size is an impressive $324.7 billion. 

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The different types of crypto include:

  • Coins: Such as Bitcoin and altcoins, which are non-Bitcoin currencies. 

  • Tokens: These are programmable assets that live within the blockchain of a platform.

Most types of cryptocurrency generally fall into one of these two categories. 

Note that a lot of people use the terms cryptocurrency, coins, and tokens interchangeably, but these differ from one another in many ways, and they often provide different functions.

Below, we take a look at some of the main things that separate Bitcoin from other cryptocurrencies so you can gain a better understanding of whether or not it has a competitive advantage over the others.

1. Type of Distributed Ledger Technology (DLT)

Bitcoin and other cryptocurrencies are not issued, backed, or regulated by any central authority, such as a bank. 

Instead, they are created through the use of a distributed ledger (blockchain), as well as peer-to-peer review. 

These coins are then encrypted or secured using specialized computer code known as cryptography.

 

The different cryptocurrencies each have their own type of DLT. Bitcoin and most cryptocurrencies including Litecoin and Ethereum se blockchain technology, but there are other types of DLTs that are less known, including: 

  • Hashgraph patented by Hedera Hashgraph, the only cryptoasset which currently uses this type of DLT

  • DAG which is used by Nano, IOTA, and Obyte

  • Holochain is the backbone of the Holo digital ecosystem

A good understanding of these types of distributed ledger technologies will help you make a more informed decision about the best cryptocurrency to focus on right now. 

2. Bitcoin’s Proof-of-Work vs. Other Consensus Algorithms 

Bitcoin was invented as a type of currency which people could exchange without a bank, credit card company, or other third party intermediary moderating the transaction. In other words, if I go to a coffee shop and buy a cup of coffee with my credit card, then the bank and the credit card have to confirm the payment before the coffee shop gets paid.

If I pay with Bitcoin, the money goes straight from me to the coffee shop. No banks or credit card companies required. 

To accomplish true peer-to-peer transactions, Bitcoin uses blockchain technology. The blockchain, in turn, uses a consensus algorithm to ensure that the transaction is cryptographically secure. 

This means that I can buy a cup of coffee or anything else without my personal identity being revealed to anyone. I can’t do that when using my credit card. 

Problems with Bitcoin’s Proof-Of-Work

Not all consensus algorithms operate in the same way. Bitcoin uses Proof-of-Work (PoW). Every transaction that occurs with Bitcoin gets bundled up with a bunch of other transactions. Then supercomputers attempt to solve a complex algorithm to transform this bundle into a block that can be added to the blockchain. 

The first computer to solve the math problem successfully “mines” the block, which means that the transaction is indelibly recorded on the blockchain and can never be altered. Additionally, the first person to solve the math problem is rewarded with bitcoins.

Thus, Bitcoin mining is a very competitive industry, which means there is a huge barrier to entry. Additionally, the energy consumed to run the mining computers is staggering. 

In 2019, researchers found that Bitcoin mining produced between 22 and 22.9 metric tons of CO2 per year. This is more than most African and Latin American countries, which means Bitcoin is making climate change worse.

Proof-of-Stake As an Alternative to Bitcoin Mining

Fortunately, there are less energy intensive consensus algorithms available. For example, Proof-of-Stake (PoS) is generally perceived as being PoW’s biggest competitor. It doesn’t require mining but instead uses probability to select who validates the next block on the blockchain. 

To become a validator, you must stake some or all of a specific cryptocurrency. The more you stake, the better your shot at discovering a block. For example, if there are 1 million total coins staked, and you stake 1,000 coins, then you will have a 0.1% chance of discovering the next block. However, someone with 10,000 coins will have a 1% chance to discover it.

The total number of people that can become validators on a PoS consensus algorithm is much greater than those who can become Bitcoin miners. Thus, there is a much lower barrier to entry.

