November 27, 2022

Jimmy Song on the assessment of altcoins

Altcoins are fundamentally different from Bitcoin, and valuation models developed for Bitcoin completely unsuitable for altcoins. What does the cost of altcoins come from? Why do altcoins have any value at all? Do altcoins bring valuable new technical features? Are buyers of these tokens hoping for a gradual transition of projects to a decentralized organization? What made Litecoin successful, while the earlier and very similar Fairbrix failed? Why did many coins with a large volume of preliminary mining (like IxCoin) fail, and Ethereum succeeded? How can these examples of relative success and failure be explained? Jimmy Song, a developer, entrepreneur and influential participant in the Bitcoin community, gives his answer to all these questions.

Bitcoin has value because itdecentralized digital money. It has an ever-growing Stock-to-Flow coefficient (the ratio of stocks to growth) and the scarcity provided by a highly reliable monetary policy, which a physical asset simply cannot have. In addition, Bitcoin is the Schelling point for the crypto market and has security, which is an extremely expensive task to break, and a history that no other crypto asset can compare with. Some new studies suggest that the ratio of stocks to growth is a universal cost criterion for bitcoin, which makes sense because of the truly decentralized nature of Bitcoin.

Altcoins have a different story. They do not have the crucial innovation that Bitcoin has: decentralization. This means that altcoins are fundamentally different from Bitcoin and, in fact, closer to fiat money. Their central points of failure can be used - and used - by external forces to establish influence or even control over the network. It is because of centralization that the stock-to-growth ratio model does not work for altcoins at all, unlike Bitcoin. So what is the value of altcoins coming from? Why do altcoins have any value at all?

The myth of technical innovation

Talk to any altcoin holder and hewill inevitably tell you that his coin has one of the most interesting sets of technical specifications. They claim that it is this coin that is capable of revolutionizing a certain industry by doing something such that their tokens will increase in value, usually through some kind of ornate incentive system for network members. The hope of coin owners, of course, is that their coin, thanks to its innovative functionality, will become the “next Bitcoin” and Schelling's new point for the global monetary system.

However, counting on it means giving outwishful thinking, and any token holder of previous candidates for the throne will confirm this to you. From Feathercoin to Auroracoin or Steem, there were a lot of coins that offered some kind of perceived technical advantages, but didn’t even manage to stay afloat, not to mention claiming to be the “new Bitcoin”.

Technical Benefits of Altcoins Mayinclude such characteristics as a shorter interval between blocks, proof-of- (something else-except-work), changes in hashing algorithms, monetary policy, increase in block sizes, promises of privacy, estimated usefulness for a particular service, the solution of some problems of some of the industries and so on.

All this at best is self-deception andan attempt to pass off wishful thinking as the community of all these coins is made up of demoralized and / or deceived token holders who continue to cherish the hope that someday their altcoin will miraculously be able to take the place of Bitcoin. Technical “innovations” often turn out to be extremely undesirable (like Turing-complete smart contracts), or even openly fraudulent (Bitconnect), but even those few altcoins that have some advantages are so hopelessly stuck in a quagmire of poorly designed incentive systems that are hardly capable of solving at least some of the problems of the real world.

In short, technical innovations in altcoins- it is almost always a complete failure. True innovations find their market. But these altcoins failed to find real users to achieve their stated goals, and only a very few of them increased at least some real amount of anything.

Since the source code of most altcoinsopen, copy it, change several parameters and create a technical clone is quite simple. If technology or functionality were the basis for the value of altcoins, the technical clones of existing coins would have significant value. However, this is not so, which suggests that the technical characteristics of altcoins are not an explanation of their value.

No, altcoin having some value is not distinguished from not possessing at all by technical innovations, but something completely different.

History of Litecoin and Fairbrix

A history of benchmarking altcoinsstarts here because Fairbrix and Litecoin are very similar projects. They have the same consensus mechanism (proof-of-work), launch date (2011), and even one creator: Charlie Lee.

Both of these altcoins came from Tenebrix,launched in 2011 and having the same PoW algorithm, Scrypt and a slightly shorter block interval compared to 10 minutes of Bitcoin. The crypto community then did not accept Tenebrix due to the large volume of preliminary mining, which prompted Charlie Lee to create a fork from Tenebrix, Fairbrix. Just like Zclassic, who broke away from Zcash much later, Fairbrix was a complete Tenebrix clone, but without premining.

