The Debate on Bitcoin Maximalism: Exploring Arguments For and Against (And Why Altcoins Still Matter)
16 min read
key Take-Aways
Interest rates are one of the main tools used by the Federal Reserve to stabilise the US financial system. It achieves this goal by managing the Fed Funds and Discount rates.
Satoshi Nakamoto designed bitcoin to avoid some of the problems experienced with fiat currencies when central banks intervene with monetary policies. Bitcoin is decentralised, which means no central authority controls it, and the total circulation is capped at 21 million.
The relationship between bitcoin and interest rates is generally inverse- when rates fall, bitcoin tends to rise, and vice versa. This pattern appeared to have failed in 2023, although other catalysts have driven the latest bull market.
Given the bullishness of bitcoin maximalists, particularly those involved in the ecosystem since the early days, investors can easily be tempted to concentrate their crypto exposure. However, the vast universe of altcoins, which are driving innovation, offer an attractive tradeoff between potential returns and the risk of losses. This article breaks down the arguments for and against bitcoin maximalism before exploring the opportunity presented by altcoins to help investors make informed decisions when building a portfolio.
What is Bitcoin Maximalism?
The latest data from CoinGecko suggests that there are over 14,000 cryptos in existence (as of date), but according to bitcoin maximalists, just one is worthy of inclusion in an investment portfolio. They believe bitcoin is the only crypto with long-term viability and value, and the rest are inferior because they don’t reflect the ideals- largely inspired by the 2008 financial crisis- embedded in the protocol by Satoshi Nakamoto, the pseudonymous founder. For example, maximalists claim bitcoin is far more decentralized- one of the key pillars of the ‘blockchain trilemma’- than the networks underpinning other cryptos. Ultimately, they foresee a future with a bitcoin monopoly.
Jack Dorsey, founder of X, is one of the leading maximalists. Dorsey has previously stated that he believes bitcoin will eventually replace the US dollar and has regularly criticised ether, the largest and most successful altcoin. Michael Saylor, cofounder of software firm MicroStrategy, is another well-known maximalist, as demonstrated by the amount of bitcoin the company holds on its balance sheet. MicroStrategy recently topped up its holding with a further 122 btc.
“We believe capital is going to keep flowing from those asset classes into bitcoin because bitcoin is technically superior to those asset classes and that being the case, there’s just no reason to sell the winner and to buy the losers.” Saylor told Bloomberg in February 2023.
Source: Twitter
Arguments For Bitcoin Maximalism
Satoshi designed bitcoin with a clear function- to facilitate peer-to-peer transactions. By cutting out intermediaries, Satoshi protected bitcoin from the inflationary policies employed by financial authorities to offset economic slowdowns, such as quantitative easing. Its unique design has also helped bitcoin earn a reputation as digital gold. Bitcoin shares many of the same characteristics as a store of value- scarcity (due to its capped supply of 21 million), divisibility, durability and portability- and some analysts believe it can erode gold’s market share as it continues to gain traction.
One of the key arguments among bitcoin maximalists is the strength of its network. As the original crypto, bitcoin’s blockchain is the longest (it stores the most blocks of transactions), making it harder and more expensive to hack. Bitcoin’s security is enhanced by the number of nodes (participants responsible for validating transactions) operating on the network- 19227 (as of July 3rd 2024) compared with other protocols such as Ethereum (7101 as of July 3rd 2024).
Another reason maximalists believe in bitcoin is because it has the widest adoption. A crypto’s value depends on its network effect, where the more participants a network has, the more value it offers. To put the level of adoption into context, bitcoin’s market capitalisation is $1.2 trillion (as of date), which accounts for 54,38% of the overall crypto market cap.
Finally, the argument that other networks like Ethereum have brought greater functionality to blockchain technology has weakened following the launch of Layer 2s. Layer 2s are protocols built on top of the bitcoin blockchain that increase its scalability, the pillar of the blockchain trilemma sacrificed by Satoshi in favour of security and decentralization. Examples of widely used Layer 2s include the Lightning Network, Rootstock and Stacks.
Arguments Against Bitcoin Maximalism
Despite the benefits offered by Layer 2s, they’re experiencing growth challenges. For instance, the Lightning Network aims to reduce congestion on the main bitcoin blockchain by opening a direct channel between the counterparties involved in a transaction. Antoine Riard, a developer who resigned in October 2023, warned that the network is becoming more centralised to meet the demands of its venture capitalist investors, which creates a single point of failure and increases cyberthreats like ‘replacement cycling attacks’.
Another argument against bitcoin maximalism, and a long-standing criticism of the protocol’s design, is the network’s carbon footprint. Miners consume substantial energy to solve the complex mathematical puzzles required to validate transactions and earn rewards. Critics often highlight bitcoin’s heavy energy usage by comparing it with countries, residential use (equivalent to lighting, fridges and TVs in the US) and other industries (greater than gold). However, a range of initiatives have recently emerged to promote alternative sources, such as hydropower and flared gas.
Some in the crypto community, including Komodo protocol’s CTO Kadan Stadelmann, also claim that bitcoin is becoming too centralised due to the concentration of mining activities. As of April 2024, Foundry USA and Antpool control more than 50% of the computing power required to process transactions (known as the hash rate) while five mining pools account for 80%. Again, various initiatives are attempting to overcome this challenge, such as a recently launched mining pool called Ocean (backed by Jack Dorsey) which pays miners directly from the bitcoin protocol rather than via the pool’s centralised authority.
Why Altcoins Matter
Bitcoin may dominate the crypto markets, but altcoins still represent a trillion-dollar market, as the chart below demonstrates.
Altcoins may not share bitcoin’s track record, but they’re responsible for the majority of the innovation in the crypto space over the last nine years. While Ethereum was the first blockchain platform to support decentralised apps, many have followed in its footsteps, such as Solana, Cardano and Avalanche. According to DefiLlama, these dapps hold $95,129 billion (as of date) of total value locked (TVL), a metric used to measure the volume of funds deposited by investors. In terms of TVL, Ethereum ($57,786 billion) dwarfs Bitcoin ($1,011 billion).
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When considering whether to add altcoins to a portfolio, investors should treat them like small-cap shares because they may offer attractive growth potential but can be very volatile. Altcoins can also be short-lived- research shows that only four of the top 25 projects by market cap in 2017 remained in the top 100 by 2021.
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Conclusion
Bitcoin maximalists believe bitcoin is the only crypto that will deliver value in the long term. They base this argument on its real-world use cases as a medium of exchange and store of value, the strength of its network and the amount of traction it has gained. But bitcoin has its critics too, who highlight its scalability, carbon footprint and increasing centralisation as reasons to explore the trillion-dollar opportunity and innovative use cases provided by altcoins.
