Translator's Note: The author of this article is the bitcoin evangelist Jimmy Song. In his article, he analyzed the valuation sources of competitive coins. He believes that the success of the coin is not related to factors such as technical functions, but related to marketing. During the bitcoin bull market, successful marketing can push up the price of the competitive currency. It is precisely because of the emphasis on marketing that there are a lot of scams in the competitive currency market. Therefore, every kind of competitive currency should be regarded as a scam before a certain competitive currency proves that it is not a scam.
Bitcoin is valuable because it is a decentralized digital currency. Its supply and current ratios continue to rise, and its highly credible monetary policy has brought scarcity, a feature that no physical asset can have. In addition, Bitcoin has a large network, which makes it a Schelling Point. The security of the network is costly, and its history is unmatched by any cryptographic asset. Some emerging research shows that supply and circulation ratios are a basic indicator of the value of Bitcoin, which makes sense because Bitcoin is very decentralized.
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The competition coins are completely different. They all lack a major innovation in bitcoin: decentralization. This means that the competition currency is fundamentally different from Bitcoin and closer to legal tender. Their failures can and have been used by outside parties to influence and even control them. The supply and circulation ratio models do not work here in the competition currency because they are centralized. So, what gives the value of the competition coin? Why do competitive coins have prices?
In this article, I hope to explore this issue. Does the competition coin add valuable new technology features? Do their buyers want to go to the path of centralization? Why did the Litecoin succeed, and the "cousin" Fairbrix, which is very similar to it, failed? Why do pre-tipping coins like IxCoin fail and Ethereum will succeed? What should these relative successes and failures be attributed to?
Virtual fantasy about technological innovation
When talking to any of the competitors, they will definitely mention that their coins have the most interesting features. They believe that the coins in their hands will use some complex incentives to push up the value of the tokens, thus completely changing certain industries. Of course, their wish is that, because of some new features, their currency will become the "next bitcoin" and become the new Xie Lin point of the global currency.
This is just a wishful thinking, as anyone who once said the bitcoin throne has said. From Feathercoin to Auroracoin to Steem, there are a lot of currencies that offer some theoretical technical advantages, but they don't hold on to the attraction, let alone let Bitcoin fall back.
Their technical features include faster blockouts, mechanisms other than PoW, changing algorithms, changing monetary policy, increasing block size, committing to privacy, applying specific services, solving certain problems in specific industries, etc. .
All of this is at best a wishful thinking, because their community is full of depressed and/or deceived token holders who want Bitcoin to miraculously abdicate. These “innovations” are often seriously lacking in technical value (Turing complete smart contracts), or even outright scams (Bitconnect), but even a few valuable innovations will be hopelessly lost in the quagmire of poorly designed incentives. Therefore, it is impossible to solve problems in the real world.
In other words, the technological innovation of the competition currency almost always fails completely. The real innovation is to have a market. These competitors have not found any real target users.
Since most of the competing coins are open source, forking and changing some parameters to create a technical clone is very simple. If technology or functionality is the foundation of value, then technology cloning must have very important value. But in reality they have no value, so this shows that technical function is not the reason for shaping the value of the competition currency.
Distinguishing between valuable and worthless competitors is not technical advancement, but something else.
The story of Litecoin and Fairbrix
The valuation of the competition currency should start with Litecoin and Fairbrix because it is two very similar currencies. They all use the PoW mechanism, the launch dates are very similar (2011), and the same creator: Charlie Lee.
Both coins are based on Teneblix. Tenebrix is a competing coin launched in 2011, using a new PoW algorithm, Scrypt, which is faster than Bitcoin. The community at the time opposed Tenebrix because of large-scale pre-excavation, which directly led Charlie Lee to choose to fork Tenebrix to create Fairbrix. Like Zclassic fork Zcash, Fairbrix is a Tenebrix clone without pre-digging.
Of course, Fairbrix didn't have a good place to go. This is the beauty of Charlie Lee's strategy. He created another coin, the Litecoin, with the same function, creating a better brand. He changed the block time from 5 minutes to 2.5 minutes and solved some problems to make his marketing better. Over the years, he has told many people that his most forward-thinking idea is that he gave Liteco a catchy title: digital silver corresponding to the digital gold bitcoin.
From a technical point of view, this is just a trivial new feature. The most important change in this currency is the change in the PoW algorithm, which was copied from Tenebrix. Accessing Scrypt is not a big project. For example, the block hash of the Litecoin is indistinguishable from the transaction hash. This is different from Bitcoin, because the block hash of Bitcoin starts from 0. Similarly, some small design errors in Bitcoin, such as OP_CHECKMULTISIG, have not been corrected because the bug is not enabled or the 4-byte timestamp is not corrected. The Litecoin is essentially a clone, with only a few fine-tuning and good marketing.
