Another crypto bubble and the rise of altcoin markets - a story in 9 charts

The crypto markets seem to be in another bubble, orders of magnitude bigger than the last. However, this time a lot of the money is flowing into altcoins interestingly enough. How this situation will play out and where the market will stabilise at will be a really interesting story to watch unfold - whether Bitcoin will re-capture the market, or will some other crypto take its place. I would like to take this time to go over some of the history that brought us here however, as it's also a fascinating tale (if you like graphs).

Here is a short version of the story, in one graph by Woobull:

Bitcoin network congestion, market dominance, and altcoin marketcap, by Woobull.

This is a cautionary tale for Bitcoin, but before we can really talk about how Bitcoin might be impacted, we have to talk about some altcoins. So strap yourself in for this whale of a tale in 9 charts...

Story leading up

The story of this bubble really starts around 2015, when some Bitcoin core developers wanted to address the network congestion they saw coming in Bitcoin. This was the start of the Bitcoin scaling debate that gave rise to BitcoinXT, Bitcoin Unlimited, SegWit, UASF, etc. The writing was on the walls - if Bitcoin continued to grow in popularity, soon the blocks would be full and we would have to deal with the consequences. Two years have passed, and no consensus has been reached, thus priming us for the current events.

Bitcoin Unlimited Rally

The bubble proper was started by the disagreement on how to scale Bitcoin. At the moment, there were two major solutions being proposed to address the issue - SegWit and Bitcoin Unlimited. Perhaps tired of waiting for consensus to emerge, perhaps prompted by Roger Ver's ambitions, Bitcoin Unlimited started to rally people behind its hard fork. Those came in two main waves - around October 2016, and March 2017, increasing both node count and number of blocks mined.

Bitcoin Unlimited node count

Bitcoin Unlimited mined blocks (green)

The fact that Bitcoin Unlimited was gaining momentum, coupled with rumours of a planned 51% attack to cull a network split made serious waves in the community. We were faced with a real possibility that the network will fork and perhaps split. Every major player was taking sides in the discussion, and the tensions kept rising. The problem got exacerbated by the Covert ASICBOOST scandal. If Bitcoin had a doomsday clock for the network splitting, it would probably be uncomfortably close to midnight.

With the uncertainty of Bitcoin's future and the rising tensions, other events started to take place.

Rise of Ethereum

2016 has been a bit of a rollercoaster for Ethereum. The year started at a sub-dollar price per ETH, reached about 20 USD/ETH due to The DAO, then slumped to about 7 USD/ETH after its hard fork and network split. The new year started on a positive note with a roadmap for the future of Ethereum. ETHs were sitting comfortably at #2 market spot by market cap, increasing a bit with Bitcoin price increases (1, 2, 3, 4) as you'd expect in a calm market.

Then March came along. Bitcoin Unlimited started gaining popularity, and the fear of a potential Bitcoin network split started shaping the market. While historically Bitcoin has been seen as the stable gold standard among cryptos, the safe heaven you'd park your money at if you didn't want to cash out into fiat. However, with the future of the network being uncertain, some people decided to move their wealth elsewhere.

March was the month where Bitcoin slumped and Ethereum was there to pick up the money moving away (1, 2, 3, 4). You can practically see the ~21B USD market cap shifting gently towards Ethereum, giving it a boost from 1.6B USD to 4.6B USD in that month, while Bitcoin went from 20B USD to 15B USD.

Bitcoin price chart

Ethereum price chart

In April the Bitcoin situation started to calm down. Bitcoins started to recover along with their market cap going back to 21B USD by the end of the month (1, 2, 3, 4, 5). However, another important development started brewing elsewhere...

Litecoin and SegWit

Litecoin has always been "silver to Bitcoin's gold", its shadow. Sometimes outperforming Bitcoin price increases percentage-wise, but rarely making a big splash overall. Seeing Bitcoin stumble with its scaling solutions, it seized on the opportunity to make a name for itself.

What is important to remember, is that Litecoin can be classified as a "copycoin" - a cryptocurrency largely operating similar to Bitcoin, on a pretty similar codebase with minor tweaks. It's so similar, that by chance or negligence, Litecoin's multisig addresses have the same prefix as Bitcoin. Copycoins in general operate on hype and innovation (real or manufactured) - there are so many similar coins that if you don't stand out from the crowd, you're going nowhere.

While Litecoin did not have the network congestion issues of Bitcoin, it still decided to improve its network and push for SegWit adoption. While it looks like the process started in February, there was a considerable rally for SegWit in late March, as indicated by the sudden jump in SegWit blocks and market activity.

Litecoin SegWit adoption

Litecoin price chart

The process was spearheaded by Charlie Lee, the creator of Litecoin. A notable opposition to the SegWit progress were Bitmain and Antpool. Supposedly they were blocking Litecoin's SegWit activation to prevent further SegWit adoption on the Bitcoin blockchain, where they are allegedly profiting from Covert ASICBOOST. After a long ordeal, Litecoin finally locked in and activated SegWit mere days ago.

