The cryptocurrency world is now awash with new altcoins, with Shiba Inu (SHIB 1.86%) being the latest to receive a huge surge of appeal among retail traders. However, that craze could be fizzling out.
As more new coins come out, the huge moves of shiny new altcoins can be tantalizing. But unless you are really involved deeply in the crypto world and know a lot about the technology and potential real-world use cases, I'd be wary investing in any cryptocurrency long-term other than Bitcoin (BTC 2.10%)... and recent events have only seemed to cement Bitcoin's lead.
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The Taproot Update and why it's important
While a lot the investing community views bitcoin as a potential store of value and payment network, rival coin Ethereum (ETH 1.09%) was designed more specifically for decentralized finance (DeFi) applications, such as smart contracts. In fact, Shiba Inu is a token that's built on Ethereum's blockchain. Ethereum's status as a go-to platform for DeFi applications is what gives it much of its value.
However, a new Bitcoin update called Taproot now gives Bitcoin enhanced DeFi capabilities too. Just activated this month, Taproot allows multiple cryptographic signatures to be recorded as a single signature on the Bitcoin blockchain. While it may sound like small change, the new innovation will greatly enhance the ability to record smart contracts on on top of the Bitcoin blockchain. Taproot also enables greater privacy for those transactions, allowing transacting parties to only submit crucial information to the blockchain without revealing all identifiers.
That essentially means Bitcoin can now be used for DeFi applications, plugging a current hole in its functionality and making it more competitive with Ethereum.
Don't think Taproot is a big deal? Twitter (TWTR +0.00%) and Square (SQ 0.17%) CEO Jack Dorsey does. He just released a white paper for a new Bitcoin-based DeFi application on November 19, shortly after the Taproot update was activated. The paper outlines plans for a decentralized Bitcoin exchange at Square called tbDEX. While the paper has been hinted at for a long time, it was only released after Taproot was activated.
There may only be room for one universal digital store of value
Jack Dorsey is a bitcoin enthusiast and believes Bitcoin will become the "native currency of the internet." There aren't two internets, so do there need to be two cryptocurrencies that can be used throughout the world? And as a general currency inflation hedge, speculators have traditionally speculated on gold, perhaps some silver -- but not may other commodities that have their own supply demand dynamics.
Famed hedge fund manager Bill Miller also agrees Bitcoin's first-mover status and wide buy-in from large financial institutions gives it a lead that's tough to surmount. As is the case with many internet companies, once a network achieves escape velocity in terms of acceptance, network effects generally make it a winner-take-all or winner-take-most situation. In other words, once bitcoin has been institutionalized and widely accepted as a viable asset class, another digital asset would have to be decidedly better than Bitcoin in order to displace it.
Dorsey and Miller are joined in their Bitcoin-only outlook by MicroStrategy (MSTR +1.87%) CEO Michael Saylor. Saylor has been buying Bitcoin with MicroStrategy's corporate cash as fast as he can -- a risky strategy that essentially turns the software company into a leveraged Bitcoin fund, with a nice little software business on the side.
In a recent interview, Saylor expressed his own prediction that the world's sovereign currencies could consolidate, much like all the currencies of Europe consolidated into the Euro. And if there are only a few regional government-backed currencies for the world, there may very well only be room for one universally agreed-upon digital alternative, which is likely Bitcoin.
Going back to Miller, he said in a recent interview, "There are 10,000 various tokens and stuff floating out there. The chances of more than a handful of them being worthwhile is very, very small. Bitcoin, Ethereum, and a few others are probably going to be around for a while."
Of course, since that interview, Taproot was activated, perhaps neutralizing Ethereum's biggest strength. So Miller's list of winning cryptocurrencies may be even smaller -- leaving Bitcoin as perhaps the last cryptocurrency standing.
For new investors interested in crypto, I still think it's important to make Bitcoin the largest position in any crypto basket -- especially those with a longer-term outlook.
