“There is a lady who is sure that everything that glitters is gold
And she buys a staircase to heaven ”
Robert Plant and Jimmy Page – Led Zeppelin – Stairway To Heaven
“Stupid gold” is a common nickname for pyrite. It got this nickname because it’s practically worthless, but it has an appearance that fools people into thinking it’s real gold. With a little practice, there are many simple tests that anyone can use to quickly tell the difference between pyrite and gold. The nickname “Fool’s Gold” has long been used by gold buyers and prospectors who amuse themselves at enthusiastic fools who thought they had found gold. The ignorance of these fools resulted in many of them losing their savings and falling into poverty.
Does it sound familiar to you? Well, if Bitcoin is digital gold, then it’s only natural that there should be a digital version of fool’s gold as well – that is, shitcoins.
Gold and pyrite
Gold occurs in nature mainly as nuggets in some river sediments or, to a lesser extent, embedded in rocks. Its name comes from the Latin aurum, which means brilliant. It is a dense, malleable, ductile, bright yellow metal that does not react with other chemicals or oxidize (it does not rust).
Because of these properties of brightness and no chemical change, gold has always been considered valuable by humans and was used by great cultures to mint coins. Because it is a soft metal, it must be hardened to use and is often mixed with silver and copper to form stronger metal alloys. The fact that gold is malleable makes it possible to use it in jewelry as it can be shaped without breaking. Gold is also used in the electronics industry and as a store of value. Gold is scarce, which adds to its high values as humanity values its scarcity.
Fool’s gold, as pyrite is informally called, has none of the main characteristics of gold other than its bright yellow color. Pyrite is not made of a precious metal, but is a mixture of iron and sulfur that forms an iron sulfide. The color and brightness of pyrite is similar to that of gold and may deceive beginners and the most naive, but the similarities stop here. Unlike gold, pyrite has square or hexagonal features and reacts with other chemical elements or when heated and usually gives off a characteristic sulfur dioxide odor (rotten eggs). Despite its gold-like color, pyrite cannot be used for jewelry because it is not malleable like gold, but rather brittle. Pyrite is also an abundant mineral and was first referred to as fool’s gold in the California gold rush, when less experienced miners believed this yellowish shimmering material was real gold.
There are two categories of minerals in the mining industry: ores, which are the material of economic interest, and gangue, which is material of no commercial value that must be separated from the ore. By definition, gold is an ore while pyrite is a gangue mineral. In this way, it is dangerous to believe that “everything that glitters is gold”, like the lady in “Stairway to Heaven”.
Bitcoin and Shitcoins
Bitcoin is popularly referred to as digital gold because of one of its main characteristics: scarcity. Bitcoin is scarcer than gold itself because its supply is inelastic. In addition to the absolute scarcity, Bitcoin also has several properties that cannot be reproduced by other cryptocurrencies, such as a flawless design (without pre-minted tokens and no advantages for the “friends of the king”), apart from a gigantic network effect.
Alternative cryptocurrencies, also known as altcoins or shitcoins, do not have any of these properties. Like pyrite, shitcoins are not in short supply and there is an unlimited supply of similar and generic projects. Shitcoins aren’t decentralized either. Illustrative examples of this are Vitalik Buterin’s stake in Ethereum and Charles Hoskinson in Cardano. Or more generally: every coin that has a well-known founding team is not decentralized enough, as these coins are not immune to enforcement and blackmail, i.
Decentralization doesn’t just mean running on an independent network, it also means that ordinary users should be able to validate the network themselves. In Bitcoin, this is possible and the cost of running a full node is low (less than $ 200 total). On the Ethereum, network nodes can run on Amazon Web Services (a centralized company) and the cost is about 175 US dollars per month (0.243 US dollars / hour). In Ethereum 2.0 (a big update that could one day come off paper), users need at least 32 ETH to run a validation node, which at current prices is almost $ 110,000 to validate the Ethereum network.
The computing power of blockchains is also a relevant factor in ensuring the security of cryptocurrencies, and as can be seen in the comparison above, there is only one blockchain with relevant computing power: Bitcoin.
The race for digital gold
As with the California gold rush, there are now thousands of coins trying to attract the most naive. These are people who still do not understand the non-repeatable properties of Bitcoin and are naively trying to find “the next Bitcoin”. After all, “it’s easier for this shitty coin to go from $ 1 to $ 2 than it is for Bitcoin to go from $ 50,000 to $ 100,000,” or so is your mistake.
And just like with physical fool gold, this misunderstanding of the qualities that make digital gold truly valuable is causing people to lose their savings, and will continue to do so.
But then how do you know if a particular cryptocurrency is a digital fool’s gold?
- Are there any well-known founders?
- Is there a marketing team trying to sell this coin?
- Is it possible to run your own node at low cost or can only the very rich validate this blockchain?
- Are there coins that have been pre-mined and distributed to founders or early investors?
- Are there any privileged individuals on the network who can validate transactions for the simple reason that they have more of the cryptocurrency than others (or in other words, whoever has more can do more)?
If the answer to any of these traits is yes, then watch out: this coin is not digital gold.
As with gold, the properties of Bitcoin are also not reproducible. There will never be another cryptocurrency with the same network effect, the same computing capacity, resistance to censorship due to real decentralization and everything based on a flawless conception.
But some fools haven’t figured it out yet, which makes them an easy target for shitcoin scammers.
This is a guest post by Pudim. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.