Many of the currencies that were born in 2011 did not survive, including the "brothers" Fairbrix of IxCoin, SolidCoin, Geistgeld and Litecoin, and the "father" Tenebrix. For some people, pre-drilling is a fatal blow. Many people in the community will condemn this mechanism, but as you can see from Fairbrix, even if you don't pre-dig, you can't guarantee the success of the coin. The reason why Let Lite is popular is its clever marketing techniques, which have little to do with technical functions.
So why do these currencies appear in the same period? The first bitcoin bubble appeared in mid-2011, rising from less than $1 at the beginning of the year to $30 in July. All of the above currencies appeared shortly after the bubble burst in August. Many people call it the 2011 "Scambrain". Since all of these currencies were issued shortly after the bubble burst, there seems to be at least some correlation between them. We will see a similar "Scambrain" explosion in the follow-up bubbles of 2013 and 2017.
Mastercoin vs. Counterparty vs. Ethereum
Time to fast forward to 2013, we can see another set of competitive coins appear. Mastercoin was launched that summer, and the Counterparty came a few months later. In early 2014, Ethereum opened for pre-sales. All three currencies are pursuing the same goal of creating a platform to release new tokens. Mastercoin may be the first platform to make pre-sales before the launch of the product. The pre-sale of the token here is what we call ICO today. In the summer of 2013, Mastercoin also pre-sold shortly after the bubble burst in April 2013. This token has been sluggish for several years before 2017.
Counterparty asked to destroy bitcoin instead of donating. In order to get the XCP token, you must send Bitcoin to an address that requires a password to be redeemed. Counterparty was launched a few months after the launch of Mastercoin in 2013.
Of particular interest is that after the 2014 Ethereum ICO, all of the new technical capabilities (Solidity) that were considered to be Ethereum were added to the Counterparty. In response, Ethereum's response is that the Counterparty smart contract platform can also be easily completed at Ethereum. In essence, the characteristics of these two currencies are the same.
The reason Ethereum is more successful than Mastercoin or Counterparty is the unprecedented marketing for token sales. Not only is the amount of ICO much higher than it used to be (30,000 BTC), but they have made pre-digging a good thing – as a source of funding for development and marketing. As Vitalik said, he made pre-drilling acceptable, which was unacceptable in those currencies in 2011.
(Jimmy: I don't know which planet Vitalik comes from, but on Earth, 67% is not a small number)
The promotion of ETH pre-sales marketing dwarfs any previous currency, which is why, although Ethereum and Counterparty have many similarities in terms of feature set, they are still able to succeed in the 2017 bull market. This is the other Tokens cannot be done.
When Ethereum went online, all rational investors thought it looked crazy. This model of token sales is completely lacking in the protection of investors and the ridiculous pre-excavation of 72 million. For many people, Ethereum is hopeless. In addition, in the process of creating Ethereum for a year and a half, there have been several noticeable delays and funding issues.
From a technical point of view, Ethereum has many shortcomings, Ethereum 2.0 plans to abandon the entire infrastructure! From DAO to Parity vulnerability, to the lack of checksums on the ETH address, a number of problems have been documented. However, all of these issues are largely ignored by the market. The technical status of Ethereum does not seem to matter to investors.
In other words, Ethereum can overcome all problems with crazy marketing. In a sense, Ethereum is a precedent for all tokens that have no code or investor protection. Their existence shows that even a hopeless and insecure system can thrive through adequate marketing. As long as you talk about competitive coins, you know that marketing is better than everything.
Strange case: Ripple
XRP was the first fully pre-digging token to be launched in 2012. Interestingly, until 2017, the market value of this token has been below $1 billion until it was multiplied by the bitcoin bull market, reaching a market value of $127 billion during the peak period. The XRP did not become part of the April 2013 or November 2013 bubble, but broke in the 2017 bubble.
What happened in the end? How can an asset that has existed for five years suddenly become so popular? There seem to be several reasons, one of which is more efficient marketing during the bull market and the other is the lower price.
Ripple's main marketing point is always the adoption of businesses and large organizations. This is an excellent marketing story because no other currency can do this when it was born.
In addition, in 2017, the XRP army appeared on Twitter, and it was desperate to promote this token. Ripple Labs has also issued a number of press releases that, even if they are not related to XRP, can cause token prices to rise. A centralized company seems to be helping XRP marketing because it's easier to issue press releases and events, which leads to higher exposure.
In other words, by 2017, the Ripple Labs company has strengthened their marketing games.
From a technical point of view, Ripple is very central, it uses software calls to upgrade, and can't resolve the differences between different database states. However, the marketing of Ripple and the XRP army is masking this every day. The state of the art and marketing do not seem to require any adjustments.
Since then, other competing currencies have taken further action to create or commit to creating ecosystems in exchange for fully pre-excavated tokens. These tokens are equivalent to gift cards in stores. The store has not yet been built, and there are no products or services. It is only vaguely promised to open at some time in the future.
