“What sets each cryptocurrency apart from the others?”

“Cryptocurrency” is a broad term. It refers to payment coins, of course—such as Bitcoin and Litecoin. But, because most tradeable tokens attain an asset value, the word is often used to refer to smart contract devices, such as Ethereum, a host of other blockchain based tokens, functional Internet-of-Things tokens, and even ICOs (Initial Coin Offerings). Since people treat ICOs and IOT tokens as investment instruments even if they are useless as a payment mechanism, they all fall within the realm of a cryptocurrency.

So, before addressing the question, let’s distinguish between Altcoins and ICOs. I assume the question refers to Altcoins, and not ICOs…

ICOs are almost all scams. A very few of these are designed to function in a well-defined IOT role (Internet-of-Things). But, any ICO that you are likely to hear about share one or more traits described here.

But Altcoins are different. These are typically forked from Bitcoin or another established blockchain-backed coin. They are created because developers feel that they have solved one or more of the problems that limit the growth or appeal of Bitcoin. For example, Bitcoin has (or recently had) all these problems or perceived limitations:

• Transaction Malleability (Recently solved with activation of SegWit)
• Speed of transaction (Now being addressed by Lightning Network)
• Cost of transaction (Also addressed by Lightning Network early 2018)
• Very high electrical demand by miners (Still a major problem)
• Fairness of and speed of distributed governance process (a big problem)
• Finding a validation incentive after mining runs out (a long term issue)
• Deep privacy features. These are inherent to Monero and Zcash. (Bitcoin will soon support onion routing transactions to enhance privacy)
• Disparate goals of miners, developers, vendors and users (still a problem)
• Limited Smart Contract mechanism (Ethereum is the current king in this realm, with slick methods of administering and executing contracts. Bitcoin will eventually acquire these features & benefits.
• Like ICOs (these are almost all scams), some Altcoins (not scams) address specific IOT applications. This is a legitimate and non-payment use of blockchain technology. It represents a promising evolution. It is not yet clear if Bitcoin can eventually adopt these features and function in a non-payment, IOT capacity. The intrinsic, stored value aspect of Bitcoin would make it difficult to use in such applications.

One big problem facing Bitcoin is that the distributed consensus mechanism that makes it a trusted, peer-to-peer mechanism is based on Proof-of-Work (POW). Coupled with a mining incentive that increases dramatically with exchange rate, Bitcoin is—quite simply—untenable. With consumption topping 33 terawatt hours in December 2017, it already consumes more power than some countries. If even 2% of the world’s payment transactions were settled in Bitcoin, the mining would consume more power than is generated throughout the world. This just cannot continue!

Fortunately, developers and armchair inventors have proposed or demonstrated clever POW alternatives to achieve a fair distributed consensus. Some of these use a Proof-of-Stake mechanism, while others add a limited central-authority nexus to facilitate governance and scaling. Some are built on a modified blockchain that weaken several pillars of a true decentralized, p2p network. Of course, researchers are concerned that these systems deteriorate the decentralized nature of Satoshi’s original blockchain.

But, other systems may allow for a fully distributed and democratic trust platform, such as BFT Replication (IBM) or Distributed Objective Consensus, which was proposed by an amateur mathematician.

In reply to the title question, Altcoins are set apart by their claim to address the above problems & limitations, or to add features.

Will an Altcoin Triumph over Bitcoin?

Perhaps, a few altcoins will thrive, due to specific niche advantages; features that Bitcoin chooses not to address, such as deep anonymity or with a novel utilitarian feature that facilitates a specific Internet-of-Things process.

Unfortunately for altcoins, all coins require public trust and transparency. For this reason, they are open source, permissionless, without licensing, without patent protection and with a fully disclosed pre-mining history. And for that reason, Bitcoin is free to steal any clever advantage that works. It’s all up for grabs and no one can be sued.

In effect, each altcoin as a beta test platform for Bitcoin. Now that Bitcoin is finally addressing the problems of scalability and fair/speedy governance, there is little doubt that it will continue to dwarf other coins.

Philip Raymond sits on Lifeboat’s New Money Systems board. He co-chairs CRYPSA, hosts the New York Bitcoin Event and is keynote speaker at Cryptocurrency Conferences around the world. Book a presentation or consulting engagement.

