Bitcoin versus Crypto

The term “cryptocurrency,” or “crypto” for short, is used to describe digital tokens enabled through cryptography. And Bitcoin was the first mainstream and widely used cryptocurrency.

However, it’s important to understand that Bitcoin has unique characteristics beyond just the use of cryptography, making it an important digital money in today's world.

In this article, we’ll explore Bitcoin versus Crypto.

Square and Rectangles

All squares are rectangles. But not all rectangles are squares.

By definition, a rectangle is a four-sided object. And a square is a four-sided object. But to be a square, those sides must all be of equal length.

Simple geometric shape information... I know. But it’s important to understand this concept and how it relates to Bitcoin and crypto.

When it comes to what makes up most cryptocurrencies, they typically share these attributes:

• Cryptography - They use public/private key cryptography to prove ownership of transactions that appear on the digital ledger.
• Blockchain - A blockchain controls that digital ledger. This is a record of all past transactions on the network that proves where ownership is.
• Digital Assets - The network utilizes a token or digital asset to transfer value or pay fees for using the network.

The “rectangles,” or four sides of the crypto space, are the attributes above. And tens, if not hundreds, of thousands of cryptocurrencies, share these attributes.

What Makes Bitcoin Unique

So, what makes Bitcoin square in the rectangle world?

It’s both a technical innovation AND it has sound money principles. It combines the traits of sound money, like a predictable supply and censorship resistance, with technological innovations of digital money.

Sound Money

Since the dawn of human civilization, groups have sought sound money to build economic systems. Using shells, stones, and other artifacts was common in early human societies. More recently, gold has been the primary sound money of choice.

When determining if money is “sound,” there are a few common attributes that we look for:

• Durable - Does the money persist over time? For instance, bananas would make terrible money as they would go bad in a few days.
• Portable - Can the money be moved easily? If you are going to transact with money, it needs to be easy to bring with you and to send.
• Fungible - Is the money uniform and interchangeable? Trading original art pieces for money wouldn’t work because one Picasso painting wouldn’t be fungible with some watercolor art my daughter created.
• Recognizable - Is the money easy to recognize and verify? People need to trust that the money they are getting is authentic.
• Divisible - Can the money easily be divided into subunits for commerce? Digital money like Bitcoin can be divided by 1/100,000,000 of a unit to provide exact value amounts.
• Scarce - Is there a fixed amount of money in the system? Money needs to have some level of rarity; otherwise, its supply will be flooded and inflated away.
• Censorship-Resistance - Specifically for digital money (including government currencies), is it censorship-resistant? Money becomes political and weaponized if its use can be controlled.

Reviewing these properties of sound money, it’s clear that Bitcoin is well fit to be sound money by its design. It’s the digital version of gold, but even better because it’s coupled with technical innovation for the digital age.

The ability for Bitcoin to be sound money is the “equal side” of making it a square in a world of rectangles.

The Problem with “Crypto”

Where “Crypto” and Bitcoin deviate is when it comes to the fundamental structure of what makes sound digital money.

Centralization

Most cryptocurrencies have layers of centralized control. From centralized organizations that run them, to the “pre-mine” of tokens, when founders award themselves tokens at the start of the blockchain.

For example, Ethereum, a prominent cryptocurrency, has a controlling foundation that awarded itself millions of its tokens from the onset. This foundation controls the development of the token and has changed the rules of the network multiple times.

Bitcoin has no central control and did not have a pre-mine of tokens.

Opaque Issuance

To be sound money, the supply must be scarce. While we can’t verify gold’s total supply, we at least know that it’s physically rare. But with most “cryptos,” the supply issuance is opaque at best. Some have unlimited supplies by design, while others are regularly changed by the central developers controlling them.

If we allow the issuance or supply of money to be controlled by people, it will inevitably change over time. All we have to do is look at our central banks that control the Dollar or Euro to see how human actors can make justifications to manipulate the supply of money.

Bitcoin has always had a 21 million unit limit since its inception.

Trust Required

One of the significant benefits of using digital money and blockchains is that trust is no longer required to use the monetary network. By running your own copy of the network on a personal node (computer), you can independently use the network without trusting other people.

However, many “cryptos” make it nearly impossible for everyday people to run their own nodes. Their technical innovations of faster transaction times, or non-money data on the blockchain, create technical bloat on the network. This means that nodes must be run on expensive servers and advanced computers. For everyday users, that means they must use or trust somebody else’s computer to use the network.

Bitcoin nodes don’t require advanced computers. This allows many people to run their own nodes trustlessly, and distributes control of the entire network.

Proof of Work vs. Proof of Stake

Most cryptocurrencies use a consensus mechanism (how blockchains are controlled) called “Proof of Stake.” In this approach, who creates new blocks in the ledger is determined by who is “staking” their tokens in the network. The more tokens you stake, the more likely you can control the next block in the ledger.

This Proof of Stake consensus is promoted as energy-efficient and good for users (as interest is paid to stakers), but it enables massive centralized control and censorship of the network. All that is required to control the network is holding large amounts of the underlying money/tokens. Because most cryptos had pre-mined tokens given to controlling entities, this creates centralized blockchain control.

Bitcoin uses proof of work consensus, which requires energy and computation power to control the blockchain. The network is controlled by energy, not existing owners of tokens.

A New Crypto - CBDC

Then there is the new problem in crypto… and that is Central Bank Digital Currencies (CBDCs). These are cryptocurrencies that are run by government central banks like the United States Federal Reserve, European Central Bank, or the People's Bank of China.

CBDCs take all the negatives of other cryptocurrencies (centralized, trusted, pre-mines) and combine them with government censorship. From the onset, these new digital government forms of money will be subject to government oversight risks.

While they do enable digital wallets using existing fiat currencies, they come with a whole host of new drawbacks.

The Bitcoin network is independent of governments.

Conclusion - Bitcoin vs. Crypto

Bitcoin, in my opinion, is sound digital money. It can provide an open monetary system built for the information age.

Crypto, on the other hand, I view as a speculative investment in unregulated technology companies. But buyer beware, there is little regulation on making false statements or claims that their promoters can make.

While I’m not going to provide specific investment advice, I hope this article helped illuminate the importance of understanding the fundamental differences between Bitcoin and Crypto. Just because something is a rectangle does not mean it’s a square.