The strange world of altcoins

Fairbrix, of course, ingloriously sunk into oblivion, and herehere we are in full splendor is Charlie Lee's strategy: he took all the same properties and created a new coin, Litecoin, this time more successfully approaching branding. He further reduced the interval between blocks - from 5 to 2.5 minutes, - fixed several bugs and came up with a much better marketing line for the new coin. As Charlie Lee himself has said many times, his most successful find over the years was the catchy slogan that he came up with for Lightcoin: digital silver compared to digital gold Bitcoin.

From a technical point of view, Litecoin is almost notdiffered from Bitcoin. The only significant difference was in the implementation of the proof-of-work algorithm, which was copied to Litecoin from Tenebrix. Scrypt integration efforts could not be called successful development. For example, block hashes in Litecoin are indistinguishable from transaction hashes. In Bitcoin, this is not so: block hashes always start with a bunch of zeros, which makes them easily distinguishable. In addition, none of the small bugs in the Bitcoin code were fixed in Litecoin, like an error of an unaccounted unit in OP_CHECKMULTISIG or a 4-byte timestamp. Litecoin, in essence, was a Bitcoin clone with a few minor changes and good marketing.

In 2011, many coins were created thatultimately did not survive, including IxCoin, SolidCoin, Geistgeld, or close relatives of Lightcoin, Fairbrix, and Tenebrix. In the eyes of many, pre-mining, which is condemned by a large part of the community, is a mortal blow to marketing, however, as Fairbrix's experience shows, the lack of mining in itself also does not guarantee the success of the coin. Litecoin owes its popularity primarily to smart marketing, and the technical features had little to do with its success.

But why did these coins appear just whenhave appeared? Mid-2011 was the time of the formation of the first major bubble in the Bitcoin market, the price of which for half a year rose from $ 1 to $ 30. All the coins mentioned above began to enter the market starting in August of that year, shortly after the Bitcoin bubble burst. Similar periods of active entry into the market of new coins could be observed with subsequent bubbles, in 2013 and 2017.

Counterparty, Mastercoin and Ethereum

Fast forward to 2013, where we becomewitnesses of the emergence of a new group of altcoins. Mastercoin launched that summer, then, a few months after it, Counterparty, and in early 2014, a preliminary sale of Ethereum tokens was held. All three projects had a similar concept: a platform for launching new tokens. Mastercoin was probably the first to pre-sell tokens before building at least some product, later it was called ICO. The pre-sale of Mastercoin tokens was held in the summer, shortly after the April 2013 Bitcoin bubble. For years, this token has been trading in a rather narrow range - we had to wait for the pump until 2017.

“When will you finally take the initiative?” “When will you command me, sir!”

Counterparty was a response to the Mastercoin project, butwith burning bitcoins, instead of donating them. Bitcoins had to be sent to the address that exchanged them for XCP tokens, subject to some cryptographic operations. Counterparty launched a few months after Mastercoin.

Interestingly, after the Ethereum ICO in 2014, everythingEthereum’s proposed new technical capabilities associated with the use of the specially developed programming language Solidity have been added to Counterparty. Ethereum in response demonstrated that the Counterparty smart contract platform can be easily implemented on the Ethereum blockchain. In essence, the functionality and capabilities of these two coins coincided almost completely.

What made Ethereum much more successful thanMastercoin or Counterparty is an unprecedented marketing campaign that accompanied the pre-sale of its tokens. Not only did the record amount (30,000 BTC) be raised at the ICO, they managed to present their large-scale premining to the general public in a positive way, as a way of financing further product development and marketing initiatives. As Vitalik himself said, he managed to make preliminary mining acceptable in the eyes of the community, unlike many 2011 coins.

@VitalikButerin: Personally, I am proud that I was able to set a precedent and contribute to the legitimization of small premining. This is a terrible idea that only those who work with boxes devouring a huge amount of electricity should profit from crypto seignorage.

I don’t know how it is in Vitalik’s universe, but in my 67% it can’t be called “small” mining.

Thanks to marketing, pre-sale ETHwas so successful that all previous tokens against its background began to seem dwarfs. And, with huge functional similarities with the same Counterparty, in the bull market of 2017 Ethereum again surpassed all competitors.

Say that at the time of the launch of Ethereum forany rational investor, such a prospect seemed utter madness, it would still be a very restrained assessment. The complete lack of protection of investor rights at the stage of pre-sale of tokens and the wild volume of pre-mining (72 million ETH) in the eyes of many made Ethereum completely uncompetitive. I must also say that during the one and a half years that went into creating Ethereum, his team experienced problems with financing, and the launch of the project was accompanied by several resonant delays.

