The Coming Demise of the Altcoins (And What You Can Do to Hasten It)
TheMisesCircle.org is no longer being updated. Please see the current version of this article at NakamotoInstitute.org.
O my brethren, am I then cruel? But I say: What falleth, that shall one also push!
Everything of to-day—it falleth, it decayeth; who would preserve it! But I—I wish also to push it!
Know ye the delight which rolleth stones into precipitous depths?—Those men of to-day, see just how they roll into my depths!
A prelude am I to better players, O my brethren! An example! DO according to mine example!
And him whom ye do not teach to fly, teach I pray you—TO FALL FASTER!—
– Friedrich Nietzsche, Thus Spake Zarathustra
Introduction
I understand the word altcoin to mean a network which competes with Bitcoin’s function as a currency and which is smaller than Bitcoin’s network. Thus, Litecoin is an altcoin, whereas Bitmessage is not, even though it is inspired by Bitcoin technology. The Ripple system is not an altcoin, although there is an altcoin called ripples (XRP) which is inexorably linked to it. Ripples the currency should still be considered an altcoin even though its underlying technology is quite different from Bitcoin.
This article explains why there is a tendency towards a single dominant currency, why the network effect overwhelmingly favors Bitcoin above any of its competitors, and why people should speak out against altcoins rather than allow more people to get fooled by them.
The Uses of a Currency
There are two things you can do with a currency: save it or spend it. Although in the future I expect that most people will become both savers and spenders of bitcoins, it is possible to separate these two uses conceptually.
It is possible for people to save with a currency even if there is nothing to buy with it, but it is impossible to spend a currency (that is, use it as a medium of exchange) unless there is someone who wants to save it. If everyone who acquired bitcoins did so simply to spend them literally immediately, then it would be impossible for them to have any value because anyone who held them for any period of time at all would be willing to get rid of them at any price, including zero. Once the currency develops a little bit of demand, then it can be used as a medium of exchange by paying to those who demand it in exchange for a good or service, or indirectly by paying it to a merchant who immediately resells it for money.
The market cap of a currency should be seen as roughly proportional, all things being equal, to a currency’s liquidity, which refers to the value that can be bought or sold without significantly altering the price. While it is theoretically possible for a currency of a given market cap to support any volume of trade as a medium of exchange, this requires that people become less and less willing to hold the currency for any length of time as the volume of trade increases. In this situation, severe practical difficulties ultimately develop. For example, if someone wanted to buy something worth more than the entire market cap of the currency he was using, he would have to pay with several transactions.
Any disruption in the balance of buyers and sellers would affect a currency’s market price more drastically if its market cap was small than if it was large, so the currency with the smaller market cap would be less liquid than the other.1
The Highlander
A more liquid currency has an advantage over a less liquid one because it can support more trade. Furthermore, liquidity in a currency is self-reinforcing. The more that people buy a currency, the more liquid it becomes. This naturally tends to promote the success of a single currency over all the rest.
Consider the hypothetical example of an economy that uses exactly two currencies, Acoin and Bcoin, which are equally preferred by holders. For whatever reason, Acoin develops a very slight advantage over Bcoin. Consequently a few people exchange Bcoin for Acoin, thus very slightly increasing the market cap and liquidity of Acoin and slightly decreasing that of Bcoin.
Now, in addition to its initial slight advantage over Bcoin, Acoin has the advantage of becoming more liquid. As a result, more people will tend to sell Bcoin for Acoin. Thus, Acoin’s initial advantage is self-reinforcing, and as the disparity between Acoin and Bcoin increases, its superiority becomes more and more evident.
This process will continue as long as Bcoin still serves as a currency. It may ultimately remain only to serve some extremely marginal purpose, but not as a general medium of exchange. This process should be expected for any two currencies on the free market, ultimately leaving one that is overwhelmingly dominant.2
Thus, a more liquid currency will tend to be preferable to both savers and spenders: to savers because of its self-reinforcing superiority and to spenders because there is simply more that can be bought with it.
Liquidity Cannot Be Designed
Liquidity, which is required for anything to be used as a currency, cannot be built into a protocol. It does not matter how brilliantly designed an altcoin is and what cool features it has. Its value depends on a factor that is outside its designer’s control, something more characteristic of the “spontaneous order” of the market than an intrinsic property of the currency.
Bitcoin and the dollar have very different properties, so it is possible to explain Bitcoin’s success in competition with the dollar despite the network effect of the dollar in light of those different properties. However, cryptocurrencies do not have very different properties from one another, so there is very little basis to predict that an altcoin can successfully compete with Bitcoin. In the case of, for example, as Bitcoin and Litecoin, I see no evidence in reality or in my understanding of human psychology that investors should see the difference in their mining algorithms or confirmation times as remotely important. The factor of roughly twenty by which Bitcoin’s market cap outweighs Litecoin’s is by far the biggest difference between them. Right now Bitcoin is growing by supplanting the national currencies, but eventually will absorb the altcoins as well. Bitcoin will gobble up Litecoin at some point, but I do not know if it will be the appetizer or the dessert.
A new altcoin cannot survive with only a fraction of the cryptocurrency pie. It must defeat everything else to succeed, including Bitcoin. Since it begins at an extreme disadvantage with respect to Bitcoin, it cannot succeed with technology that is marginally superior to Bitcoin. It must be as significant an advance over Bitcoin as Bitcoin is over the dollar.
Merchants Don’t Matter
The above discussion explains why Vitalik Buterin’s objection to my earlier article completely misses the point. He first downplays the network effect for currencies on the basis of switching costs.
Making the switch from fiat currency to Bitcoin is quite difficult, and creating bridge services that work between the two is a multi-million dollar affair involving placating established banking partners and complying with a large body of regulation.
The path from one cryptocurrency to another is much simpler. Anyone can set up an anonymous exchange over Tor, and it may even be possible to make trust-free decentralized exchanges between currencies using Bitcoin’s underlying cryptography directly.
He then argues that merchants can easily accept as many cryptocurrencies as they wish.
For a merchant accepting Bitcoin, if alternative currencies gather any popularity at all then switching to Litecoin or Primecoin will be a simple matter of downloading a patch. It is even possible for a merchant to accept every cryptocurrency at the same time.
These arguments entirely misconstrue the nature of the network effect for currencies. Merchants are totally irrelevant and so is anyone who uses the coins only for the purpose of transferring funds. What matters are the investors, the people who hold the coins long-term. For them, there is an enormous difference between the different coins, and switching costs are largely irrelevant. Investors will prefer to hold the coin that has the best prospects, thereby necessarily improving it relative to its competitors.
Analogy to Social Networks
For currency investors, the network effect is absolute because it is impossible to buy bitcoins and some altcoin with the same money. This is why analogies to other network effects, such as that between social networks like Facebook and G+, are spurious. It is possible to leverage the benefit of Facebook and G+ at the same time. I can, for example, write a single status update and then post it to both social networks at almost no additional cost.
Furthermore, there is very little long-term investment in the use of a social network. New status updates lose all value in hours. Message boards come and go. All it takes is to ignore Facebook for a few weeks before there is little to draw one back to it. The network effect for social networks is therefore tiny compared to that of currencies.
Intellectually Barren
So far, altcoiners have been able to continue creating and mining altcoins without having to justify themselves very clearly. The responses I have heard to my arguments against them have been terribly inadequate: I get either a non sequitur (“Scrypt is ASIC-resistant”) a misunderstanding of the network effect (as with Vitalik’s piece) or a vapid, inappropriate skepticism (“How can you be absolutely certain that Bitcoin will win?”3).
I have never even heard any positive argument for any altcoin that explains why a majority of Bitcoin investors should sell and buy the new coin, or why enough new investors should reject Bitcoin and invest in the new one, in spite of the enormous advantage that Bitcoin already has.
Altcoin Investment Psychology
The present popularity of altcoins should be explained in terms of foolishness and hubris because it cannot be explained rationally.
As investors look at a new altcoin that has come out, they might think to themselves, “This cryptocurrency network is innovative, perhaps this means it will do well.” They might buy in at that point, or they might think a little harder and continue, “But wait. Bitcoin has the much larger network and is therefore objectively more useful as a currency than this new altcoin, despite its innovative features. If I decide to buy some, I would have to sell some of my bitcoins for it, so there is a real opportunity cost. Furthermore, the only way it can win is if all the other investors also switch. Will they or won’t they?”
