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Jaron Article #2

Coinsetter: Will a Better Virtual Currency Make Bitcoin Obsolete?

Building my first startup in the highly competitive online ticketing industry taught me a lot about who wins and loses in a changing environment. Many people in the tech world suggest that all you need to do in order to attract customers is to build a great product and users will naturally come. While building a great product is vital, it’s not the whole story. All around us, we see large, imperfect companies dominating their market while new entrants with theoretically better products never quite gain traction. Many entrepreneurs rely upon this “create a better product” strategy and never understand why users aren’t willing to leave their old product for the shiny new thing. With many people questioning if Bitcoin is the best implementation of virtual currency, I can already see parallels in comparing Bitcoin with other options. The answer to whether Bitcoin is the long term winner in this race is actually quite clear.

First, most people would admit that Bitcoin is not perfect. The 10 minute confirmation time is not optimal for quick transactions. The 51% attack is still a looming risk. Then there’s the huge amount of energy “wasted” in the mining process – not great from an environmental standpoint. I’m not the first person to point these issues out, and in response, many people have already released other virtual currencies that aim to improve upon the movement that Bitcoin has started. Litecoin, Ripple, PPCoin, Feathercoin, BBQcoin and others all claim to be a better virtual currency, and their proponents are just waiting for bitcoiners to flock over. BBQcoin is obviously the most delicious of the virtual currencies and way more delicious than Bitcoin, but what would need to happen for it to truly rival Bitcoin?

I think it helps to take a step back and ask why a lot of Bitcoin’s imperfections exist in the first place. These imperfections were not oversights by its core developers; they were expected byproducts of thoughtful decisions that they made. For instance, the 51% attack is only possible because of the extremely distributed nature of the mining structure that makes Bitcoin unstoppable by groups that would limit it. A system like Ripple reduces this particular risk and uses far less energy in the process, but by using trusted gateways as the basis for making confirmations, it is prone to government manipulation. Though I believe Ripple as a technology is needed and will be successful, I see its form inevitably becoming influenced by the government. Bitcoin companies will have to play ball with regulation, but the currency itself will hold its ability to force desired change in world.

Beyond imperfections, Bitcoin has an attribute that will solidify its place as the only viable virtual currency: Bitcoin’s use as an IP address for money. While closed payment networks will initially be apprehensive to accept Bitcoin transfers, they will find that they must accept out-of-network Bitcoin transfers or become obsolete. Within the next five years, almost all closed payment networks will have an input for your Bitcoin address, turning them into open payment networks that can accept money from anyone. However, you won’t find two inputs on these apps for your Bitcoin and Litecoin address. Bitcoin is the only virtual currency that has sufficient adoption to become the standard. If you want to know how this story unfolds, I encourage you to read the history of the Internet and TCP/IP.

Further solidifying Bitcoin as the only viable virtual currency, wider adoption will lead to increased switching costs. Once a company, product or in this case, a currency takes dominance in an industry, people don’t tend to leave it for something with low value improvements. This happens, firstly, because people find comfort in familiar things and don’t become compelled to try something new unless the benefit is overwhelmingly obvious. Bitcoin already has far wider adoption than any of its alternatives and has substantially more infrastructure being built around it. Second is track record. For as bad as a product is perceived to be, proven “good enough” reliability goes a long way against unproven alternatives. Bitcoin’s four years of success in the face of hackers and growing transaction volumes builds confidence. Finally, Bitcoin has very social roots. Given the value now associated with the word “Bitcoin,” it is very unlikely that another virtual currency will match its caché in the next five years.

So will a better virtual currency make Bitcoin obsolete? The answer is very clear to me. Bitcoin isn’t perfect, but it doesn’t have to be in order to fend off competitors and remain the world’s dominant virtual currency. An understanding of this notion presents an opportunity for people that understand it today. Until traders widely realize that Bitcoin is here for good, there will be a lot of untapped value in Bitcoin’s market price. The currency’s longevity will become obvious over time and be reflected in prices down the road, so eat your BBQcoins, sell your PPcoins, and go buy some Bitcoins before they’re back at $200!

About the Author

Jaron Lukasiewicz is the CEO and Founder of Coinsetter, a New York City-based company that offers a high performance levered trading platform for Bitcoin. Prior to Coinsetter, Jaron was the Co-Founder of Ticketometer, a social media-focused online ticketing platform. Previously, Jaron was an Associate at The CapStreet Group, a Houston-based private equity firm; an investment banker at J.P. Morgan and Madison Williams in their global investment banking groups; and began his career as a summer analyst at SPB Partners, a Las Vegas-based private equity firm.

Jaron graduated from Rice University on the President’s Honor Roll with a Bachelor of Arts in Economics and is fluent in Spanish and Portuguese. He is a frequent speaker at events on the topic of Bitcoin and financial technology and has been featured in The Wall Street Journal, Bloomberg, Fox Business News, TechCrunch, Mashable, Entrepreneur, Forex Magnates and other news media.

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  • Colin Dean

    There doesn’t have to be one winner. Competition among currencies strengthens them all, at the cost of a little bit of sanity on the part of the user. Systems like Ripple may be necessary in the future in order to quickly exchange Xcoin for Ycoin when someone finds a vendor that doesn’t accept one, but any of a host of other digital currencies, each with their own reasons for a vendor to choose them. Vendors who don’t have a preference would foreseeably choose one nearby vendors choose, or one that their own vendors choose.