From a technical point of view, there are so many Ethereumshortcomings that for the so-called Ethereum 2.0 it is planned to completely rebuild the entire network infrastructure! During its existence, the project faced numerous and well-documented problems, from “hacking” DAO to a bug in Parity wallets and the lack of a checksum for ETH addresses. However, all these problems were largely ignored by the market. Ethereum’s technical realities do not seem to matter much to investors.

In other words, Ethereum managed to overcome all theseproblems only due to what can only be described as incredibly effective marketing. In a way, Ethereum set a precedent for all of the subsequent coins that raised billions without writing a single line of code, and without any protection for investors. In addition, he showed that even hopelessly insecure systems can develop only through sufficiently effective marketing. For altcoins, marketing is paramount.

Curious Ripple Case

Launched in 2012, XRP became the first token with100% premining. Interestingly, the token's capitalization did not exceed a billion dollars until 2017, when in the wake of the bull market in Bitcoin, it reached its peak at the peak of $ 127 billion right away. Somehow missing the bitcoin rally in April and November 2013, in 2017 XRP suddenly soared.

What happened? Why did an asset stomping around the same level for five years suddenly become so popular? It seems that there were two reasons: more effective marketing during the period of the bull market and low cost of the unit of account.

The main message of Ripple marketing has always beenXRP is a coin for corporations and large financial institutions. It was a great move: no other coin then built a marketing strategy this way.

In addition, formed by 2017The XRP Army has been relentlessly promoting the coin in social networks all year. Ripple Labs also published many releases, which, even if not directly related to XRP, contributed to the rise in the price of the token. Positioning XRP as a token for corporations seemed to be quite convenient for conducting marketing campaigns, since it was much easier to send out a large number of press releases with announcements of ongoing or only planned partnerships, which significantly increased the public presence of the project.

Technically speaking, Ripple is extremelycentralized, with mandatory software updates and the lack of ways to resolve conflicts in database conditions. However, the massive Ripple marketing campaign and support for the XRP Army overshadowed all of these shortcomings. Technical realities and marketing, it seems, may be completely unconnected.

After Ripple, new projects went even further.creating (or only promising to create) ecosystems in exchange for 100% premining of tokens. These tokens were akin to gift cards of a store not yet built - the projects did not have ready-made products or services and only promised to make them someday.

BCH / BSV and other BTC forks

2017 brought us another class of altcoins,served as an “airdrop” (free token distribution) for all Bitcoin holders. BCH was the first such hard fork, but the story did not end there: after it appeared Bitcoin Gold, Lightning Bitcoin, Bitcoin Private and many other, even less successful, Bitcoin hard forks. This is despite the fact that many of them have the best technical characteristics. In Bitcoin Private, for example, support for secure transactions is implemented, as in Zclassic (to which, in turn, they switched from Zcash). Lightning Bitcoin provided a minute interval between blocks. Bitcoin Clean requires less energy, and Bitcoin Interest allows coin holders to earn money on PoS mining.

Why do flies even sit on something like that? .. Rats should be ashamed to fall into such a trap ... Bears, this is just funny! ..

Why are all these Koins turned out to be lesssuccessful than bch? The relative success of BCH is provided not by technical features, block size or lack of SegWit, but by the marketing capabilities of cryptocommunity figures such as Roger Ver, Calvin Eyre and Cihan Wu. Roger Wer owns the domain name bitcoin.com, and this alone is quite capable of confusing a significant part of the new users who will take BCH for Bitcoin, and Cihan Wu at some point demanded that the buyers of the popular Bitcoin miners of the Antminer series pay with BCH.

“I made Bitcoin what it is now, and I will do it again for Bitcoin Cash,” Roger Ver.

Of course, Roger Ver, to put it mildly, stronglyexaggerating the degree of his influence on Bitcoin, however, he is quite right about his role in BCH. Due to powerful marketing, BCH gained a huge advantage over other hard fork coins. In 2018, Roger Ver spent a lot of money sponsoring numerous conferences organized to promote BCH and bitcoin.com (in 2019, this activity was almost completely stopped).

Separation into BCH and BSV is anotherAn instructive story, since the market capitalization of Bitcoin Cash before the hard fork was higher than the combined capitalization of the two coins after it. Separation of marketing initiatives reduced their overall effectiveness, which led to a decrease in total capitalization. Calvin Eyre and Craig Wright obviously had a certain marketing value for BCH, which has now shifted to BSV.