There have been some other altcoins that also followed Litecoin's SegWit adoption, but their stories aren't that interesting.

The price also reflected that - going from under 5 USD/LTC at the start of the year with about 220M USD market cap, to a high of 35 USD/LTC and 1.8B USD market cap in the recent weeks. While this would normally allow it to take #3 spot on the crypto market cap list, another network had a meteoric rise that came largely out of nowhere...

Rise of Ripple

Ripple has had a mixed reputation in the Bitcoin community. It's the oldest and one of the most prominent Crypto 2.0 networks. It has been caught the ire of bitcoiners in 2013 for being seen as "pro-regulation" during US Senate hearings, declared dead in 2014 (Bitcoin has been declared dead over 100 times now), has been fined by FinCEN for Bank Secrecy Act Violations, etc. Ripple Labs have developed essentially a competitor to its own network - the Interledger Protocol.

However, more recently it looks like the company is going back to its roots and focusing on the Ripple network. It stated publishing quarterly market reports on XRPs and talking about its plans for the future. There are more and more news about various banks using its network. All in all, it looks like the market has warmed up to the currency:

Ripple price chart

While we see a small blip on the chart in early April when it crossed 1B USD market cap, the currency started to enter a meteoric rise around the start of May (1, 2, 3). The year started with a market cap of 220M USD and a price of 0.006 USD/XRP, while currently it sits at 8.4B USD and 0.22 USD/XRP.

Now, let's look at how this all comes together.

Market dominance

At the time of writing, we this is how the market looks like:

#1 Bitcoin - price: 1813 USD/BTC, market cap: 29.6B USD
#2 Ripple - price: 0.22 USD/XRP, market cap: 8.4B USD
#3 Ethereum - price: 90.8 USD/ETH, market cap: 8.3 BUSD
#4 Litecoin - price: 29.6 USD/LTC, market cap: 1.5B USD

Total market capitalisation of all coins: 55B USD, of which 25B USD are in altcoins. This means Bitcoin's market dominance is under 55%, while at the start of the story, it was about 85%:

Market dominance

Bitcoin has historically been the "gold standard" for crypto. The market leader, the first mover, the biggest whale. However, it seems like in this market if you're standing still, you're moving backwards.

Since the start of our story, Bitcoin has periodically dipped in its price, but overall we're seeing all-time high price. The recovery was probably due to people worrying less about the potential network split that might come from Bitcoin Unlimited. Bitcoin is certainly stronger than ever, but there might also be blood in the water - despite the price of bitcoins rising, so too did the altcoin markets grew in leaps and bounds.

Whether this bubble we're in right now (and it certainly has the look of a bubble) will pop hard and the market will rebound in Bitcoin's favour, or whether a new paradigm will be made where bitcoins play less of a dominant role, only time will tell. It is very unlikely Bitcoin will ever sink too deep into the coin list, but if the scaling stalemate continues, Bitcoin's advantage will be eroded over time.

For years one could easily dismiss altcoins as being a fad, nowhere near as mature as Bitcoin. But at some point you have to realise you might have to compete for your top dog spot. We're living in a market that is used to exponential growth, and Bitcoin's market cap is "only" two doublings away from its next competitor.

Conclusions

We are probably in the biggest crypto bubble to date. Not only has once again reached its all-time high price recently, but the altcoins have also grew by leaps and bounds.

In the near future, I would expect some large contraction, especially in the alt market. Litecoin will probably dip back down now that SegWit is activated and its rally is over.

It will be interesting to see where the money will flow if the value of bitcoins will pop - whether people will be cashing out to fiat, or altcoins.

The biggest threat for Bitcoin is still the scaling issue - if that's not dealt with soon, the issue might just go away... along with many Bitcoin users that will switch to some of the alternatives.

On the subject of altcoins

Recently I created a FAQ/Guide for /r/Bitcoin and I was asked to expand it by adding information on altcoins and their merits. Since such a discussion is a big subject onto itself, I decided to devote a whole blog post to this.

If you want the quick and easy version - if you are starting your adventure with Bitcoin and crypto-based currencies, stick with Bitcoin and don't look at other currencies. Most of them exist only to speculate on their value and don't offer anything in return. All the technical innovation is happening in the Bitcoin space, all the merchants are there, this is where you should focus your attention. Come back here once you feel confident in operating in Bitcoin securely if you want to learn more.

Getting dirty

Now, lets quickly talk about a few characteristics of Bitcoin:

• Bitcoins are very divisible. Currently 1BTC can be divided up to 8 decimal places. This means that Bitcoin can handle very very small transactions (at the current price of about $1000/BTC, we are talking about the precision of 0.001 cent). If the need arises, this precision can be increased further. There will always be enough units of account to handle even the smallest payments in Bitcoin.
• The way Bitcoin operates is very wasteful, but it is pretty much the only way such a system can operate. Bitcoin solves two very hard problems - decentralized money creation and decentralized money transmission. Both of those problems are easy to address for centralized currencies, but the decentralized nature of the system requires the process of block mining. As discussed previously, this means that bitcoins have an intrinsic value, since they cost money to create.
• Because of the high cost of mining involved, any attack on the Bitcoin Network is very costly. Anyone trying to steal bitcoins through the means of double-spend or Finney attack will have to overcome the entire Network working against them.