But what about Bitcoin? It is not a scam, but questions remain about regulation, intrinsic value* and its likelihood to be superseded by something better. Bitcoin skeptics point to two facts: (1) Bitcoin is open source, and so anyone can create an equally good altcoin. (2) Newer coins incorporate improvements that overcome governance and scaling issues: cost, transaction speed, the burgeoning electric needs of miners, or whatever…

While both statements are true, they miss the point. This is not a VHS-vs-Beta scenario. Bitcoin has achieved a 2-sided network and it is free to fold in every vetted improvement that comes along. For Bitcoin, all those other coins are simply beta tests.

Even the functional tokens will unwittingly feed their “improvements” into Bitcoin. For this reason, it is a safe bet that Bitcoin will reign supreme for years to come—perhaps even long enough for the dominos to fall.

Why I rarely consult to ICOs or prospective ICO investors

I recently presented at cryptocurrency expos in Dubai and Gujarat. As a result of these presentations, my organization now receives ICO pitch decks, white papers and business summaries—15 or 20 each week. About ⅔ are sent by investors asking for advice as an investment opportunity, while ⅓ are from issuers seeking accreditation from CRYPSA or at least a quote than can be used as a comfort statement.

The market potential for consulting to issuers and high-rolling investors is very alluring. Figuring that we could certify gems and advise the dogs (help them to create a more legitimate token), we put together a business plan to address a massive new consulting opportunity. But guess what?

… They are ALL dogs! That’s right! ICOs are scams. They are not the same as ‘altcoins’, which is a term more commonly used for open source forks of legitimate cryptocurrency platforms.

Now, the SEC has begun to investigate ICOs and for good reason. Most are thinly veiled scams to fleece widows and orphans by ducking under securities regulations. Others are MLM scams, proprietary mechanisms (in which founders or early partners hold all the cards), or they are simply poor/fake implementations of Blockchain services.

How to spot an ICO scam (Hint: They are almost all scams!)

What fraction of ICOs are scams? More than 97% according CRYPSA. To preserve our reputation, we have suspended a high profit project to endorse the hidden gems. Despite scores of applicants, we simply cannot find any worthy of accreditation, with the exception of a few Bitcoin forks. But, these forks are altcoins, and not really ICOs.

Nearly all ICOs that we analyzed fall into one of these categories…

• Veiled securities offerings, designed to duck under securities regulations
• Created for the express purpose of pump & dump (without clearly disclosing caps, reserves or pre-mined stakeholders)
• A non-functioning coin that can only gain value through MLM. (This is not necessarily criminal, but outside our research and advisory mandate. Such coins are unlikely to provide value without quick, speculative trades and market timing that amounts to “dumb luck”).

So, what are the signs that an ICO is a scam? Is there anything you can do—short of hiring an expert—to evaluate each new proposal that comes along?

We don’t advise or recommend holding such risky tokens—but for those attracted to the siren call of ICOs, here are six common tale tell signs that you are dealing with a scam:

• If you received an announcement of an ‘Air drop’ or a coupon to get 25 or 50% bonus coins, it is a scam
• If the value of coins is influenced by your ability to find new investors, it is a scam
• If the coin is not based on Satoshi’s blockchain reference code, or is not open source, peer-to-peer and permissionless, then it is very likely a scam. (There are certain, limited exceptions)
• If the coin is based on Tangle, then it is a scam—or at least, it is functionally useless—and therefore it is a bad investment risk
• If the coin was pre-mined, then it is a scam. All mining by principals, insiders and early buyers must be disclosed and must be at least a full month after the first widely available public announcements
• If any advertisement, announcement, affiliate contact or press release ends up in the hands of someone who did not independently contact the issuer for information and a prospectus, it is most definitely a scam

Are you like me?

Because most initial coin offerings exhibit these traits, I pass on opportunities to consult or present at organizations and conferences that cozy up to ICOs. This decision limits my participation at many crypto venues, but my conscience is clean and my Bitcoin future is secure.

Resist the siren call and keep your wits about you. You, too, can also avoid the illusory trap of ICOs. Run, hide or just ignore them. “These are not the coins that you are looking for.” (with apologies to Obi-Wan Kenobi and Alec Guinness).

* Related:

• Spell it Out: What backs Bitcoin?
• ICO’s –vs– Value: Tale of two Bitcoins
• Can Bitcoin be Defeated by Legislation?