Ray Dalio has a point, while BTC has a limited supply, there is no limit to crypto assets (alt coins) supply. I can create RobCoin on the internet right now, if I want. Concerned investors may ask themselves questions like, “what does the infinite supply of crypto assets mean for bitcoin?” or “Will another crypto compete with, and unseat, bitcoin?” TLDR: Do not confuse bitcoin with crypto assets. Bitcoin’s network effects make it the most powerful, secure, and scarcest digital store of value.
Bitcoin is a digital protocol for exchanging value, a non-state monetary commodity and an independent system of property rights (more detail HERE). The first component, the digital protocol, is easy to replicate. In fact, many crypto assets, like Litecoin, are forks in the bitcoin code whereby developers took the original code, made a few changes and spun out a new coin. But Litecoin is not bitcoin. Why?
Becoming a non-state monetary commodity and an independent system of property rights requires a lot more than just the protocol. Network effects are critical.
Most assets are useless without network effects. I need to know that other people will transact with the asset… otherwise what is the point of holding it?
Bitcoin has more than 10 thousand nodes, hundreds of thousands of miners and tens of million users. You can log onto an exchange in almost every country in the world and buy/sell bitcoin in a few minutes. That is an enormously powerful network!
Think about the other digital networks like Amazon, Google and Facebook. We gravitate towards the biggest networks because they’re the most useful. Privacy centric users might choose a different platform, or perhaps tech specialists will gravitate towards another, but these are niches rather than the norm. And if the smaller platforms achieve a critical mass, the bigger networks merely incorporate the new features, cannibalizing the upstarts.
Plus, there’s more to bitcoin’s network effects than branding, tradability and network utility…
Miners serve as transaction executors and node operators have validators. Bitcoin becomes more secure the more miners and node operators are allocated to the network. The more eyes on the network and the greater the computer processing power, the less likely invalid transactions become. So, bitcoin becomes more secure the bigger it grows.
It’s possible that a new crypto could generate bitcoin’s network effects, but its improbable. Network effects are difficult to create and long-lasting once entrenched. Think about it, where do new people to crypto go? They buy bitcoin because it’s the brand name and it’s the least volatile crypto (apart from stablecoins), and it’s the safest.
By contrast, smaller crypto assets have numerous security concerns because their hash power is lower (Here’s an interesting website from @lukechilds where he estimates network security across various cryptocurrencies https://t.co/FaD8AQvlXt). I’m not saying that other protocols have no value, but they aren’t as secure. And given my primary investment thesis is store of value in sound money assets I’m biased towards the most secure asset (read about that HERE).
There are thousands of crypto assets, and yet bitcoin continues to hold market dominance with 60% of the total crypto market capitalization and a far higher proportion of total hash power. The infinite supply of crypto assets is only a risk to those people who are fooled into trying to find the next bitcoin. I’m not arguing that there is no value in other coins. But investors need to appreciate what their strategy is and how they are going to achieve that. If you’re looking for a secure store of value, don’t look further than bitcoin.