At the same time, many of the other investors will be thinking the same thing. They will think about the fact that the rest are thinking it too. They will think, “No reasonable person would expect this coin to have any but a small chance of success. But since it can only succeed if lots of people really believe in it, this ensures that it cannot be successful because if no one buys more than a small gamble, then its failure is virtually guaranteed.” If they stop thinking there, they will stick with Bitcoin.
However, they might also think something along the lines of, “It’s quite possible that this altcoin will have an extra jolt in price during the next Bitcoin mania because some people may buy it either because they were not intelligent enough to follow the same train of thought as me or because they too, like me, realize that it may attract people who can be preyed upon. However, that is a risky proposition because it will be hard to know if I am the one preying upon suckers or if I am a sucker myself.” They will then either buy it or not depending on their own confidence in their ability to predict the behavior of foolish people.
Thus, altcoin investment ends up as a dynamic interplay between people who have not thought very far ahead, and people who think they are taking advantage of other people.
The Bursting of the Bubble
The more that altcoiners are asked for valid self-justifications, and the more they are asked how their new coin will achieve liquidity, the less effective their arguments will become, the less hype they will be able to generate, and the less that people will buy them. To defeat the altcoin movement, keep warning newbies against them and insist upon relevant arguments every time an altcoiner tries to change the subject.
The irrationality that props up the prices of altcoins cannot continue indefinitely. As soon as enough investors learn to think far enough ahead to wonder who the sucker is, the prices of the altcoins will begin to drop inexorably. We can make this happen sooner than later. I would like to see a more concerted effort within the Bitcoin movement to demand valid answers and to denounce as charlatans those who cannot give them.
I don’t think it is right to let the altcoin bubble continue without trying to stop it. Altcoins will cause a lot of people to lose money and for a lot of people to make money who are not adding value. Many who are already invested will lose, but I would prefer at least that there will be no more.
Although I cannot be certain, and I am, like everyone, prone to wishful thinking, I think that there is some indication that the altcoin movement is playing itself out: it is no longer possible to generate any interest in a straight Bitcoin clone like Litecoin. It is now necessary to add either a lot of extra features, as is the case with Mastercoin and Ethereum, or simply to act outrageous, as with Dogecoin. Furthermore, it is ridiculously easy to create altcoins now: Coingen is a service that automatically creates altcoins to any specification, and which, amusingly, only accepts payments in Bitcoin. It was apparently created especially for the purpose of helping to discredit altcoins.
Dogecoin
Dogecoin is the highest form of satire. It is such a perfect depiction of the real-life insanity that it is being treated seriously. It is unabashedly coasting on image with no substance whatsoever. Dogecoin supporters do not claim to be the silver to Bitcoin’s gold or attempt to make any arguments (other than “such wow”) to justify Dogecoin as an investment; they just make jokes and give tips to one another.
As I write this, Dogecoin is the fourth largest altcoin between Peercoin and Mastercoin. This fact should get altcoin investors thinking, “Does this mean that other altcoin investors are so stupid that they can’t tell the difference between a joke and innovative projects like Mastercoin and Peercoin or does it mean that there actually is no difference?” The more people think this way, the more the concept of an altcoin will be discredited.
Mastercoin and Ethereum
The other trend in altcoin creation is to add a lot of bells and whistles and to pretend to be a very advanced product so as to hide the fact that it is, at bottom, an altcoin. Examples of this trend are Protoshares, Mastercoin, Ethereum.
All of them are basically altcoins that are also platforms for creating more altcoins. This is insane. Each of them has its own individual problems, but the fundamental problem with all of them is that none of their features are useful unless the underlying altcoin is liquid. Thus, their extra features should not be seen as necessarily granting a competitive advantage over Bitcoin. They still have an enormous hurdle to overcome before they could be a viable competitor to Bitcoin. When people say, “But Ethereum can do smart contracts!” this is actually false. It is only the Ethereum protocol plus liquidity that make smart contracts possible. If Ethereum were not liquid, it would be impossible to build any real penalties into a contract because it would be impossible to tie a sufficient value into them. Since there is no logical reason to expect Ethereum ever to be liquid, there is no logical reason to expect that many people will be able to create smart contracts with it.4
Protoshares and Mastercoin are no longer being hyped much and Ethereum is the big new thing. However, none of them addresses the real issue of being a viable competitor to Bitcoin. Ethereum will therefore soon be forgotten like the rest once it inevitably fails to deliver on its promise.
Legitimate Reasons for Altcoins
I don’t object to altcoins in themselves. What I object to are the lies. There are legitimate reasons for altcoins, but none of them allow for real money to be made off of them. Altcoins should have little or no market value, but the distributed system as a whole can have value as an experiment or test of a possible upgrade to Bitcoin.
If you tell me this altcoin implements some cool new idea, then very well. But if you tell me it’s going to be the next big thing and that it’s a great investment, you’re lying. And if you believe it yourself, you’re lying to yourself.
The only reason that an altcoin should have any value at all is as an extreme speculation on the death of Bitcoin. Although it is impossible for an altcoin to beat Bitcoin on its own merits, it is theoretically possible that the Bitcoin community could destroy Bitcoin through its own foolishness. If that possibility should loom, then altcoins can do a valuable service by going up in value, thus alerting the Bitcoin community to reverse whatever it is doing.
Namecoin
Namecoin is unique among altcoins as far as I know in that it provides a valuable service directly to users that does not depend on the value of the underlying coin. It is not simply an experiment that might be viable one day if it were incorporated into the Bitcoin protocol, although it would be more useful if it could at least be made compatible with Bitcoin in some way.
Namecoin is a system that includes both an altcoin and a distributed name registration service. Namecoin is designed so that namecoins must be spent in order to register a name on its block chain. This is a design flaw because the extra currency is extra baggage. It would have been better to design Namecoin to work directly with Bitcoin instead, but since a distributed DNS service is inherently useful, it is possible that Namecoin could succeed anyway.
In a future world in which Namecoin has gone mainstream, namecoins would have to have some value, even if they did not become the dominant currency. In that case, however, namecoins would not be a currency at all, but simply a token used to interact with the Namecoin system. They will survive as a parasite that detracts from the overall value of the namecoin system.
If a means could be designed to make Namecoin work with Bitcoin payments, for example by designing a protocol that provably ties a Namecoin payment to a Bitcoin payment that goes to the Namecoin miner, then Namecoin the currency would become a nearly worthless token more rapidly and the Namecoin system would be greatly improved.
Conclusion
Altcoins are not viable because they cannot reproduce that which gives Bitcoin an overwhelming competitive edge: its market cap. It is unethical to create an altcoin with the purpose of making money off of it for this reason. They should not be taken seriously. The way to defeat them is to keep demanding of the altcoin promoters that they spell out why their altcoin makes sense as an investment. The more that this demand is made, the worse altcoins will look.
This point needs to be made in a variety of ways, again and again. This article and the few others that have been written are not enough. It needs to be restated in as many different ways as possible until the altcoin movement is over.
Disclosure: the author owns bitcoins but has never owned altcoins, due to the fact that they are unsustainable. If he thought altcoins were sustainable, he would buy them rather than explain very carefully why they are unsustainable. He did try to mine dogecoin for a few hours once, but was not wowed.
Update March 17, 2014: Clarified 2nd paragraph of section “Liquidity Cannot be Designed”.
If you like putting altcoins out of their misery, please donate to Daniel’s writing!
