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What to Consider When Accepting Altcoins

September 17, 2019 5 min read

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What to Consider When Accepting Altcoins

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We’re living in the era of digital money. There are now over a thousand cryptocurrencies in circulation, the majority of which were founded in the last few years. Businesses are overwhelmed with figuring out what is safe to use in this new landscape. At OpenNode, we firmly believe that accepting altcoins is a dangerous endeavor and exposes businesses to unnecessary risks and losses. This is why we have been a Bitcoin-only company since day one: Bitcoin has the highest security, liquidity, and regulatory clarity of any cryptocurrency. All other cryptocurrencies, commonly referred to as altcoins, fall short in one or more of these metrics, making them unsuitable as a transactional currency for a business of any size.

Security of Bitcoin’s infrastructure

Fidelity Investments, one of the largest asset managers in the world, created Fidelity Digital Assets last October. The move signaled the Boston-based financial giant’s formal entry into the cryptocurrency industry, offering both brokerage and custodial services. In May 2019, when the brokerage component went live, Fidelity said in an email to the press, “Currently, our service offering is focused on Bitcoin.” Fidelity decided that Bitcoin is the only digital asset it can recommend to its clients for the same reason that businesses should only accept Bitcoin: security.

Merely imagining the magnitude of Bitcoin’s hash power can rattle the brain. Bitcoin’s immutability is so strong that after a few blocks have been mined, transactions are considered set in stone by all participants in the Bitcoin network. The sheer amount of computing power required to undo a transaction becomes exponentially more difficult as block time passes. The largest bitcoin exchanges around the world require about an hour of confirmations in order to process a client’s deposit; roughly six block confirmations give them all the security they need to be certain a transaction is final.

What does this type of security look like for altcoins? Just how inferior are other networks’ security when compared to Bitcoin and its hash power? To attain the equivalent of six confirmations on the Bitcoin blockchain, Ethereum would take over six hours, Bitcoin-Cash over a day, and Monero over five days.

Fidelity is not going to offer a product for Monero with over 100 times less security, or hash power, than Bitcoin. They owe more to their clients than to have to wait five days to trust that deposits are immutable. Merchants need to take the same caution. Even though Bitcoin is still young, it is no longer an experiment like many Bitcoin-pretenders. Altcoins have come and gone, but Bitcoin’s network effects are reinforced every time a company like Fidelity decides to work only with bitcoin.

Risks of Altcoins

Decentralization is one of Bitcoin’s greatest features; it prevents transaction censorship and increases immutability of transactions. Unfortunately, centralization is unavoidable when it comes to altcoins. Centralization can lead to unfavorable dilution, blocked transactions, corruption, and greed. Accepting centralized cryptocurrencies opens businesses to these unwanted risks when all they want is a secure way to transact.

Ethereum: a case study for cryptocurrency bailouts

Ethereum is the world’s second largest cryptocurrency by market capitalization, but businesses should not use it to transact because it is centralized. In 2016, an Ethereum bug exploitation led to the loss of $50 million at the time. The hack was “undone” when the Ethereum leadership decided to split the cryptocurrency into two separate blockchains. One record of transactions would reflect the hack, now called Ethereum Classic (ETC), and the other record, Ethereum (ETH), would reverse time to negate the exploit. One must ask, who decided that the hack was unfair and should be undone by a blockchain rollback? This was cryptocurrency’s first official bailout.

Bitcoin doesn’t have such bailout mechanism. Binance, a large Bitcoin exchange, was recently hacked and lost some clients’ bitcoins. Their CEO, Changpeng “CZ” Zhao, publicly suggested a rollback of Bitcoin’s blockchain to undo the hack. He quickly learned that a CEO imposing his or her will on Bitcoin’s immutable transaction history for personal gain just isn’t possible; there’s no central authority to which one can file an appeal. Bitcoin is unforgiving in its decentralization, an attribute that should be celebrated and considered a safeguard against corruption and greed.