There are many misconceptions being spread around that try to fool people into thinking that altcoins solve those problems. Let me address some of the more popular claims.

You need coin X to allow for small transactions

No, you don't. The Bitcoin Network is capable of handling transactions with 0.00000001BTC precision and the blocks are big enough to handle the traffic. You don't need an altcoin to handle small transactions or more transactions.

You should look into coin X - you can mine it and make a lot of money!

There is no easy money to be made. Mining bitcoins is a specialized industry where one needs to invest a lot of money to be competitive on the market. Mining altcoins is hoping that your small effort is in fact big and will make you rich. Again, mining is wasteful - unless you have the right equipment for the job, it will cost you more in electricity and computer parts than it will earn you. Unless you know what you are doing, there is no money to be made there.

Coin X has blocks generating Y times faster than Bitcoin, this means that your transactions are Y times faster!

No, not really. The amount of computing power behind Bitcoin dwarves any altcoin. At the current time getting 1 confirmation is enough to secure most commercial transactions. The hassle of someone trying to scam you while buying coffee from you is not worth it. In most cases seeing a transaction appear in your client with a proper fee will be enough to transact - altcoins don't offer any advantage here.

Buy coin X and diversify your portfolio!

Bitcoin is not a system set in stone. If there will be an important problem or security vulnerability Bitcoin needs to address, it can change itself to keep up with the world. This means that unless Bitcoin fails abruptly (for example someone suddenly discovers a major vulnerability in ECDSA algorithm and can steal everyone's coins), its failure will mean that other altcoins will fail as well. If government cracks down on Bitcoin, other coins will follow. If the Internet is shut down and Bitcoin Network dies, other coins will follow. Diversifying into altcoins will not save your portfolio.

And remember...

If someone claims their altcoin is really something, take a look at the list of all cryptocoins. There are hundreds of them. Almost all of them without merit.

The exceptions

There are a few altcoins that have a merit of their own. I would not recommend them to anyone starting with Bitcoin, but they deserve a mention as an exception to some of the rules.

TestNet Bitcoins

I think this quote of mine explains TBTCs well:

"TestNet coins are worthless, but useful. They are useful because they are worthless. If you will add value to them, they will be useless, therefore worthless."

TestNet Bitcoins are not used as a normal trading currency, but are created for software developers wanting to test their software in a Bitcoin-like environment without losing their money getting lost or them messing with the Bitcoin Network. If you are a software developer and need some TestNet Bitcoins, you can visit my faucet.

Ripple

Ripple is an entirely new beast onto itself. It is a combination of decentralized currency, payment network, exchange and peer to peer lending. The system is still in early development, but since it operates completely different from how Bitcoin works, it is worth looking into at some point. Do be warned, the currency that fuels how Ripple functions - ripples, was all created upfront and a vast majority of it is being held by one or two companies. Some people take issue with that, so be warned.

Namecoin

Namecoin is not only a Bitcoin-like currency, but also a distributed Domain Name Service. The project recently experienced some major bug in its system that made it pretty much useless. If the developers address the issue, it will continue to be a very interesting project to follow due to the extra utility of the created coins (although there is also an issue with Namecoin possibly not being future-proof).

Everything else

Coins other than the ones mentioned above don't offer anything beyond what Bitcoin does. Some people may claim that some altcoin has an innovative block generation algorithm that doesn't require much computational power, or contributes to some prime number research, but in the end that doesn't make them better than Bitcoin, only different. Unless you know what the differences mean and wish to support them, don't buy them.

And remember, some people just want your money

A big number of altcoins are promoted only for one reason - to get your money. Some people were too late to the Bitcoin party, so they decided to start their own and get rich with it. They hope that their coin will grow and become a system like Bitcoin, so they paster a lot of people to devote their time/work/money to make that happen. The most prominent offenders I have come across are the Litecoin supporters. I have seen them asking people working on Bitcoin projects to create projects for their coin, to beg exchange owners to allow their coin to be traded on the exchange, and trying to convince a lot of people new to Bitcoin that they can earn a lot more money by investing into Litecoin. Recently their coin's value has risen along with Bitcoin, but the darnest thing is - there has been no major innovation taking place in the Litecoin ecosystem. There are no new big merchants accepting it, no new services have been created to make Litecoin use easier or anything like that.

So far, Litecoin is a big speculation currency.

There are many other ones like it, but this is probably the first you will come across. Unless speculation is your thing, don't give them your money.

To sum all up

If you are new to Bitcoin, don't look further than Bitcoin - there is a lot of people that will confuse you.

If you are confident in using Bitcoin and want to see what else is out there, check out Ripple and Namecoin.

If you are a software developer and want to program something yourself, check out Bitcoin TestNet.

Every other altcoin - keep away unless you know what you are doing and are certain you are doing the right thing.