Daniel now publishes at the Satoshi Nakamoto Institute: http://nakamotoinstitute.org/mempool/
- Although in an earlier article I satirized people’s fear of volatility, clearly if Bitcoin’s price could change drastically as a result of everyday purchases or over ten minute spans, then it could not be used to make payments. The difference here is that between volatility and liquidity. A currency is liquid if one person can spend it without changing the price, whereas it is volatile if everyone is trying to spend or buy it at the same time. If a currency is volatile because many people are investing in it, then that is a good thing because the currency is becoming more liquid. ↩
- Update March 17, 2014: It has been objected to me that people can value an altcoin for reasons other than the size of its network. That possibility does not change the outcome of this discussion at all. All that will do is change the tipping point between them. When people are perfectly indifferent between Acoin and Bcoin, then they are at an unstable equilibrium when they have exactly the same market cap and whichever one happens to grow slightly at the expense of the other should be expected to win. But let us say for example that Acoin is perceived to be stodgy and uptight whereas Bcoin is fun and youthful, so that people can prefer to hold Bcoin even if it has a smaller network. That does not change the fact that they both become worse when their networks shrink and better when their networks grow. If Acoin and Bcoin were perfectly balanced, you would expect Acoin to have a bigger market cap and Bcoin to have a smaller one. However, if Acoin grew at the expense Bcoin, then the network effect benefits Acoin at the expense of Bcoin. At that point, they are no longer in equilibrium and the network effect benefits Acoin at the expense of Bcoin. And the same thing happens to Bcoin if it grows slightly at the expense of Acoin. There still cannot be two currencies trading side-by-side in the long run. ↩
- My response to this is that I cannot be absolutely certain of anything, but if Litecoin were to beat Bitcoin, I would take this as evidence that cryptocurrencies as a class are not a worthwhile investment. If Bitcoin can be defeated by Litecoin, then Litecoin can be defeated by Dogecoin. Why should anyone invest in any cryptocurrency, and thereby deign to give it value and liquidity, if mere hype and lies can change its fortune? If Litecoin defeats Bitcoin, then I would predict ultimately that no cryptocurrency will win. ↩
- Update March 15, 2014: It was pointed out to me that Ethereum is capable of acting as a distributed DNS service. This puts it in the same boat as Namecoin. See the section on Namecoin for another conceivable outcome for Ethereum. ↩
I think you are missing the two principal reasons that Altcoins exist, and will continue to exist:
1) They are an outlet that miners turn to when mining a mature coin becomes unprofitable
2) They are significantly more volatile than Bitcoin, and provide get rich quick opportunities, especially shortly after being released, which appeal to people for obvious reasons
I foresee a revolving door for altcoins. New more “promising” ones will come and replace the older ones that have lost their appeal simply because other altcoins are more attractive for reasons I mentioned above. Then, as these new coins age, they will also get replaced, providing a constant opportunity for miners and gamblers alike.
I see nothing wrong with this, and I don’t see it as a threat to Bitcoin. As the number of altcoins increases, they compete significantly more with each other than they do with Bitcoin.
Neither of those actually explains or justifies the existence of altcoins. They are just things you can do with them provided they already exist. If people started to realize that altcoins don’t make any logical sense as investments, then you could never make money mining them or trading them.
People are looking to get rich quick, not “invest” in the traditional sense. Getting in early on the right altcoin, either by mining, or buy purchasing, can do just that. This incentive is too great to ignore. Altcoins will not only continue to exist, but get more popular.
That’s also very true.
In order for people to think that altcoins are viable as short-term speculations, there has to be someone around who think an altcoin might actually work in the long run or else there could would be no one to make money off of. If people realized taht altcoins were not long-term viable, there would never be any altcoin hype cycles and they would just be worth nothing.
Honestly, you’re almost entirely wrong about this. The altcoin scene is at least 90% speculators making money off other, slower speculators. The vast majority of investors (and, full disclosure, I am one) fully understand that these coins are all basically pump’n’dumps, and are happy to participate on the theory that they’ll get in and out on any given coin faster than other speculators before moving on to the next one. There are a small number of true believers for particular coins, but they’re just a tiny minority of overall participants.
I don’t understand how any of that makes me wrong. That sounds exactly like what I described in my article to me.
I meant your statement that there has to be someone who thinks an altcoin might actually work in the long run. Most newer coins are straight-up clones with no added functionality, but with some new marketing hook (support the Lakota! benefit the people of Iceland!) that the developers hope will produce a quick hype cycle they can profit from before selling their entire stake within a few weeks of the coin’s release. Speculators buy in not because they believe the believe the developers’ hype, but because they evaluate the marketing as being clever enough to hopefully hook in dumber people and gamble that they’ll be able to get in and out before the developers dump their holdings. It’s a very, very cynical scene overall.
That’s strong evidence that the altcoin bubble is fit to burst and that no one will be able to speculate on them successfully in the near future.
> In order for people to think that altcoins are viable as short-term
speculations, there has to be someone around who think an altcoin might
actually work in the long run or else there could would be no one to
make money off of.
False. It’s enough to simply think there’s a chance to get rich quick even if everyone knows it’s going to crash; this is why ponzi schemes work even though people know it’s a ponzi when they invest. They’re looking for the greater fool. Long term investors are simply not required.
However, excellent article otherwise.
No, a Ponzi scheme does not “work”. You can only consistently make money off them as long as there is a greater fool. Once people get wise to the trick then they stop working. That’s what’s happening now, and pretty soon you’ll be the greatest fool left.
Your comments here have not aged well.. As I predicted, altcoins are doing better than ever, and are much bigger than they were when we had this debate.
It seems that the main reason altcoins exist is the get-quick-rich-like-bitcoiners scheme. Most of them wish to steal some of the bitcoin’s glory, but in the end they depend on bitcoin’s success. If bitcoin crash, they all crash as we recently saw.
But what about Dogecoin? You said there is no logic to it. Maybe, but there a great community that fanatically believes that it will go to the moon. Here are some network effects you mentioned.
Another interesting coin is Auroracoin, it is the 3rd true crypto by market cap. The devs preminded 50% and in the next months they will distribute all these coins to Iceland’s citizens. It’s such a neat idea that it found a lot of imitators.
The problem is that there is still no answer as to how Dogecoin or Auroracoin can compete with Bitcoin. You can create hilarious or innovative coins all day long, but you still haven’t come up with something worthwhile unless you can get around the problem of the network effect.
You are missing the point, it’s not Dogecoin vs Bitcoin vs Litecoin vs whatever. The point is that currently crypto-currencies are something like the 0.2% of the global cash right now and it will take probably several decades for them to reach full potential. Do you really think that Litecoin will become irrelevant? Dogecoin’s community evaporate? Not really, even if some people think that they are stupid (there are people that think bitcoin is stupid). Will ShitCoin disappear? Most probably.
My prediction is this (for the next 5 years):
– Bitcoin will remain the top crypto coin
– Payment processors will accept several crypto coins
– Cryptos will not replace fiat
– The value will go up (bitcoin vs USD, litecoin vs bitcoin)
– Many crap-coins will disappear/become irrelevant
If people understood this economic argument, then litecoin WOULD become irrelevant. I’m trying to make it irrelevant by arguing about it. And everyone else should do that too because the only basis for altcoins is taking advantage of stupid people, which I don’t think is ethical.
If you try to differentiate between major coins like Bitcoin, Litecoin, Dogecoin and minor coins that mainly are used for speculation and mining, then you have a valid point.
If you say that the 2nd largest blockchain-based currency is irrelevant and that it takes advantage of people, then what about Bitcoin itself? Your argument is null, as bitcoin ecosystem is worst in this sense: price crashes, goxing. How many people lost their money? Yet this is why bitcoin is so great, it is the pioneer coin.
Another point: The crypto startups that are being created now are supporting more and more altcoins. Coinkite already supports Litecoin and are going to add Dogecoin soon. Litecoin’s Charles Lee works for Coinbase and they will add support too in the future. If BitPay will not accept Litecoin that’s fine, I can guarantee that others will. Litecoin is younger than Bitcoin, so it only natural that it will come second in adoption.
I get your point and totally agree that bitcoin is the number one and most probably will stay like this. What you fail to acknowledge is that there is not a technological reason not to adopt major alt-coins. It’s like saying that Mastercard should not exist because VISA is larger, I don’t get your point.
I am following Bitcoin from the first bubble in 2011 and became interested in Litecoin 3 months ago. The feeling that I have is the same that I had for Bitcoin, a lot of uncertainty but huge potential. Dogecoin? Great community.
You are a smart person and I enjoy a your writings especially because you have a mind provoking ideas and you expand my horizons. Keep promoting Bitcoin (and hopefully not bash too much the major alt-coins)
Cheers
I already addressed this stuff in my article and you haven’t addressed my basic thesis about network effects. The fact that Bitcoin is the biggest indicates that investors ultimately will favor it over the other cryptocurrencies.
They are already favoring Bitcoin but this doesn’t mean that Litecoin will not get any love 😉
Very thought-provoking. But “network effect” seems to be your only determinant of a new currency’s success or failure. I’m not so sure. I think what Doge has showed us is that, absent any other single actual advantage, “affinity” money can be successful. Seems to me that means we’ll get PepsiCoin, MileyCoin, and the one I’ll use, SeaShepherdCoin. The Doge community seems not to care much whether they lose money or whether they can spend their Doge. They care about the community they’re in, and the token is just a membership fee.
