Bitcoin - What We Can Learn From the Bitcoin Maxis

Disclaimer: This article is for informational purposes only and should not be considered as investment advice.

Bitcoin maximalists, in brief, are steadfast advocates of Bitcoin’s unrivalled supremacy over other cryptocurrencies. Their belief emanates from Bitcoin’s core fundamentals that contribute to its enduring value. We may ask, “What can we learn from these Bitcoin maximalists or ‘Maxis’?”

Bitcoin Fundamentals: Decentralisation, Security, and Scarcity

Bitcoin is built on three foundational pillars:

1. Decentralisation: Bitcoin relies on a peer-to-peer network devoid of central control. This distributed network encourages democratic participation, ensuring power isn’t concentrated with a single entity.

2. Security: The bedrock of Bitcoin’s security is its cryptographic proof-of-work mechanism. This consensus algorithm safeguards the network from malicious actors.

3. Scarcity: With a maximum supply of 21 million bitcoins, Bitcoin’s scarcity is built into its protocol, contributing to its perceived value.

Recognizing these fundamentals, a clear trend emerges:

• Decentralisation: The more participants join the network, the more decentralised it becomes. This broad-based participation prevents any single entity from monopolizing the network, ensuring a fair and equitable system.

• Security: An increase in participants contributes to a higher cumulative hash rate, thereby enhancing the network’s security. The proof-of-work mechanism makes it exceedingly difficult for any individual or group to launch successful attacks, as overpowering the network requires an inordinate amount of computational power.

• Scarcity: A rise in participants amplifies the feeling of scarcity. With a constant, limited supply of bitcoins, increased demand accentuates Bitcoin’s scarcity. Offer and demand. Stock to flow.

The Law of Attraction and Netwrok Effect

These fundamentals we just discussed, core components of the BTC cryptoeconomics, unfold their full potential when significant attention is directed towards a specific coin. The largest coins usually retain long-term value due to the snowball effect of increased attention and investment.

Momentum Investing

One noteworthy study substantiating this “Snowball Effect” theory comes from Jegadeesh and Titman (1993) and their work on momentum investing. Here, well-performing stocks attract more investment, which in turn boosts their value, paralleling the dynamics observed in the cryptocurrency market.

Network Effect

In the tech world, platforms like Facebook and Twitter demonstrate the ’network effect’, where increasing user participation enhances the platform’s value and attracts even more users. These phenomena highlight the importance of attention in enhancing an asset’s value - a crucial insight that also applies to Bitcoin and other cryptocurrencies.

From this perspective, many altcoins struggle to hold their value in the long term. Case in point, Bitcoin Cash or Dash, which despite the initial hype, failed to live up to expectations.

Learning from History

History serves as a stern reminder of this brutal reality. Numerous coins that dominated headlines and captivated investors between 2015 and 2017 have seen their value dwindle, if not disappear altogether.

I was recently reminded of this by Charlie Shrem’s podcast, ‘Untold Stories’. Shrem, an early entrant into the crypto space in 2011, discussed the ebbs and flows of various coins over the past decade. It is striking that the majority of these coins have since vanished.

The ‘Flippening’, Schnorr Signatures and Layer 2s

Bitcoin’s market capitalisation consistently outperforms other cryptocurrencies combined. However, Ethereum (ETH) maximalists have been anticipating the ‘flippening’ – a potential shift where ETH’s market cap surpasses Bitcoin’s.

The website ratiogang.com provides a real-time glimpse into this intriguing race. Despite Ethereum’s innovation, Bitcoin’s robust fundamentals make it the safer bet.

Notably, the advent of Schnorr signatures could revolutionise Bitcoin’s ecosystem by enhancing layer 2 integrations. That said, it’s crucial to stay grounded. Such changes won’t happen overnight.

In my view, the ongoing advancements in layer 2 will keep Bitcoin not just relevant, but the leading player in the cryptocurrency space.

In conclusion

While Bitcoin maximalists’ views may seem overly rigid, they shed light on the significance of strong fundamentals and the lasting value they can generate. It is crucial, therefore, to not lose sight of these lessons when navigating the cryptocurrency landscape.