14.5.2024
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The early days of cryptocurrency were a wild west, with tens of thousands of altcoins emerging to challenge bitcoin's dominance. From privacy coins to meme tokens, seemingly every novel blockchain use case spawned a new explosion of digital assets. This early experimentation was understandable as bitcoin sparked imaginations and led to many innovative ideas. But the resulting fragmentation was never sustainable. As the crypto ecosystem matures, powerful network effects are accelerating the inevitable consolidation around bitcoin as the clear winner. We are starting to see this play out in real time.
Network effects refer to a product or service growing in value faster than the number of people who use it. We see this principle at work with telephones, social media platforms, and operating systems. The more participants the network has, the more utility and liquidity it commands.
Consider the telephone system as an example. If I have a telephone, the telephone network has no value to me if no one else has a telephone. The network becomes more valuable to me individually as more other people get a telephone because I can communicate with more people. So the value per individual grows with users. But on top of that, the number of users grows, with each new user experiencing the increased value of the larger network. So the value of the telephone network grows faster than the number of users.
Bitcoin grows the same way. As the number of potential transactors grows, the value of the network grows faster. Because of this, a single large monetary network is more valuable than two smaller ones. With a single large network everyone can transact with everyone else with a common currency without currency exchange. Bitcoin, as the original and most established cryptocurrency network, wields formidable network effects that altcoins cannot match.
Bitcoin has several values, each of which has a network effect:
The combination of network effects in each of these categories gives bitcoin an unrivaled overall network effect, which will inevitably lead to consolidation around bitcoin.
Data shows this consolidation around bitcoin's key advantages is already in motion. Bitcoin's dominance, its share of the total cryptocurrency market capitalization, has rebounded to around 55% as of April 2024 after falling below 40% at times during the initial fragmentation phase.
This growing bitcoin dominance signals that money is flowing back into bitcoin from speculative altcoin investments. Investors recognize bitcoin's superior network effects, security, and status as an established store of value.
Altcoins face intensifying challenges that accelerate the inevitability of crypto consolidating around the original.
Investors are beginning to ask whether altcoins have valuable use cases that distinguish them from bitcoin. Many ideas have been explored—functions that cannot presently be implemented on bitcoin—but most of these have not proven to have significant lasting value. These low-value use cases will be crowded out by the consolidation of high-value uses of the bitcoin network. Some will find a more logical home elsewhere without the need for a secure, censorship-resistant network. In addition, layers on bitcoin are enabling bitcoin to provide many of the more valuable functions.
Furthermore, regulatory scrutiny is increasing for altcoins viewed as unregistered securities lacking decentralization. With regulatory risk and without compelling real-world utility, their primary purpose becomes mere speculative investment vehicles.
Altcoin devs also struggle to match bitcoin's innovative momentum as scaling solutions like Lightning, sidechains, and rollups gain traction.
The flippening is a crypto meme describing the idea of an altcoin (usually Ethereum) permanently overtaking and dethroning bitcoin's market cap dominance. However, this narrative ignores the sheer magnitude of bitcoin's entrenched network effects and global credibility.
Altcoins like Ethereum, with a DeFi ecosystem, currently have utility that cannot be duplicated directly on bitcoin, but even that differentiation is disappearing. Surmounting the original crypto's lead appears virtually impossible. Bitcoin's inertia has reached a point where a flippening is even more improbable than a new social network immediately dethroning Facebook or X.
As the crypto industry matures, market forces are culling the herd of thousands of altcoins to consolidate around bitcoin's superior properties as decentralized money. Bitcoin's first-mover status and superior network effects create extraordinarily high barriers to entry that altcoins cannot replicate.
Sovryn understands that in this next phase, consolidation around bitcoin is inevitable. And Sovryn is strategically positioned to be a part of that process. This realization sparked the birth of the Build on Bitcoin (BOB) alliance aiming to make bitcoin more programmable, scalable, and innovative via layered technologies. Sovryn is a key contributor to BOB.
In addition, Sovryn is leading the charge with the forthcoming BitcoinOS, a layered superchain designed to expand bitcoin's capabilities without compromising base layer properties.
While the journey has been fragmented, the evolutionary path points to bitcoin's reign persisting as the crypto asset world consolidates around the most adopted and anti-fragile money. We are still very early.