If you only consider network effect, then why would people have adopted Bitcoin in the first place? It was volatile, untested (and still is). There were people that assumed the first risks (trading 10k for a pizza), because Bitcoin had another vector unrelated to network effect. It was because it represented a new possibility: an intangible additional factor. Think of altcoins as networks, whose base finds itself in a blockchain. Bitcoin does NOT represent all the niche networks of ALL communities. When different currencies can be easily duplicated, the inevitable result will be thousands of currencies with various network effects. There will be a huge long-tail of community coins. Heck, you even have this example in real life. Why is there paper community currencies? Because that community currency has an additional factor: meaning. Using that currency over another is not just about it’s monetary value, but its use a method for communication: an implicit vote of a network.
And yes. Networks rise and die. All of them do. And yes, depending on risk aversion, people will stick with currencies with more liquidity (ie BTC in the crypto space). But if people are given a choice to use a different currency that has an additional loaded meaning, they will assume that risk even if there is a currency with less risk.
Your argument is broken.
Network effect favors one player to the detriment of others which usually means favoring the first player.
Local currencies usually work because they are subsidized one way or another, not because people attach some sort of meaning to them.
Dogecoin is a good example, it’s successful not as a means of exchange, ie. a currency, but as a meme, ie. some random t-shirt sporting some witty message.
Litecoin had good marketing, it was presented as silver to gold. The problem is that the double standard never really worked.
The point is not that altcoins won’t exists, it’s that they will have an insignificant monetary function compared to the first player,who benefits from a huge network effect, and therefore from a massive liquidity advantage.
There are currently many different networks in reality. We all form part of different ones. It’s one massive venn diagram. It’s all liquid and not very tightly defined (some are, some aren’t). You have country-affiliation, city-affiliation, neighbourhood-affiliation, religious-affiliation, friends-affiliation, music-affiliation and so forth. Altcoins can quantify interest & ownership in any and all networks.
Each altcoin’s purpose both can ‘act’ as a currency but also as a verifiable proof of ownership in any network. And that’s what is meaningful and useful to people. That’s why people own Dogecoin, because it represents a light-hearted community. And when you are trading Dogecoin, you are not only transferring monetary value, you are transferring the implicit connection to the community.
They might have insignificant monetary function, but people still use them (and the current market shows exactly why), even in the face of it being a poorer form of money. It’s exactly how Bitcoin started. Initially, everything about it made it a shit form of money. It only had promise to eventually fulfil the role of a very useful form of money. But people spent it, even when dollars and credit cards worked perfectly fine, because they were vested in what it represented.
So think about it like this: people use a currency because it has 1) a monetary vector and 2) meme vector (using meme in the pure Dawkins sense of the word). If we only relied on 1) a monetary vector, no one would’ve adopted Bitcoin. In some cases, the meme vector is enough for people to take the risk for a reasonably bad monetary vector.
And this is innate. Even as children we understand this. Playgrounds are rife with informal economies that are incredibly bad monetary vectors. We traded cards, we traded marbles, we even trade sweets. But in that context, the meme vector was more important, because it meant a social involvement with the other kids in the playground.
You keep repeating over and over the same bogus assumption without actually arguing it : that people will use a currency for anything else than its properties as a currency. If I like Pink Floyd, I listen to it, I wear a Pink Floyd t-shirt but I don’t go out of my way to use PinkFloydCoin for anything else than lulz.
There are also a couple other things you seem to be confused about, for example “the current market shows exactly why”, no the market doesn’t show the “why” part, that’s your own personal, subjective and unargued opinion. The market just shows relative valuation, which may be based on perfectly rational premises or complete nutjobbery. Which is which is the very purpose of this argument.
The other thing you misunderstand is the initial reason why people used Bitcoin in the first place. It’s not because it was “some other cool form of money” it was because Bitcoin, from its very inception, disrupted the core assumptions of the monetary forms that were present to date. It introduced a revolutionary new form of money that was immune to arbitrary inflation and that was also immune to forcible taxation. In comparison to Bitcoin there’s no altcoin that can say it brings such disruption. And that’s why extending the comparison “Bitcoin vs. fiat” to “Alts vs. Bitcoin” is completely broken.
Your analogy to marbles puts the final nail in your own coffin. As children we might have used marbles, but growing up, we recognize the superior form of money and switch to it. Is there a single adult you know that uses marbles because “hey, they’re pretty!” or Pokemon cards because “hey, gotta catch’em all” ?
So no, people do not, and have never used an actual currency for its intrinsical “meme factor”. If you have a coherent argument as to why people would use currencies for their “meaning”, “meme factor” or any such nonsense, then please proceed, I’m listening 😉
Hey David. Thanks for the reply.
> complete nutjobbery.
So you are saying that all the altcoins value are made up of nutjobs? Rationality & nutjobbery are not mutually exclusive. Any economist (and writers such as Dan Ariely [Predictably irrational] & Daniel Kahnemann [Thinking, Fast and slow]), will tell you. We aren’t rational. Even if we think we are rational, we aren’t. I fully admit I’m not rational and prone to plenty biases (which I actively seek to understand and mitigate), based on those books I’ve read.
I still stick with the marbles anecdote. It represents on a microcosm my point. Value networks rise and die. Bitcoin for the most part will retain most value simply to due its first-mover advantage in this space. Niche networks of value will always exist (and we can see that right now with the altcoin space), and that’s admitting that they rise and die. Heck, remember, even Bitcoin might disappear if a vastly superior form of money comes along (personally doubt it at this stage).
Here’s an argument about why a ‘meme factor’ is important and always will be. Let’s say there are 2 world powers. The big world power has a stronger currency, but you are a part of the other. You disagree fundamentally what the other world power stands for (death to all to cats!) Out of principle, EVEN if the other currency is better, you won’t use it.
Nope. To put it another way the market exists as a quantum superposition of rationality and nutjobbery. Interpreting the market is why we have market analysts for, (which are nothing else than glorified meteorologists). But let’s move on to the actual issue.
Your marbles example was broken, I’m not really sure why you bring it up again as backing for what follows, which simply consists in guessing what the future will be like without really arguing it.
Your final thought experiment isn’t really backed by anything tangible, sure the North Koreans don’t use the USD, but maybe it’s simply because it’s not practical, and not because of some assumed emotional response. Look at the Venezuelians, they’re not particularly fond of the US, but guess which currency they’re stacking by buying it on the black market… You got it.
The bottom line here is that the “meme”, or “novelty” factor might influence some hype, but certainly not the natural selection of a superior medium of exchange.
Gold is for coins, silver is for forks, and *that* is for a very good reason.
That was awesome. Never thought of it like that before.
Actually most people in the world right now would rather get paid in USD/EUR rather than any other currency, regardless of culture. I’ve said it on your blog but your vastly underestimating human greed and intuitive understanding of opportunity cost. Those community currencies you’re talking about are very niche anomalies that result from unnatural external constraints (eg. cigarettes in prison). Once a money flows freely there is no way that another currency is going to be used unless it is the law or the rule in a given ecosystem (such as a company that would choose to issue its own currency and only accept payments in their currency).
See my comment here: http://themisescircle.org/blog/2014/03/14/the-coming-demise-of-the-altcoins/#comment-1322913334
Did people only adopt Bitcoin in the first, because of its benefits? No. Trading 10k for a pizza had no additional benefits to the process. It was only a belief, a decision to assume risk that *most* people won’t ever do. Perhaps it was a belief in the what monetary future it would represent, but there was definitely an external factor to the decision -> that of the community and what Bitcoin represented (and could represent). It was a mutually satisfying exchange between two participants who both *got* Bitcoin. The same exists in altcoins. Trading Dogecoin, there’s always a vector where the implicit meaning is there. Money is never free from what it represents.
P.S. Sorry, yes, I still need to reply to your comment on my blog. 🙂
I can’t speak for anyone else, but I personally bought bitcoins in early 2011 because of the potential benefits I could get from bitcoins. It had nothing to do with community. Just a pure speculative investment in a technology that I though could genuinely change the world, just like when people bought domains in the early days of the Web or when VCs invest in startups. This potential is realizing itself much faster than I ever thought it would, but that’s besides the point.
Until an altcoin brings breakthrough (not incremental) innovation competing with Bitcoin as an incumbent technology, all altcoins will remain very small phenomena, on the same scale as frequent flyer miles or various ponzi schemes.
People referencing Dogecoin as a better currency because people are actually spending it on tips are missing the point. It’s only because people know there is no future for Dogecoin that they’re getting rid of it. And that’s exactly what happened with that 10kbtc pizza sale. If the guy who paid 10kbtc had any hope that his bitcoins would one day be worth $100+, he would’ve never actually paid with them, unless he’s an extremely rare kind of weird or 10kbtc was a very small % of his holdings. The minute people start believing Dogecoin actually has potential to become a store of value and hence money, they will start hoarding it. (But that will never happen as it is both inflationary and not backed by a state, making as worthless as air in an open field).