BCH and BSV vs. other bitcoin forks
Another competitive currency appeared in 2017, with airdrops for bitcoin holders. BCH is the first hard forked coin, but everything has not stopped. Between 2017 and 2018, Bitcoin Gold, Lightning Bitcoin, Bitcoin Private, and many other underperforming forks appeared – even though they have better technical characteristics. For example, Bitcoin Private inherits Zclassic's shielded transaction (from ZCash's trading model). Lightning Bitcoin promised a one-minute block time. Bitcoin Clean uses less energy, and Bitcoin Interest brings staking revenue to owners.
Why are these coins not comparable to BCH? The appeal of BCH is not in technical differences – such as larger blocks or no SegWit, but the marketing capabilities of Roger Ver, Calvin Ayre and Wu Jihan. Roger Ver used bitcoin.com's domain name to mislead people into thinking that BCH is bitcoin, and Wu Jihan once asked the customers of the Antminer series of mining machines to use BCH to pay.
"I made Bitcoin what it is today, I will let BCH do the same thing. – Roger Ver"
Although Roger Ver completely misunderstood his influence on Bitcoin, he had a correct assessment of his role in BCH. Marketing gives BCH a huge advantage over other forks. Roger Ver has invested heavily in sponsoring many conferences promoting BCH and bitcoin.com in 2018 (this type of activity is basically rare this year).
The split between BCH and BSV is another warning. The market value before the split is higher than the sum of the market values after the split. Disagreements in marketing have reduced overall efficiency and led to a decline in overall market value. Calvin Ayre and Craig Wright clearly have a certain marketing value for BCH, but BSV has taken away this value.
Technically, BCH has had a lot of problems and continues to release suspicious features. Note that like Litecoin, many of Bitcoin's design errors have not been fixed on BCH, although since August 1, 2017, many opportunities have been made in many hard forks.
Again, these seem to have nothing to do with BCH holders. Marketing outweighs all.
Why does competitive currency marketing work?
There is a benign feedback loop in marketing within the cryptocurrency circle, because people who buy tokens are more likely to sell to others through word of mouth than products. The specific incentives are such that the token holders do a lot of marketing, which is basically free. The creators of the competition coin euphemistically call these people their “community” and they help promote the competition without any fees. As a result, marketing funds invested in competitive currencies have received huge returns.
Therefore, the biggest factor in the valuation of competitive currencies is effective marketing and simple coordination. Ironically, as long as it is more centralized, the effect of competitive currency marketing will be better. It is no coincidence that Ethereum and Ripple are ranked second and third respectively by market capitalization. They have a strong centralization team, one is a foundation and the other is a company that specializes in marketing. As of this writing, BCH's market capital ranks fourth. The currency also uses Roger Ver as the marketing center, and Ver has a very valuable bitcoin.com domain name.
Over time, competitive coins that are not good at marketing tend to perform worse, even if they have a strong technical team to no avail. This includes Monero, ZCash, Grin and Decred currencies, and their teams have strong cryptographers and programmers, but it's hard to market effectively. There are also some competitive coins that have neither good marketing nor a good technical team, which is even worse.
Marketing is the means used by competitive currencies. The most valuable currency is almost exclusively created by marketing. In other words, demand is largely artificial. Technical efforts can easily be replicated, but funds on the market cannot. This explains why so many competing coins spend so much money sponsoring conventions, hosting parties, airdropping, buying online advertising and making charitable donations. The market value of a competitive coin often reflects the effectiveness of its marketing efforts.
Competitive currency trend
There are some obvious trends in popular competition coins. Most of the competition coins were born after the 2011 Bitcoin big bull market. Most of the competition coins will raise prices when they go online. This is the time when marketing is most needed. In addition, during the bitcoin bull market, it is also the easiest time to market to attract new investors.
The technical details of the competition currency do not seem to be that important. Considering that it is easy to copy a coin, there is no "basic" value for technology or functionality. In contrast, technology "characteristics" are more valuable to marketing. In other words, the value of a competitive coin lies in marketing.
The bull market also makes these currencies new through new marketing campaigns. They all caught up with the bitcoin bull market. Even during the bull market, if you stop marketing, the coins will still fail.
What does all this mean? This is good news for traders, because it turns out that the technology of competing coins is not important! Traders can trade competitive currencies based on market perception without having to spend time doing any due diligence on products that are difficult to understand.
However, for investors, this conclusion should be very harsh. Technical capabilities or application potential have nothing to do with price. The market value of the competition currency can only indicate how well the marketing department is doing, regardless of the quality of the developer, the reliability of the idea, or even the existence of the product. The popularity of a competitive currency does not prove its technical ability, product potential or return, and its popularity does not represent anything, except for marketing effects. The reality proves this.
The existence of marketing affects regular due diligence, so there are many scams in the competitive currency field. The lack of foundation, coupled with the huge role of marketing, makes fraud both profitable and virtually risk free. Therefore, many investors who do not make mistakes in late 2017 or early 2018 are now in deep trouble.
So which competitive currencies are scams and which ones are reliable? Given this very distorted incentive, the only reasonable approach is to treat each of the competing currencies as a scam until they prove to be not. We can only hope that the market will learn from the lessons ahead of the next bitcoin bull market.