From a technical point of view, BCH has manydocumented problems and continues to introduce dubious functions. Please note that, as in the case of Litecoin, many Bitcoin design errors - such as an error of an unaccounted unit in OP_CHECKMULTISIG or a 4-byte timestamp in the block header - have not been fixed, despite the wide possibilities opened up by many hard forks made since August 1 2017 year.

And again, none of this seems to matter much to BCH holders. Marketing outweighs everything.

Why altcoin marketing works

Cryptosphere marketing has a stronga positive feedback cycle, since everyone who buys a token is inclined to talk about his network of contacts, and such a “word of mouth” with cryptocurrency tokens works much stronger than with any other product. The incentives are such that the holders of a certain token provide him with quite active additional marketing. The creators of altcoins neatly call such people the "community" (or community) of the project. Thus, the money spent on altcoin marketing brings, one might say, enhanced returns.

“Of course, he thinks of another woman.”.

Consequently, the most important factor for highaltcoin valuation is effective marketing and, to a lesser extent, coordination of efforts in this direction. The irony is that the more altcoin is centralized, the better it will cope with this task. It is no coincidence that Ethereum and Ripple have the second and third largest capitalization among cryptocurrencies. They have strong centralized teams: in one case, Foundation, in the other, a corporation that stands out for effective marketing. BCH, which ranks fourth in market capitalization at the time of writing, has the same centralized marketing built around Roger Vera, who also owns a very valuable bitcoin.com domain.

Altcoins that aren’t so good at marketing,even having a strong technical team, as a rule, show weaker results. This group includes projects such as Monero, Zcash, Grin or Decred, each of which has strong cryptographers and programmers on staff, but cannot boast of effective marketing. However, altcoins feel the worst of all, having neither good marketing nor a strong team of technical specialists.

The main component of altcoin success iseffective marketing. The most highly valued projects on the market managed to create a demand for their tokens almost exclusively by means of marketing. In other words, this demand is largely artificially created. Technical approaches can be easily copied, but the marketing budget is not. This also explains why many altcoins spend so much money on sponsoring conferences, parties, airdrops, online advertising and charity events. Coin capitalization, as a rule, reflects the effectiveness of its marketing strategy.

Altcoin Trends

In the market of popular altcoinsseveral clear trends. Most altcoins, starting in 2011, were created immediately after the large-scale Bitcoin rally. Most of the altcoin pumps coincided with the bull markets of Bitcoin, that is, with those periods when it is easier to conduct effective marketing campaigns and new money comes to the market.

Technical features of this or that Koin,don't seem to matter much. Given how easy it is to clone coins, technology or functionality is not the basis of their “fundamental” value. Instead, technical features are more valuable in terms of marketing. All this suggests that the main reason. according to which altcoins have any value, is marketing.

- Thanks sir! Can I have one more?

Bull markets also extend the life of these projectsthrough the influx of new money into the crypto sphere and the possibility of resuming marketing initiatives. All altcoins go in the wake of the Bitcoin bull rally. And even during these rallies, altcoins will still fail if they stop paying enough attention to marketing.

Conclusion

What are the practical conclusions from all this?to do? Well, this is good news for traders, since it turns out that the technical component of altcoins does not really matter much! Traders can boldly follow their understanding of the market situation without worrying about the fundamental analysis of difficult to understand products.

For investors, such a conclusion shouldbecome extremely unpleasant. The technical competence of the team or the potential for use have practically no effect on the price of the token. The market capitalization of altcoins speaks only about the quality of work of their marketing departments and nothing fundamental about the coin itself, such as the quality of the development team, the idea or even the existence of the product. The popularity of altcoin cannot be considered an indicator of the technical competencies of its authors, the potential of the product or the profitability of the token for investors. Practice shows that the popularity of altcoins does not say anything at all, except for the effectiveness of marketing.

As a result of this possibility, the meanscompetent marketing to overcome the resistance of normal examination and fundamental analysis, a large number of fraudulent projects arose in the altcoin market. This combination of the lack of reliable fundamental indicators and the exaggerated role of the marketing component increases the profitability of fraud and makes it almost risk-free. As a result, many investors who entered the cryptocurrency market in late 2017 - early 2018 today suffer huge losses.

Which altcoins are considered honest and which arefraudulent? Given the greatly distorted incentives of the participants, the only reasonable solution seems to be to treat any altcoin as fraudulent until proven otherwise. And we can only hope that the market will learn a lesson before the next Bitcoin rally begins.