Bitcoin allows for profitable new business models to exist that are impossible in a dollar network. They are profitable enough to make the transaction costs worth it. This is what got Bitcoin a foothold, through businesses like the Silk Road and Satoshi Dice. As its network grows, it draws more and more people in. http://nakamotoinstitute.org/mempool/why-bitcoin-will-continue-to-grow/
Bitcoin is the biggest simply because it was the first out of the gate. Make a calculation about the money that was recently spent on Scrypt ASICS, that’s got to tell you something about investment in altcoins.
Yes, bitcoin has the biggest network because it was the first one out. That changes nothing. The fact that it has the biggest network is what makes it the best one, and also the reason that none of the alts can beat it. If Litecoin had come first, then litecoin would be the biggest and best.
4 years later and Litecoin has much more stability then the fork troubled bitcoin. How will Bitcoin Gold rank 1 year from now ? The name is really appealing and it has Segwit. I think it depends on how many people will mine it.
In innovation history the early birds tend NOT to be the winners in the long term. Bitcoin is plagued with too many problems and the developers are not rewarded properly. The miners took over the coin. I really prefer Dash and Litecoin. But Ether is terrible to use and most of the tokens on ETH will disappear. The first ICOs made the ‘organizers’ rich in minutes, but that hype is gone, at least for now.
Interesting. You were absolutely right. Even if it is only 4 years later now.
Altcoins do not have as much bad publicity as Bitcoin does. When there’s bad news in the cryptocurrency world it’s usually the word Bitcoin that takes the bullet for the altcoins. The negative publicity works on the favor of altcoins and pretty much.
The thing about the technology space is that it thrives on innovation. At one point people never thought that anyone would be able to dethrone MySpace and Facebook comes along and turns MySpace into some obscure music sharing site. LiveJournal used to be the de-facto social blogging service and had a much more powerful “network effect”. History has shown us that people are quite feeble when it comes to sticking to one technology.
Get Rich Quick is the most scammy niche on the internet, even if it always fails to appear so at first. How many times have you personally made a joke about nigerian princes or MLMs with no underlying value? Yet each of those scams started out making money for someone or we never would have heard of them.
Altcoins will soon be relegated to this subclass, simply because they offer no value.
I came here to write the same. I have a friend with a mining rig, and he used to mine only Litecoins, but now he mines various altcoins. He doesn’t invest in them, he exchanges them to Bitcoins ASAP, but he says they give him a better ROI than Litecoins, so long as he pays attention what the price to ease of mining ratio is.
You’re gonna hate the fact that in the short term the number of alt-coins will continue to increase, at an increasing rates. You’re gonna really hate that.
Ethereum and other ‘Bitcoin 2.0’ projects are not alt-coins per se. They are platforms with native units, just like Ripple in that sense. Also, they are experiments that aim to extend the application and usefulness of the underlying blockchain technology. An experiment worth doing. Ultimately the market will decide.
We run an exchange in S. Africa. The #1 thing people wanted was litecoin. So we gave it to them. People like alt-coins, the demand is really there. It’s strong. As ASICs come to scrypt all the scrypt coins will get a boost in network strength. Then a boost in market cap etc…
You say alt-coins are not viable, and yet here they are, with value and being used.
The market is its own justification for existence.
The market can have price things in ways that are wildly incorrect. Just because altcoins exist now has nothing to do with the arguments presented in this article. You have done nothing to refute my arguments or to show that altcoins are, in fact, viable. The only reason people would want to invest in an altcoin is because they don’t understand the economic problems with them, exactly as I explained in the article.
Time will tell on this one Daniel. Good luck with convincing the world of your arguments. Meanwhile if you check all the crypto exchanges, payment processors, mining hardware companies etc…you’ll see the market is telling a different story.
Viable long-term? I happen to see a future full of alt-coins. More than there are now. Many more. But that’s just my vision.
I also suspect you’ll be waiting a while for Bitcoin to rule them all and all alt-coins to drop to zero. Again, just my hunch.
Good article though man. I really did enjoy it.
Also, this is a cool one I discovered just today. A bullion backed coin that moves through the Ripple network. How cool is that.
http://www.nofiatcoin.com/
Why are you cluttering up the comment space under my article when you have nothing to say? All that you’ve said above is ‘I disagree’ with no argument whatsoever. I bet that centuries from now, people will still love reading your unsubstantiated opinion here. Also I already dealt with ‘let the market decide’ in my previous article on this topic. http://themisescircle.org/blog/2013/08/22/the-problem-with-altcoins/
Dude. Relax. If it worries you that much just delete the comments. FFS.
Honestly I couldn’t be bothered refuting it paragraph by paragraph. It;s been a long day. I’m not as emotionally invested in your opinion piece as you clearly are.
Best of luck with everything.
Ah, now we’re getting somewhere. Yes, the Russell 2000 at 85x earnings and CCC-rated Indian company 5-year debt yielding 4.41%…I would heartily agree, “the market can price things in ways that are wildly incorrect”. And, as Keynes said, “the market can stay irrational longer than you can stay solvent”.
Great article Daniel, important analysis for helping us all to figure out these important things. Your argument seems to come down to network effect (which is very strong when dealing with currencies) verus a new altcoin that could be significantly better than bitcoin.
The more useful a currency is, the more confidence people are likely to have in it, and the more investment it would therefore naturally draw.
So what could be better than bitcoin? Well in the very long run, a proof of stake coin because it has no massive mining overhead that needs to be paid for by some involved parties. If transaction costs are much lower with a system like NXT, then people will use such a coin more for their transactions. Over the long-term it will gain traction and eat into Bitcoin if that advantage is big enough to offset the network effect. Saving money on every transaction could well be enough of an incentive to drag people’s confidence in bitcoin to a POS system like NXT.
The more useful a system of payment and store of value a currency is, the more it will be used for these purposes. With cryptos these two function of making payments and storing value are intertwined. NXT has lower inflation (due to not having to pay unnecessary miners), and so could attract savers too as well as the payment network users via more attractive transactions.
Will the lower and faster transaction fees for those making payments plus the lower inflation for savers be enough to usurp the strong network effect of Bitcoin? I suppose that nobody knows, and time will tell, but probably not for a quite a long time. In the meanwhile I think we just let things happen because we don’t really know.
Obviously, none of that matters. Users don’t care what the mining algorithm is. They care about whether the coin can act as a store of value and whether it’s widely accepted as a payment system. Transaction costs are also not necessarily relevant because even if some transactions could go more cheaply through an altcoin network, that alone is no reason to think that there will be enough liquidity in the altcoin to make this a viable strategy for a lot of transactions.
Also, there is no particular reason that a proof-of-stake coin would have lower transaction costs than Bitcoin. Those are two separate issues. Payment fees are determined by the likelihood of an orphaned block, not by the mining algorithm. See my upcoming article on The Economics of Bitcoin Mining, which will go into more detail on this topic.
Glad you enjoyed.
There you go Daniel. Comments deleted. Excuse me for cluttering your precious comment section.
Ok well I’m sorry if you felt put out by what I wrote, but I write comments for the amusement of anyone else who might be reading, not for the person I’m actually responding to. My point is just that this is a discussion about cryptocurrencies as a value proposition and it is possible to rationally assess them and come to some reasoned conclusion about what might ultimately be possible for them. Yes, ultimately the market will decide who is right and wrong, but the whole point of this discussion is to come to some idea about the future is before it happens, so simply stating an opinion about the future isn’t really engaging with the discussion.
Just some random thoughts and facts:
– Bitcoin most probably will remain the largest by market cap but the percent will be lower
– Bitcoin has no major technological advantage over other coins
– Late players are more attracted to the major altcoins because of the price and psychology
– There is huge supply of altcoins and not so big demand so the price will go down
– The global amount of fiat in circulation is $4 trillion (src wikipedia) while all the cryptos are ~9 billion
– In real life there is diversity. There is EUR, USD, Yen, British Pound, RUB etc (while USD/EUR are biggest I think)
– Altcoins are a speculation tool
Disclosure: owner of bitcoin and several other cryptos
You made a valid argument and you didn’t even cover reason #1 why altcoins (at least the proof-of-work based altcoins) should have little market value — their significantly increased risk of a 51% attack.
