Altcoins Use Bitcoin Ecosystem to Leapfrog Forward, Grow Faster

Anybody who was drawn to Bitcoin in the very earliest days might have been put off by one significant fact. Bitcoin’s biggest exchange, where they would likely go to purchase the currency, was bizarrely called: “Magic the Gathering Online Exchange,” or Mt. Gox for short. Anybody who was confused as to why they needed to go to a “Magic the Gathering” website to purchase Bitcoin probably just went ahead and closed their browser.

A nascent economy

Mt. Gox is just one example of the type of services (or lack thereof) provided during Bitcoin’s infancy. Eventually more reputable exchanges would come along, and sites like Coinbase would make buying Bitcoin quite simple. But these conditions took time to develop.

Before Bitpay and its ilk, merchants who wanted to accept Bitcoin had a difficult time doing so. Integration into their ecommerce platforms was extremely difficult, and they were constantly exposed to Bitcoin’s famous volatility. Eventually payment processors would come along that converted Bitcoin into fiat immediately, making Bitcoin acceptance much easier for traditional businesses.

Companies like Blockcypher would eventually develop APIs to help integrate Bitcoin more readily into various web services. The Bitcoin Investment Trust would make it easier to expose one’s traditional investment portfolio to Bitcoin via shares in GBTC. Still more companies have arisen to fill various other niches in the ecosystem.

There are now accountants who specialize in Bitcoin, lawyers who are experts on the subject and a litany of lobbyists who promote the interests of Bitcoin owners. Even more important, the media has reported time and again on Bitcoin and begun familiarizing the public with the concept of digital money.

The second wave

All of these companies and services add significant value to Bitcoin’s network by filling important roles in the ecosystem. Yet Bitcoin’s very success has paved the way for challenges from would-be contenders.

These so-called “altcoins” find that there is no need to reinvent the wheel. It took years for Bitcoin to gain the kind of traction needed for people to build Coinbase, Bitpay, Blockcypher and others. Yet a promising altcoin can usually be integrated into any of these services within weeks or months.

There is no need for altcoin investors to wait years and hope that savvy businesspeople will come along and build a quality exchange, or payment processor, or API service. Altcoins are able to very quickly capitalize on the work Bitcoin has done.

Bitcoin businesses, for their part, would be foolish to ignore the money that holders of the top altcoins can bring to their platform. Since these digital currencies don’t have to wait years for new companies to be built to service them, they are able to grow and mature much more quickly than Bitcoin did.

Lawyers and accountants who specialize in Bitcoin don’t have to relearn everything in order to assist customers with other forms of digital currency. Their expertise applies to altcoins just as well as it applies to Bitcoin.

Dash doesn’t have to lobby Congress for friendlier regulation. Neither does Ethereum, or Litecoin, or Zcash, or any of the other hundreds of coins in existence. Bitcoin has already cleared the way, and continues to do so.

Leapfrog

Many developing countries never bothered to build a wireline telephone network. There was no need. By the time they were able to fund such a project, mobile phone technology had already been invented. In this way, the developing world skipped decades of waiting for technological progress, instead advancing quickly to the present state-of-the-art.

The cryptocurrency world is advancing in much the same way. When Bitcoin developers create promising new code, it is quickly copied by eager altcoin developers. This happened recently, when Litecoin adopted Segregated Witness.

The technology was designed for Bitcoin by Bitcoin developers, but was actually deployed on Litecoin’s network before Bitcoin adopted it. Even though Bitcoiners did all the work, Litecoin benefited before Bitcoin did.

In the meantime, innovative altcoins continue to develop new features that Bitcoin can’t - or won’t - adopt for its own. Bitcoin is too big to take the risks that many altcoins can take. After all, it’s much easier to risk breaking a $100 million network than a $70 billion one.

Bitcoin’s biggest advantage is branding and network effects. There is no easy way to duplicate that. In every other way, expect altcoins to continue surging ahead as they take advantage of the smooth road Bitcoin has cleared.

Of course, there’s no need for there to be only one successful cryptocurrency. The market is almost certainly large enough for multiple currencies to succeed. In a very real sense, this sharing of code and services could be called “collaboration” rather than “competition.”