Additionally, since staking does not require competing miners to solve the algorithm, the energy consumption of staking is much lower than that of mining. In other words, using PoS cryptocurrencies like Solana, Cardano, Algorland, Polkadot, or Polygon is much better for the environment than using Bitcoin.

Other Alternatives

There is no single type of PoS consensus algorithm. These algorithms are often amended to function in a particular way to meet the needs or demands of a specific cryptocurrency. Above, we talked about a true PoS consensus algorithm in which the chance of being selected as validator is entirely left to chance.

One amended form of PoS is called Proof of Authority (PoA). 

PoA uses the authority of a person’s identity as a method of determining who gets to validate blocks on the blockchain. The better your reputation, the more likely you are to be selected to discover the next block. 

In addition to PoW and PoS consensus algorithms, there are other algorithms including Proof of Importance (PoI), which is used by NEM (XEM). PoI validators don’t mine or stake blocks; they harvest them. This process requires a node on the network to have vested at least 10,000 XEM. All newly bought XEM is unvested. Everyday, 10% of unvested XEM becomes vested. That means after 1 day, someone who bought 100,000 XEM will be able to harvest blocks because 10% (10,000 XEM) of that total will have become vested.

Thus, there is a barrier to entry that favors the wealthy as those who can buy more XEM will be able to harvest XEM before others while many will be simply unable to afford enough XEM to even begin harvesting. However, the barrier is not quite as high as it is with mining, and the energy costs of PoI are much lower than Bitcoin or other PoW cryptocurrencies.

3. Scalability

One of the main drawbacks of Bitcoin is the concern with scalability (although this issue is common to all digital coins). 

The scale of adoption of digital coins continues to increase rapidly, but it's still minuscule compared to the number of transactions processed by Visa and other payment companies. 

Moreover, the speed of the transaction is another crucial metric that Bitcoin and its alternatives can’t compete with. 

Visa, Mastercard, and other payment giants have powerful infrastructure at their disposal, and until cryptocurrencies massively scale their infrastructure for delivering these technologies, they won’t be able to compete effectively. 

But, although this type of evolution is hard to achieve seamlessly, many crypto platforms have already proposed viable solutions as part of their efforts to work toward scalability, including things such as: 

  • Lightning Networks

  • Sharding

  • Staking

There are also other factors to consider, such as the transaction fees, ecological costs, and much more. But the bottom line is that Bitcoin has a ton of advantages. 

For instance:

  • It has a high potential for lucrative returns

  • Bitcoin offers protection from payment fraud

  • Immediate settlement and international transactions

  • There is greater liquidity and diversification

Bitcoin also comes with a few drawbacks:

  • Black-market activity

  • No refunds

  • Unbacked and unregulated

  • Potential for cyber hacking

  • High volatility, which could lead to large losses

When all is said and done, it's clear to see that Bitcoin has a lot of advantages. It’s fast and inexpensive. It only takes a couple of minutes to send any amount of money to any destination in the world, with zero restrictions.   

This is significantly more affordable than moving money through your bank. You also have the assurance of protecting user rights when using this global currency. 

Having said that, there's been a large run-up in the prices of many altcoins, and a lot of them are making great strides, making them viable alternatives for Bitcoin. 

So, if you've been looking for a way to hedge against the possible self-destruction of Bitcoin, then altcoins are great options to consider.

Conclusion

The bottom line is that despite the many people who laud Bitcoin, there are a lot of other cryptocurrencies that are showing more promise than this popular cryptocurrency. 

As the first cryptocurrency, Bitcoin may have launched the crypto craze, but the evolution of crypto assets has produced a lot of other alternatives that have a competitive advantage over Bitcoin. 

Now that you've seen how Bitcoin compares to other cryptocurrencies, what’s your take on whether or not it has a competitive advantage? Share your thoughts below!

 

About The Author

Ron Stefanski is an online entrepreneur and marketing professor who has a passion for helping people create and market their own online businesses

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