All proof-of-work based coins (which includes Bitcoin) have a vulnerability where an attacker with 51% of the hashing capacity can DDoS the network by not including any transactions in blocks. Even more damaging, an attacker with more mining capacity than the rest of the network (i.e., 51%) can mine on a private fork of that coin’s blockchain. The attacker can then transact with coins on the public blockchain and then double spend those coins on the private fork. After the attacker receives non-reversible value from the attack (e.g., after selling Litecoins and withdrawing the bitcoin proceeds) the blocks from the private blockchain are broadcast and mayhem ensues (i.e., bankrupt exchanges which no longer have either the altcoins they thought they had and are now missing the Bitcoins that the attacker has withdrawn).
Bitcoin is protected from this with 31 Th/s of SHA256 hashing. To 51% Bitcoin you’ld need several hundred million worth of ASIC hardware — a feat logistically nearly impossible and definitely not economically feasible.
Litecoin has a much lower threshold for the attacker. Dogecoin has a threshold much lower than Litecoin’s even. And that’s before Scrypt ASICs arrive: http://bitcoinmagazine.com/11125/asics-litecoin-come such that only 15M of hardware might be sufficient to do a 51% attack on the largest altcoin. For that, profit can be earned from a successful 51% attack. Here’s more: http://www.reddit.com/r/litecoin/comments/20f374/asics_for_litecoin_here_they_come/cg2qf7j
Thanks and I agree with you! I discuss the 51% attack in my previous article on this topic. http://themisescircle.org/blog/2013/08/22/the-problem-with-altcoins/
Given the size of the largest pools, you have to consider that a very small number of pool operators could potentially collude and perform a 51% attack (for free with other people’s hashes).
Many alts, like Feathercoin, already were 51%ed a while ago. Their blockchains are forever tainted because of it.
bitcoin was also
you forgot to take pools into account
a large pool doesn’t own the hardware, but basically controls it.
what if a few large pools worked together?
Please tell me more about how bitcoin is safe from 51% ghash.io?
How would this explain the various private currencies that existed in the US (late 19th century) before the time of central banking? Couldn’t we just be witnessing a return to the “natural” order? Also, some altcoins are very far from simple Bitcoin copies competing for network domination – some of them piggy-back on the success of Bitcoin. For example “Marscoin” tries to become the first crypto on Mars either via MarsOne or SpaceX’s colonization plans.
There is nothing to explain. My argument is based on the fact that currencies cannot be in equilibrium on the free market and hence one will tend to win out long term. People can create new currencies any time they like; this is just an argument about their viability, not their existence.
Gee I guess the world’s forex markets are not up to date with your arguments. There are 150+ currencies because there are 150+ use cases: this one I can use in Nigeria, this one I can use in multiple countries (USD), this one is prudently-managed (CHF, at least until they pegged it to the EUR).
Horrifying. Your logic is no better than that of people calling Bitcoin a ponzi scheme. Your section on dogecoin is an utter embarrassment to the point where an apology and a retraction should be issued. Yes, many users play stupid for the purpose of combining money and fun. However, you ignore that many in the community do not participate in the childish behavior but rather work hard to get dogecoin accepted by businesses and try to expand the user base. The technology behind these coins is open sourced, available for anyone to copy. What you can’t easily copy is a community of supporters and the ability to be accepted as payment. Bitcoin is way ahead of all other crypto in that regard, but dogecoin has plenty of both and that certainly qualifies as “substance”.
You truly should be ashamed for being so closed minded when the coin you love requires open-mindedness by the public in order to continue to flourish.
“The technology behind these coins is open sourced, available for anyone
to copy. What you can’t easily copy is a community of supporters and the
ability to be accepted as payment.” You are proving my entire point. That is the exact reason why Bitcoin is viable and altcoins are not.
Dogecoin has a very active community and is widely used as currency on reddit. Litecoins has a much larger daily trading volume vs. market cap over Bitcoin so it is actually more liquid. You should at least do the math before posting garbage like this.
It is incredibly easy to trade bitcoin for litecoin and vice versa because they’re both cryptos, much easier than trading bitcoin for fiat currency.
Ironically, people convert altcoin trade volume that’s actually denominated in bitcoins into a fiat value using the price that bitcoin trades to fiat (tacitly acknowledging that bitcoin is the reserve currency). Thus this altcoin “liquidity” is a complete mirage, because you’re subject to bitcoin’s liquidity to fiat if you’re holding litecoin or dogecoin and want to exit crypto altogether.
Currencies for small sovereign nations have up until this point been able to fend off the dollar’s complete domination as the fiat reserve currency because there is government force being applied to back those currencies up. There is no sovereign power enforcing usage of any altcoins, so why on earth would someone foresake the greater network of bitcoin for an altcoin that offers nothing substantially different from a utility perspective?
dogecoin is a joke!
yup, but a good one
much truth!
Kill alt coins? Not a chance. It’s going to go the other way. Eventually every middle school kid will have Marycoins and Johnnycoins. There won’t be hundreds of them as there are today. There will be millions. The market will pick the winners.
Your analysis completely ignores the value and influence of branding. People buy Apple products for more than just the technical innovation, but also the status that goes with them. The altcoin you choose will say something about you. like the whiskey you drink, or the clothes you wear. Like any industry in a free market, there will always be options and competition.
And some underdogs will find great success, and those who bet on them will see great riches. That brings speculators and risk junkies. Gamblers and traders. You are taking a far too narrow view of the cryptocurrency phenomenon and almost completely ignoring the psychological and marketing side. Altcoins will be worth billions for the forseeable future. Maybe trillions some day.
“Eventually every middle school kid will have Marycoins and Johnnycoins.” Just like how every middle schooler invents their own variant of Elvish or Klingon to speak with and every middle schooler invents their own units of measurement to do their science homework with, and ever middle schooler prints out their own paper money with pictures of themselves instead of dead presidents.
You can’t be this stupid.
It’s a well conceived piece of psychological propaganda. Kudos to the person who wrote it; he has a long career ahead of him in public relations I’m sure.
As for the core of what he said, well, he’s almost right, but here is where he is off track:-
There is no such thing as “altcoins” in an objective sense. This has been written about time and time again. The term is relative and evolved from nomenclature used within the Bitcoin forum. Outside of the bitcoin forum it has no business as an absolute term. Using it in an absolute sense lays a foundation of bias in favour of bitcoin, hence muddying the ability to analyse objectively.
The liquidity situation is just as much a non-issue for Litecoin as it is for Bitcoin. Just because Bitcoin’s market cap is bigger than Litecoin’s market cap doesn’t mean investors will be put off because some people won’t be able to buy goods that cost more than the market cap.
This is the same for savers as it is spenders.
The author is promoting a recipe for economic dystopia. He is effectively saying that now that Bitcoin exists that we should be actively seeking to destroy competitors – an idea that has more in common with militant totalitarianism than it does free markets, Darwinism and libertarian capitalism.
We did not create Bitcoin to become slaves of a system, but to free us from the slavery of the banking system.
The network effect for all of the altcoins combined is bigger than that of Bitcoin. We could destroy Bitcoin in an instant and be left with a better system.
The fact that the majority of altcoins use Litecoin as their technological basis rather than Bitcoin, proves that Bitcoin is an already out of date technology that would duly be rejected under the spotlight of an un-distorted microscope.
Brand and confidence go hand in hand. Dogecoin proves that brand has a dominant influence on network effect.
The current Bitcoin market is tiny, relative to the future desires of the 6 billion people who live on Earth. Bitcoin could (and indeed should) be superseded.
The author has a self proclaimed knowledge of psychology and it is clear to me that he is employing lengthy tactics of manipulation and neurolinguistics to try and convince you that you must surrender to Bitcoin and that there is nothing you can do about it so don’t even bother.
Perhaps if the author bought some Dogecoin, or some Litecoin, or some Darkcoin, or some Potcoin… then he might understand that by trying to stamp out the opposition and protect his Bitcoin investment, all he is actually doing is laying the foundations of a future dystopia devoid of economic expression.
>”The liquidity situation is just as much a non-issue for Litecoin as it
is for Bitcoin. Just because Bitcoin’s market cap is bigger than
Litecoin’s market cap doesn’t mean investors will be put off because
some people won’t be able to buy goods that cost more than the market
cap.”
This just amounts to a contradiction of my entire argument, but no actual counter arguments. Do you want to live in denial or actually understand my reasoning and show the problem with it?
>”The network effect for all of the altcoins combined is bigger than that
of Bitcoin. We could destroy Bitcoin in an instant and be left with a
better system.”
First, that doesn’t make sense because there is no network effect for all competators put together since they are all different currencies. Second, I checked at coinmarketcap.com and the sum of the market caps of all altcoins is less than 1/3 that of Bitcoin.
