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Bitcoin has a uniqueness problem – Bitcoin has lots and lots of unique features and advantages that you can read about. However, I find one particular risk that you can drive a truck through. Compared to US Dollar (or Euro, Pound, any national currency) which by definition can have only one of each – and therefore is limited in number of ‘types’ of currency. So while in theory the Federal Reserve can print infinite dollars, there is only one Federal Reserve with only one dollar. But nothing prevents “multiple Feds” to exist in the virtual coin world – you can imagine an infinite number of currencies each with a finite number of coins. We already have Litecoin. What prevents me/you/anyone from creating Goatcoin, Sheepcoin, Bitcoin2, Bitcoin3,..BitCoinN? Why should Bitcoin then retain its purchasing power except for the first mover advantage.
Bitcoin is not like Gold
I keep reading how Bitcoin is like Gold. Well, its like Gold in the sense that there is only finite number of Bitcoins. But Gold has very little competition – Platinum and Silver being too very good alternatives. We are limited to the number of elements in the periodic table and within that to the elements that are considered to valuable metals – typically stable or nearly inert metals.
In case of virtual currencies, its possible to have an infinite number of ‘alternatives’.
Think of it this way: If Bitcoin is like Gold then you can imagine Litecoin to be like Silver. Except we can have way to many of these Coins.
This means that we can have an infinite currencies each with a finite number of coins. This means that the total supply of coins of all possible types is unconstrained and nothing like Gold or even Gold, Silver, Platinum combined.
Bitcoins in not like Fed
Another way to think about Bitcoin is to compare it to the US Federal Reserve – both ‘print’ coins. Except the Fed can print infinite while Bitcoin only allows for finite number of coins. This is hailed as one of the key big features of Bitcoin. Except that there is only one very unique Federal Reserve created by our government and there is only one – by law.
No law, no technology prevents us from having an innumerable number of Bitcoin equivalent currencies.
One counter argument – and somewhat valid – is that Bitcoin is already accepted by many people who have agreed to value it. This is true and this may mean that Bitcoin continues to hold or even increase its value. But its also true that there is nothing preventing from one or many more currencies to be launched and supported – we already have many already listed here at List of alternative crypto currencies.
(Cross-posted @ Anshu Blog)
The “network effect” is key to understanding why Bitcoin will likely remain the dominant cryptocurrency, barring some kind of technological or political catastrophe:
https://en.wikipedia.org/wiki/Network_effect
Bitcoin isn’t just source code. It is a massive network of miners and users and merchants and developers. Anybody can copy the source code. Copying the others is only really feasible if some new alternate coin has a very impressive list of objectively superior qualities to it than bitcoin has. Furthermore, you must consider that if there is a killer feature that is objectively better, then bitcoin could be easily adapted to have that feature, thus making the new coin redundant. Lastly, lets say some new coin does come along and its superior in every way, and there isn’t really any way bitcoin can alter itself to copy its features. Then what will be the easiest way to purchase this new digital currency? With bitcoin.
Thanks for the comments.
Yes, the popularity of Bitcoin does provide it a huge advantage. Just as the popularity of US Dollar and for that matter Gold & Silver provide them an edge.
Look at the irony though – we are witnessing the exponential growth of Bitcoin – proving that you can go from a handful of users to millions in a few years (or months). This unprecedented high growth rate also indicates that it may be possible for other crypto-currencies to arise as fast if not faster.
In a way Bitcoin’s rapid rise proves that its possible for new crypto-currencies to rise rapidly.
So while I agree that Bitcoin has an edge it is not a hundred year edge.
Only time will tell. I believe Bitcoin is a significant new currency right now. We will see if it remains the sole crypto-currency of import.