5 reasons so many alt coins struggle to compete with Bitcoin

12 December, 2019

If you are the head of an alt coin project that you hoped would be able to compete with Bitcoin at some level, your project's future doesn't look bright. The vast majority of alt coins that have sprung up since the crypto boom of 2017 have lost more than 90% of their value since. Many of them have completely collapsed.

Despite the relative success Bitcoin has enjoyed, few alt coins even exist on the same plane. But why? What is it about alt coins that causes them to struggle against Bitcoin? Well, there isn't just one thing. Unfortunately, alt coin developers are facing a perfect storm of factors that makes it inherently difficult for their projects to succeed.

Five of the biggest hurdles faced by project developers are described in the following paragraphs. There are others as well, but these five carry the most weight. Needless to say that nothing will change for alt coins if these things cannot be overcome. Many of the alt coins struggling the most will probably not survive into 2020 if things do not change.

Bitcoin's history and reputation

The only place to start a list like this is with Bitcoin's history and reputation. As you probably know, Bitcoin was the first. It is the cryptocurrency by which all others have been measured since. For right or wrong, Bitcoin sets the standard. If you are not sure that's true, just look at what project developers have said about their alt coins. They frequently try to distance themselves from Bitcoin by explaining how their projects are better.

Unfortunately for alt coin developers, there is something to be said about being first. In the fast food wars that started in the U.S., the White Castle hamburger chain was the first to emerge. It set the standard. In soft drinks, Coca-Cola was the first cola to go mainstream. They are still the soft drink company by which all others are measured.

Like both White Castle and Coca-Cola, Bitcoin was not the very first attempt at creating a digital currency. However, it was the first one to succeed. When Bitcoin was launched in 2009, it laid out a very workable digital currency system that was designed to be an alternative to fiat around the world. Bitcoin's original developer created the blockchain, encryption, and the proof-of-work algorithm that would set the stage for future alt coins.

Bitcoin's pedigree automatically gives it status. Moreover, Bitcoin was already established as an alternative monetary system for years before alt coin developers got moving. That gave the world's first viable cryptocurrency a big head start. By the time the other coins were ready to launch, Bitcoin already had significant value and a rather large following. Their advantage was significant enough that alt coins have never been able to catch up.

2. Lack of adoption

Lack of adoption has been a persistent cryptocurrency problem since Bitcoin's launch. It has hindered Bitcoin's ability to become a legitimate alternative monetary system capable of replacing fiat wherever people want to use it. It stands to reason that the same lack of adoption is hindering alt coins. Well, it is.

In order for an alt coin to have any value, it has to have utility. In other words, it has to have usefulness. People need a reason to purchase and use the coins or they will not. It is no more difficult than that. Unfortunately, far too many project developers have not given their coins utility. They released them in hopes that people would buy them and flood their projects with money, at which time they could go and figure out the utility part.

It turns out that commerce does not work that way. People are reluctant to invest in something if they do not understand its purpose. If you tell them said purpose will be figured out later on, you are giving them the impression you don't really know what you're doing.

In fairness, there are a lot of alt coins that are not meant to act as alternative monetary systems. Some of them were designed solely for the purpose of funding a new start up. Others are coins with a very distinct purpose, a purpose that can only be realized within the environment of the project itself. Nonetheless, such limited appeal also limits utility. Where there is a lack of utility, there is also a lack of adoption.

3. The pump and dump problem

The third challenge for alt coins is the pump and dump problem. Pump and dump is a scenario normally associated with stock markets. It is a scenario in which a small group of investors aggressively pump a cheap, dark horse stock in an attempt to get people to invest. They continue pumping until they believe the price is as high as it will go, then they sell their shares. This is the 'dump' portion.

Pump and dump is a great strategy for people who want to make money dishonestly. Unfortunately, it hurts a lot of people in the process. Those on the wrong end of the dump lose everything they invested while those who pumped up the stock walk away with everyone else's cash.

This same scheme made its way to cryptocurrency during Bitcoin's run up to $20,000 in 2017. Bitcoin's success led developers to pump their own alt coins in order to cash in on a wave of positive sentiment. But it didn't last. As soon as Bitcoin's price turned downward, those alt coin investors pulled out of their projects and sent them crashing to the ground.

The net result of this pump and dump scheme was revealed when institutional investors stopped putting money into ICOs (initial coin offerings) based on the fact that they were tired of being ripped off by pump and dump schemes. Without large-scale investors to prop up an alt coin, it is not likely to succeed.

4. The rise of the stablecoin

Believe it or not, the stablecoin has actually interfered with alt coins and their ability to compete with Bitcoin. What is a stablecoin? It is a cryptocurrency backed by an asset with value. That asset could be anything. Some stablecoins are backed by fiat currencies - like the U.S. dollar coin (USDC) for example. Others are backed by private and government securities. There are even stablecoins backed by commodities.

Venezuela's Petro is a stablecoin backed by the country's petroleum assets. It is not worth much, given Venezuela's poor economy, but Petro is a stablecoin, nonetheless. Facebook's Libra will also be a stablecoin if it is ever released. It will be backed by a basket of fiat currencies and government securities.

So why are stablecoins problematic for alt coins? Because they do the one thing traditional cryptocurrencies cannot do: they trade with considerably less volatility. Again, let us use USDC as an example. It is a stablecoin with a value tied directly to the U.S. dollar.

Where Litecoin's price might fluctuate by several percentage points throughout a given day, USDC will not. It will remain as stable as the U.S. dollar. Where alt coin prices can easily lose half of their value in just a few short days, stablecoins tend to remain fairly steady day-in and day-out.

If you were getting into cryptocurrency for the very first time, which type of coin would seem safer to you? Obviously, a stablecoin. Thus, alt coins will continue to falter against Bitcoin as long as there are marketable stablecoins to be had. Safe investors will prefer stablecoins. Meanwhile, anyone willing to invest in cryptocurrency despite its volatility is likely to go with Bitcoin.

5. Threat of government regulation

Last but not least is the threat of government regulation. Governments were not all that concerned about cryptocurrencies until about two years ago. Suddenly they awoke to the reality that either a traditional crypto or a stablecoin could displace fiat if it became popular enough.

The result of being awakened is the very real threat of significant regulation. Previously, we mentioned Libra and how it would be backed IF it were released. The word 'if' is important here. By all accounts, there is a real chance that Libra will never see the light of day. Government regulators in the U.S., France, Germany, and the EU have made their disdain for Facebook and Libra well-known. They have made it clear they intend to regulate it to death.

Creators of alt coins now have that same specter looming over them. If Libra can be regulated into irrelevance, then Bitcoin can be as well. And if Bitcoin can be severely regulated, so can every alt coin. This creates a very real problem for project developers and investors alike. People are nervous because they do not want to be stuck with digital tokens that become worthless once government regulations kick in.

As you can see, there are many reasons alt coins have struggled to compete with Bitcoin over the years. Some of what you read in this post is perception rather than reality, but perception still influences the choices people make. A fear of future regulation may prevent you from investing in an alt coin, for example, even if that regulation never becomes reality.

What is the future of alt coins? No one knows. But it is hard to see them ever giving Bitcoin a run for its money.