>”The author is promoting a recipe for economic dystopia. He is
effectively saying that now that Bitcoin exists that we should be
actively seeking to destroy competitors – an idea that has more in
common with militant totalitarianism than it does free markets,
Darwinism and libertarian capitalism.”
I don’t want to literally destroy competators, I want to destroy the intellactual foundations of altcoins (such as it is) because I don’t like seeing people scammed into buying them
>”Perhaps if the author bought some Dogecoin, or some Litecoin, or some
Darkcoin, or some Potcoin… then he might understand that by trying to
stamp out the opposition and protect his Bitcoin investment, all he is
actually doing is laying the foundations of a future dystopia devoid of
economic expression.”
I don’t buy things and then feel compelled to try to make them survive aginst all reason. I analyze things beforehand and buy what I think is likely to thrive. My economic analysis suggests that altcoins should be unsustainable, so I don’t buy any. Show me the problem with my reasoning and then I might buy some.
> Dogecoin supporters do not claim to be the silver to Bitcoin’s gold or attempt to make any arguments (other than “such wow”) to justify Dogecoin as an investment; they just make jokes and give tips to one another.
Wow, such wow!
Dogecoin bashers do not do enough research to make their arguments to prove Dogecoin is the biggest joke in crypto space; they just belittle the community do nothing but give tips and speak haiku.
1/ The Joke
Why is Litecoin not a joke? Their underlying technology are almost identical. I think your only reason here is because LTC claims itself to be silver long time ago and DOGE has a shiba inu as its mascot for just three month in.
Dismissing a lighthearted crypto currency and their vibrant community because the face of it is the real joke.
2/ Investment
More people trust a currency, more valuable it is.
Dogecoin has a huge community backing it kind of proving itself has network effect. Like Bitcoin enthusiast, shibes are always like to introduce Dogecoin to other people.
Tipping to you seems worthless but it helps to expand the community through out social network.
3/ Purpose
The community has goal in mind. To the moon they say. This keeps them busy for raising fund for charity, sponsoring Olympic Games team, building all kinds of services (wallets, shops, games). People are eager to use their DOGEs as many places as they can.
1. Litecoin IS a joke. That is my entire point! The only difference is that Dogecoin is overtly not being serious, whereas Litecoin proponents just keep telling themselves that they’re serious when they’re really not. This is why I like Dogecoin, because it’s a very strong demonstration of how silly the entire altcoin world is.
2. Every altcoin has its own network effect. The fact that Bitcoin’s is much bigger means that Bitcoin’s network effect is stronger. This means that investors will tend to be drawn more towards bitcoin than its smaller competators. This is what the entire article is about.
3. The dogecoin community should switch over to Bitcoin and proceed with those same activities.
Bitcoin has stronger network effect right now for sure. So it can definitely kill a rising competitor? I highly doubt it. If a currency can attract many people to use it, there’s value of it. Investors will speculate on its fast growth potential. Company will follow the crowd. There’s niche market for it.
Only narcissistic people could just say a community should switch over to theirs. There’s big cultural difference between Dogecoin (‘silly’) and Bitcoin (serious). That’s the reason Dogecoin and its community exists. They find another efficient way to spread crypto currency. Is this silly to you?
Yes. They should have built their silly community on top of Bitcoin and spread that around. That would have been better for everybody.
You can’t build a fun community on something that wants to have a serious image. You should try to build something fun on bitcoin. It wouldn’t work I guarantee it.
I’m building all kinds of fun things on top of Bitcoin! And plus, image doesn’t matter. http://themisescircle.org/blog/2014/02/25/bitcoin-has-no-image-problem/
I can see what you’re getting at when you say that the technological advantage of LTC and other altcoins can’t overcome the network effects of BTC. What I don’t see is why you appear to simultaneously believe that the technological advantage of BTC *can* overcome the network effects of USD and other traditional currencies.
Well that’s a really good point. I certainly don’t know for sure that it can, but the evidence seems to suggest that it is. If I see an altcoin that appears to be overcoming Bitcoin’s network effect, then I’ll switch over to it. I just don’t see any evidence of that now. Here is my article on the network effect of the dollar vs bitcoin. http://themisescircle.org/blog/2014/02/01/why-bitcoin-will-continue-to-grow/
It’s called “Confirmation Bias”. The author has lots of that.
I’ve been a regular investor in altcoins for some time now and can attest that they are more or less all treated by the vast majority of their users and developers alike as get-rich-quick pump’n’dump opportunities that, if we’re lucky, will allow us to increase our holdings of Bitcoin, ie. actual money. We investors are all looking for the next new scrypt coin that will suddenly rise 400%, at which point we will sell en masse and cast about for the next big pump.
Aside from a few idealists and zealots for particular coins, hardly anyone seriously believes any of these alts have a chance of adoption as actual currencies. Even Litecoin, the poster child for ‘me too, Bitcoin’ is basically valueless outside of its ability to trade against Bitcoin.
Now, is this exclusively speculative market sustainable? The wild proliferation of coins and new exchanges is already making the market much more diffuse and difficult to monitor than it was even a month ago, so profit opportunities are already harder to find. OTOH, people are not going to stop wanting to get rich quick, so I suspect the market will if anything just continue growing.
Wanting to get rich quick is not enough to sustain the altcoins. You can only get rich quick if people want it AND they believe that it’s possible, ie, they must believe their are altcoin investors out there who are stupider than they are to take advantage of. The more that it becomes common knowledge that altcoins are not sustainable, the less possible it will be to make money off of them. This is why destroying the intellectual foundations of altcoins will end them.
I agree in 95% per cent but i have some points to consider…
1-Could a “back-up” instinct that people sometimes follow become a important factor to suport a second coin? It would have a property that the liquidity leader would never have.A second completely separated blockchain.
I thing there is only two options to this backup role. Litecoin (most probable) and peercoin. Just because they have some network affect by their own.
2-I also believe that dogecoin or some dogecoin clone could be something different. It could survive just like namecoin because i can see room for a “coin” with almost infinite availability and price tending to zero.This kind of coin would be like a almost-free way to use the blockchain technology.
People would use for fun, for communication or for some kind of anti-spam technology or informal notarization.
3-I believe that there is a huge market for a really anonymous cryptocoin. And there is nothing that governments can do against it.My only doubt is.Will bitcoin have anonymous mechanisms or a new coin will fill this hole?The government can´t control peoples desires.The drugs markets can be contained but can´t be extinguished and the anonymous cryptocurrency market will be much more difficult to contain.
That´s why i believe that we will have 2 or 3 cryptocurrencys really acting as important currencys in the future.
Regarding point 1:
Why do we need a separate blockchain? What potential outcome or problem does this solve for or help prevent?
Regarding point 2:
As transaction costs fall over time with the introduction of congestion pricing and the increase of the bitcoin block size cap, micropayments should get a lot easier. Why do we need dogecoin if you could easily send 100 satoshis to someone?
Until that point dogecoin may have some marginal utility for tipping but only in so much as it is fungible with bitcoin.
Regarding point 3:
Something like Zerocoin could be effective, but mostly as a medium of exchange (being converted to and from bitcoin at the beginning and end of the transaction). I do think that bitcoin stealth addresses and any other development on that front could substantially reduce the need for a fully separate currency though.
In the future, the presence of millions of different altcoins won’t matter because we will have decentralized exchanges (such as on Ethereum or Mastercoin) that will allow anyone, with any coin, to exchange it for another. Technically, this means everyone will be able to accept every coin out there; practically, most will probably only accept 3-5 different coins as a matter of keeping things simple. Some will be used for long-term storage of wealth, others as spending money/spare change, others for participating in niche peer networks, others will act as tokens to tangible property. The fact that Diners Club was the first credit card to market didn’t stop American Express, Mastercard, Visa, Discover — all products which essentially did the same thing — from being adopted en masse by the public. The same will happen for all cryptocoins.
That totally ignores the arguments I made in the article itself. The network effect matters for investors, not merchants or payment processors. Investors will always se a difference between the different coins and they will tend to choose the one with the highest market cap.
Cash, digital or otherwise is a poor long-term investment, unless as a hedge against volatility. Additionally a currency that is extremely attractive to investors may not be the best for creditors.
