Bitcoin to altcoins: “All your base are belong to us”

With the developments in merged mining and multi-pools there are a few interesting conclusions one might draw in relation to the many blockchains being run all over the world right now.

First; the most powerful blockchain is also the most trusted. And when there is one, very powerful, distributed blockchain already on the market - why would investments go into an inferior blockchain?

Secondly; at any given time the most valuable currency will have the biggest fraction of investors going into mining and into development efforts (compared to other currencies) of that particular algorithm. This creates a widening distance between the most popular currency and all the rest.

However, there are several different algorithms used for different currencies. Take Scrypt, for example. Say Litecoin has the most powerful Scrypt blockchain (it does). If only a fraction of Litecoin miners decided to ”attack” a cryptocurrency with a weak (low-hashing-speed) Scrypt blockchain that currency would be in big trouble as well-read investors would shy away from the risk involved in investing in an inferior blockchain.

Hence: there can be only 1 valuable blockchain/cryptocurrency per algorithm.

In some ways we have already seen the results of that conclusion. Dogecoin mining is being merged with Litecoin mining (as they both use the same algorithm). Namecoin (which uses the same SHA-256 algorithm as Bitcoin) has been merged with Bitcoin mining, to survive.

More Than 90% Belongs To Bitcoin

Bitcoin today makes up more than 90% of all the value in all the cryptocurrencies combined. The top 100 altcoins like Litecoin, Peercoin, Feathercoin, Darkcoin, Zerocoin, Dogecoin etc altogether represent less than 10% of the total USD exchange rate value (as of early August, 2014).

Although some of these altcoins in some respects have interesting features from a technical or conceptual standpoint Bitcoin’s fraction of the total value of all the cryptocurrencies has actually increased over time - despite the flood of ”copycats” (or because of them…).

There are other ways of looking at the future value of a cryptocurrency; not only counting it’s current exchange rate but also how much activity is going on behind the scenes. For instance; the number of developers actively devoting their time to a particular coin/algorithm is an indicator of future strengths.

Here’s a site doing those kinds of comparisons; Coingecko.
Check out Coinmarketcap to compare values in cryptocurrencies.

As things changes fast in the cryptocurrency world anyone interested in mining should take a close look at these metrics.

ASIC deployments speedup culling process

ASICs (“Application Specific Integrated Circuits”) play a special part in this equation. As soon as a line of ASICs are developed for a particular algorithm, the most ”popular” coin using that algorithm should prevail, as it is the most secure at that moment, and miners would flock to that particular algorithm’s strongest blockchain.

Following the same logic; Namecoin’s exchange rate could never really develop independently or reach any impressive heights, compared to Bitcoin’s exchange rate, as it uses the same algorithm (hence: merge with Bitcoin). Following the same logic, no other SHA256-based currencies will ”succeed”. And the only coin having a chance of holding it’s value in the Scrypt arena should be Litecoin, if Dogecoin doesn’t surprise somehow. And so on.

Going further: if one were to invest in altcoins today, one should choose only the ”top" coin per algorithm (following this logic) and spread the bets. And, logically, if one were to start a new altcoin today it would be wise to choose a new and unique algorithm and try to get a healthy head start in total network power, before ASICs are deployed.

However, as a disclaimer I should add that no one can confidently say they can accurately predict exchange rates or the future in cryptocurrency mining. There may be other developments offsetting the theory that the most powerful blockchain in each algorithm will win the day, so make sure your doing your own due diligence in relation to your investment outlook and areas of interest before investing.

This blog post should not be viewed as an endorsement of any of the algorithms, blockchains or cryptocurrencies mentioned. Before considering investing please do your own thorough research.