ERC-20: Not-so-smart contracts

ERC-20 tokens, a primary vehicle for ICOs, have also had a dubious history. Huboi, a large exchange in Singapore, decided to suspend deposits of ERC-20 tokens due to yet another bug exploit. Attackers found a way to generate large amounts of tokens out of thin air. These types of security flaws, bug exploits, and exchange suspensions are confidence-shattering for any businesses considering to accept Ethereum or altcoins with a substandard history of security. ICOs have also been delisted by many exchanges which leads to plummeting liquidity. Diminishing confidence can be a downward spiral, a process that has repeated with many altcoins over the years.

Anything not Bitcoin is a regulatory nightmare

Over the past couple years, the Bitcoin industry launched a more polished product suite of onboarding, brokerage, and insured institutional grade custody. Large industry players are moving forward with Bitcoin projects because of all the regulatory guidance and clarity from multiple United States agencies. The IRS explicitly deemed Bitcoin a form of digital property for federal tax purposes, and the Commodity Futures Trade Commission (CFTC) has defined Bitcoin as a commodity. Broadly, United States financial regulatory bodies have understood Bitcoin as a new digital commodity for a few years now.

But then Libra happened

Libra is a type of stablecoin, a digital currency issued by a centralized entity, backed by an equivalent value of assets or reserves. Libra is to be backed by US Treasury Bills and other similar types of short-term government securities. Facebook’s announcement of Libra was a monumental moment in Bitcoin history, whether or not Libra ever launches or sees adoption. The moment Facebook attempted to encroach upon the world of money, the United States Congress responded instantaneously. They questioned why Facebook is creating a derivative of the US dollar, Euro, and others for their own payment infrastructure. Requests have been made by both American and European governments for Facebook to halt their development of Libra until more questions can be answered.

Libra brought cryptocurrencies a tidal wave of attention from the media and governments. The word used most frequently in most conversations was, of course, “Bitcoin” because of its brand recognition. There was a palpable understanding in the public discourse that Congress can’t send Bitcoin a letter. Unlike Libra, Bitcoin has no central authority, physical address, or group of people that have the power to control or speak on its behalf.

Amidst the discourse were soundbites that will make July 2019 the month when Bitcoin staked its claim in Washington D.C. All the messaging, narratives, and memes propagated by early Bitcoin advocates about digital gold, censorship resistance, and decentralization finally had their moment in the spotlight. Let these quotes, which are now all on Congressional record, sink in:

Bitcoin is a “speculative store of value like gold”

– Jerome Powell, Chairman of the Federal Reserve

“There’s Bitcoin, and then there’s shitcoin [in which] value can be distorted by a central authority”

Rep. Warren Davidson

“There’s no capacity to kill Bitcoin”

– Rep. Patrick McHenry

Regulators warn on altcoins

Libra doesn’t exist yet, but many other cryptocurrencies and ICOs have been classified as unregulated securities, leading to delistings at exchanges across the world. The CFTC has warned against ICOs by saying “many Initial Coin Offerings end in fraud or failure.” Altcoins’ regulatory ambiguity make accepting them an auditing and compliance nightmare, especially given clarity on Bitcoin from the IRS and CFTC.

OpenNode

At OpenNode, we help our clients accept Bitcoin and nothing else. Being a Bitcoin-only company is how we’re looking out for our clients so they don’t get confused, scammed, or forced into accepting something that might be altered, forked, deleted, or regulated away tomorrow. Bitcoin’s dominance as the world’s primary digital value transfer network is obvious to us but might not be to everybody. Our goal is to help people understand this, even if they have never before considered using cryptocurrency. Starting with a Bitcoin-only approach is not only our recommendation, but the surest way to avoid unnecessary risks for your business.

Nik Bhatia is a Research Strategist at OpenNode. In his past he traded US Treasuries and interest rate futures for Payden & Rygel, a Los Angeles based investment manager with over $100 billion assets under management. He received his Masters in Finance from IE University in Madrid, Spain in 2013, and received his Bachelors in Social Sciences (Economics) from University of Southern California in 2011. He is a CFA charterholder. His goal is to bring a capital market to Bitcoin in order for it to achieve status as a global reserve currency.