    We’re still at the very start. Bitcoin is the forerunner, the trailblazer, but we’ll be using something else in 100 years, something with all the advantages and more, and none of the disadvantages.

    My advice to the bystander? Take $X and put half in Bitcoin, 1/4 in Litecoin, 1/8 in Ripple, 1/16 in PPCoin, 1/32 in Feathercoin, and the rest in SPY and see what happens over the next 25 years.

    • anon

      I agree with Jaron, 100% bitcoin for my fiat but I’ll take free ripples or other alts when offered.

    • DigitalAndroid

      Ripple is a legitimate competitor to Bitcoin, but Lite/Feather/BBQ-Coin? I don’t think so. These are basically Testnets that adjust one or two parameters in Bitcoin, and form a parallel network, incompatible with the main network.

      The only reason they’re even on the radar is that those holding them are promoting them heavily with claims of questionable accuracy.

    • Rassah

      Sure, we’ll be using something else, but most likely that something else will still be Bitcoin, with all the improvements that other alt-coins proposed, tested, and succeeded with.

  • Androklis Polymenis

    Something you must consider: as fast as Zerocoin gets launched or it is added on another alt (BTCFoundation not happy in adopting this idea) SilkRoad and the whole black market will switch to it – in a matter of hours: “The King is dead – Long live the King!!!”…
    Anonymizing BTC is 100000% crucial for it becoming Alpha version from Beta.

    As for the security & reliability: just fork bitcoin…

    • Rassah

      From my conversations with Gavin, he didn’t seem opposed to the idea of Zerocoin. He just thinks there may be better, more efficient methods of anonymizing coins, such as with combined and mixes transactions.

      • Androklis Polymenis

        Sure, but I think it is towards the bottom of their TODO list, could be wrong though (which I wish).

        Bitcoin MUST get more stealthy and maybe add P2P exchange functionality (like a what Ripple should be version)…

        • Rassah

          It’s not at the top, I know that. Gavin said his top priority, that he will be working on full time over the next few months, is getting multi-signature stuff implemented. Specifically so that you need two devices to sign transactions and spend coins. He believes the top priority right now is security and making bitcoins harder to steal, which I kinda agree on. We MUST get Bitcoin secure enough to be used by common, non-techie, windows running and trojan downloading folks.
          After that, the second-to-top priority is still improving the blockchain database. They still have to implement the second smaller DB that only stores transactions relevant to your addresses, so that you can start using your Bitcoin wallet as soon as you download the client, while it continues to download the 8gig blockchain file in the background.
          I am guessing with things like Zerocoin and anonymity, he’s happy to let others develop it, and have it implemented when it’s ready. He definitely wasn’t hostile to the idea. So if you want Zerocoin, don’t bug Gavin, bug the Zerocoin devs, and have them stick it on the testnet to give it a good bit of testing.

    • inteblio

      Nope, de-anoymizing bitcoin is key for it’s future. Bitcoin has to be taxable, and transparent, otherwise it’s doomed to be smoked late-night in crack-dens. Bitcoin has to wear a shirt, swear allegiance to the American flag and never say naughty words in front of it’s mom. Then it’s worth a thousand dollars a bitcoin, and can absolutely revolutionise the way the world “does money”. Kids that did drugs and had knives in school = loosers. Kids that studies maths = stood a chance to get a happy family. Bitcoin that took the bad road = fail, bitcoin that comes clean = lets do it. Zerocoin? I wanna hang out with the cool kids? They ain’t so cool when they’re 50.

  • Rassah

    Summary of article: “Network Effect” – Bitcoin has it.

  • inteblio

    New things have to be 10x better than the last. Bitcoin is 10x better than cash + online banking. What is 10x better than bitcoin? it’s not litecoin etc. Bitcoin’s got a few years yet, but hard battles it must face.

  • Atoshi

    There doesn’t have to be just one winner. Bitcoin’s value is it’s first mover advatage and the resulting network effect. But other coins could add other new features or security enhancements (proof of stake for added security, anonymity, etc) and find strength from those features. Some features would likely be difficult or impossible to find consensus to integrate into Bitcoin (adding Proof of Stake, changing the block time, etc). Or maybe people will want to try coins with different initial distribution curves or experiment with different economic systems (1% inflation to miners, etc).

    Fortunately, services like Bitpay exist and don’t have to be just a *Bitcoin* merchant service. They can be a *cryptocurrency* merchant service for a few of the bigger coins and add a dropdown to let the customer choose BTC, LTC, etc. This will help with the network effect for any innovative BTC-inspired chain to come as well. (Hopefully Bitpay sticks with just a handful of well-adopted coins to limit confusion for customers and not give value to the obvious junk coins out there.)

    In the end, we all win though by having competing currencies. Because despite the junk coins out there, we also get some true innovation (e.g. proof of stake) and diversity. That diversity should bring strength to the entire ecosystem. Personally, give me one with true anonymity and I’d use it instead BTC in a heartbeat.

    I love bitcoin. But more accurately, I love what Bitcoin represents (freedom & privacy) and the innovation that Satoshi brought via p2p finance. Bitcoin was the first. It doesn’t have to be the last or only.