As the Bitcoin network experiences transaction congestion and higher fees many people have considered alternatives to avoid these issues. During transaction traffic peaks, a few cryptocurrency supporters have recommended using altcoins to save money from bitcoin miner fees and speed up settlement times. However, using an altcoin to save a few cents on a transaction may be more of a hassle than you think.
The Cost, Time, and Risks Associated With Using Altcoins to Speed Up Settlement
Lately, there have been a lot of complaints towards the rising fee market and slow confirmation times when it comes to sending a bitcoin transaction. Some say it’s best to patiently wait for Bitcoin developers to implement scaling solutions, but no one knows when this will happen. Now some people are advocating the use of an altcoin to conduct faster transactions with lower fees. But is it worth it?
Exchanging Bitcoin for an Alternative Token
In order to use an altcoin, you have to obtain the digital currency from an exchange. Exchanges will trade you an alternative digital currency, but most (not all) require bitcoin for the trade. This means you still have to use the bitcoin network to conduct a transaction, which will require a miner fee and wait time. You also have to sign up to use the exchange, which takes time and can include a verification process. There are platforms like Shapeshift that don’t require a registration process, but for a vast majority of exchanges, the procedure is mandatory.
While using a third party exchange users also expose themselves to the risks of holding funds on a platform that could be compromised at any moment. The list of dead altcoin exchanges like Mintpal and Cryptsy have proved user funds can disappear in the blink of an eye without warning. All that aside, swapping bitcoin for an altcoin will still incur a bitcoin miner fee, the altcoin’s miner fee, and also a fee to execute the trade within the exchange. Furthermore, spreads can be quite different across many altcoin exchanges so a person may lose more money waiting on a buy order to fulfill their sell request.
Another reason against using an altcoin for settlement over bitcoin is volatility concerns. Over the past eight years, bitcoin volatility has decreased significantly. However the same cannot be said for the hundreds of nascent alternative cryptocurrencies in existence. Bitcoin has far less market volatility than any altcoin, and this attribute continues to get better. This past December Bitcoin proponent and analyst Willy Woo explained in great detail why bitcoin is less volatile than altcoins. Furthermore, Woo has suggested that bitcoin volatility will match major fiat currencies in two years. “I established that Bitcoin is well on the path to being the most stable currency in the world,” explains Woo.
Using an altcoin to save money could lead to bigger losses if the transactions are not settled quickly. Moreover, leaving a secondary purse of altcoins for spending money may be even more disastrous as price swings can definitely affect a person’s purchasing power. Altcoin volatility can be a huge risk to pay in contrast to paying higher bitcoin transaction fees.
Infrastructure and Merchants
Bitcoin’s network effect runs deep and it has the largest infrastructure compared to every other altcoin. Merchant acceptance for altcoins is very low compared to the 100,000 plus merchants worldwide who accept bitcoin. So using an altcoin to save money is not so convenient as there are very few places that accept other digital currencies. Bitpay’s merchant services has no altcoin support alongside a great majority of global payment processors and debit cards that only utilize bitcoin.
Additionally, in order to hold an altcoin using a secondary spending purse rather than leaving the funds on a vulnerable exchange, users have to use the token’s limited infrastructure. A great majority of altcoins have very little infrastructure. A person may have to download the altcoin’s QT client because there are very few alternative light wallets. Furthermore, many of the light client wallets for altcoins may not be reputable or vetted enough which could easily lead to a loss of funds.
Altcoin Blockchain Issues
Altcoins can also suffer from the same issues bitcoin contends with, such as slow confirmation times and network attacks. For instance, a few months ago an attacker caused a lot of difficulty for users of the Ethereum network. Throughout the fall months of 2016, the Ethereum network had suffered through many computational DDoS attacks. This caused problems with Ethereum’s GETH client and forced some users to switch to the Parity client. Furthermore, during all of this transactions took hours and even days to process across the network.
Back in 2014, the Dash (formally Darkcoin) community suffered from an emergency fork while trying to implement its new masternode system in a series of forks. During the event, some users found their wallet clients were unable to sync, and popular altcoin exchanges froze Dash deposits and withdrawals. Dash holders suffered a significant loss from market volatility during the emergency fork. The cryptocurrency reached a record high of $15 per Dash prior to the problems and subsequently fell to a low of $5 over the next few months.
Bitcoin Has Its Problems, but Altcoins Seem to Have Far More
Saving money using an altcoin instead of bitcoin to avoid higher miner fees may not be in people’s best interest. Altcoins may be useful for other niche applications like anonymity services, but to save a few cents it may not be worth it. The fact is, there are far more risks involved with opting to use an altcoin for settlement. In many ways, bitcoin’s benefits still eclipse alternative currencies, even with higher fees and slower confirmation times.
However, if the Bitcoin network does not scale and the fee market continues to rise rapidly then an exodus to an altcoin could very well happen.
Images courtesy of Bitcoin.com, Pixabay, and Woobull.com.