In the A-Coin and B-Coin example you give, assuming both are finite issue Coins like bitcoin, then the only way for the market cap of A-Coin to increase in light of an increase in long-term investors is for it’s price to increase. As the price increase trend is obvious, interest rates will rise and credit issued in A-Coin will fall. Whereas the interest rates on B-Coin are free to decrease. Investors eager not to lose value become more willing to issue B-coin credit, increasing daily transaction volume providing incentive to increase the network, causing more demand for short-term holdings of B-Coin
Anyway I’m not real confident in this particular analysis. However I am confident in saying any analysis that makes predictions about cryptocurrencies after they replace a fiat currency but does not consider the role of credit and it’s issue is fundamentally flawed.
You made some valid points, but your argumentation has some general flaws. I´ll do my best to point them out (sorry for my english):
– It´s infrastructure that really matters and merchants are part of a currencies infrastructure
“Merchants are totally irrelevant and so is anyone who uses the coins only for the purpose of transferring funds. What matters are the investors, the people who hold the coins long-term. For them, there is an enormous difference between the different coins, and switching costs are largely irrelevant. Investors will prefer to hold the coin that has the best prospects, thereby necessarily improving it relative to its competitors.”
What´s true: the 1st and most important thing that matter is the prospect. Always was like that and will be. The value of any currency mirrors expectations of its future. The question is how these expectations are generated and this is where merchants come in. Sure, currently the price of all cryptos is mostly influenced by speculation but still there is a sort-a “real” value, which is infrastructure. Useful infrastructure is what saves and will save (some) currencies from disappearing even if the price drops and drops. Merchants are part of the infrastrucutre, likewise social networks, payment services aso aso. Bitcoin has a great headstart and it will take time until Bitcoin will have a real competitor – but history tells us that the day will come (think Myspace, think Facebook in t-5years). Altcoins are not only a field of speculation, they are also a place where people experiment how to improve Bitcoin.
– Altcoin Investment Psychology = Currency Investment Psychology
It´s true that in Altcoin communities you´ll often find a Ponzi-inspired mentality: The future will bring wealth to all of us. Yes, that´s stupid and 99% of the people who are talking like this will be disappointed in the end. However, this does not only affect Bitcoin as well but in general EVERY currency. The last three years of financial crisis in the EU, especially the moment when the greek prime minister claimed to have a popular vote on the goverments policy, reveal how the value of the Euro is based on the staging of stability not on stability itself. To say that the Euro keeps stable maybe a valid prognosis, first of all it is the attempt to lance a self-fulfilling prophecy – the crypto universe is full of these self-fulfilling prophecies and you better don´t believe in any of them, but the truth is, that this doesn´t exclude any other currencies. In the Bitcoin community you´ll find lots and lots talks about the great future of Bitcoin. I hope we are heading there, but it´s also nothing more than the good ol self-fulfilling prophecy.
– Double Standard
Most parts of yur arguments could be applied to Bitcoin in its young years. I admit however, that the situation changed in many ways. Bitcoin was avantgarde and had no competitors. Today´s altcoins have hundreds. I also agree that some altcoin will burst, maybe many, but certainly not all. You point out that the market cap as the main competitive edge. This argument doesn´t make sense at all because the market cap is a dynamic factor which can and will change in the future. The current market cap will not prevent new avantgarde projects and it will not prevent some of them to succeed. Again, plenty of historical examples for that.
“The way to defeat them is to keep demanding of the altcoin promoters that they spell out why their altcoin makes sense as an investment. “Altcoin do not make ANY sense as an investment – and so doesn´t Bitcoin. You can buy them and hope for development of the currency – an investment is, to develop the infrastructure of a currency. Everything else is speculation.
Bitcoin makes sense as an investment because it is apparently winning against the dollar, whereas altcoins do not make sense because there isn’t any similar evidence for them beating bitcoin. I have updated the article to clarify that point. Thank you!
As you say: apparently. Who wins and who doesn´t is speculation until one of the currencies is dead – which doesn´t really happen too often.
Your argumentation is valid until it becomes deterministic. The headstart that Bitcoin had will secure its pole position for some time. However, there are and will always be competitors. They´ll survive and at some point they will overtake. Neither you nor me nor anyone else knows when this will happen and what it will cause, but yes, it will happen. Maybe in 1 year, maybe in 10.
Altcoins are having a hard time, but there´s no reason why they would disappear from Bitcoins slipstream.
The author must also think that the world must operate on ONLY ONE fiat currency and that all other currencies are doomed to fail. Makes perfect logic
DISCLOSURE: I only own bitcoins, but I also support altcoins
There isn’t an equilibrium between different currencies on the free market. The only reason we have lots of currencies now is because we don’t have a free market. We have legal tender laws and capital controls. The different nation states are able to use these to prop up their own currencies. This is still only temporary; in the long run you would expect them to fail.
The reason there are multiple fiat currencies is because nations enforce their presence legally. If no nation had “legal tender” laws nor differences in how currencies were treated based on jurisdictions, then yes it is likely that only one fiat currency would exist… or more likely that none would, and gold would still be the monetary standard.
Don’t forget Huntercoin Daniel. The first human mineable decentralized game. Graphics and all. Some of the namecoin dev’s are working on that. Still very young but looks very promising. Anyways always like reading your blogs.
All cryptocoins are created equal. The value of a coin is a function of its community and network hashrate.
Could you clarify your stance on where ripple stands?
Ripples are a currency desgined to keep everyone who uses the Ripple system beholden to Ripple Labs. There isn’t any logical reason for them to exist other than as a means to require people to buy them so that Ripple Labs gets money.
Thank you for telling it like it is! At some point an attitude of “let’s play nice” with all the alts started overtaking the BTC community as it has been driving me mad. I have made many of the points you have, albeit much less eloquently, only to be shouted down.
Thank you for giving us such a great post highlighting the madness and failure of the alts.
Thanks so much! Glad you enjoyed. Altcoins are antisocial and they are a good way to trick newbies into losing all their money.
“Altcoin Investment Psychology
…investors look at a new altcoin…If I decide to buy some, I would have to sell some of my bitcoins for it…”
This assumes that only holders of bitcoin will buy altcoins and there will be no new money.
I agree that 99% of altcoins are a joke. Especially Dogecoin – a triumph of marketing over substance.
However, I believe I have found a coin with great potential: Quarkcoin. This is because bitcoin is agonisingly slow. It takes hours to make a single transaction. Quark can have fully confirmed transactions in less than 3 minutes. Confirmations take 30 seconds. Also, it is incredibly secure: 9 rounds of hashing vs bitcoins 1; and 3 of those rounds are RANDOM.
See https://www.youtube.com/watch?v=YrNnrvet7Ao&feature=youtu.be
A currency is mature when a yield curve exists for it. Credit extension against a coin means a level of expected future faith in it. Credit also creates demand in the form of debt service. Credit has a vital role in an economy for resource and capital accumulation. Credit and the implicit future demand flows the represent can be construed as a currency derivative. Currently most receivables for major merchants are settled via bitpay etc. implying a “functional” rather than speculative yield curve measured in minutes. As the yield curve “average” holding period for merchants expands one can consider the currency mature. Which coin dominates is TBD and as credit is often a regulated function may ironically end up being less decentralized than the original currency. Full disclosure (I volunteer as a spokesperson for solarcoin.org) a POW coin backed by verified solar electricity generation.
I agree, and furthermore we should reverse the polarity of the quantum conformal flux capacitor or else the marginal yield superposition opportunity cost matrix might overwhelm the Hamiltonian cycle of the network graph.
Hi Nick don’t know if you’re still around but I’d like to get in touch, mark_pey@hotmail.com
All of your rational arguments are
perhaps true if all people act to your sense of logic.
According to your logic the best
course for a rational person is to stay away from crypto currency completely.
There is a large chance it will all
fail. Why would a rational person be willing to take the risk?
The altcoin is as strong as the
community behind it and as you already mentioned DOGE coin
It thrives while it brings no
innovation to the table, and proves that the world doesn’t follow your logic.
But DOGE is such cool and being cool doesn’t
follow a rational logic and you my dear sir are not cool.
DODE thrives? Its value continues to drop? The only thing the doge community is thriving on, is suckers!
if we listen to the bitcoin rise to 10 000$ and 10$ to stay litecoin
coca cola pepsi you find real difference ? ^^ 2 choice
master card visa ? 2 choice
bmw mercedes its just car not real différence…. 2 choice
in our culture (france) the color yellow = adultery maybe we prefere litecoin design same in other country or other culture
ok 99% altcoin its joke
but in all market we have a choice why not in crypto ^^
2 coin is realy the minimum 🙂 i think
sorry for my english
we have choice in all market why not in crypto …
coca cola pepsi just drink not real différence …
bmw mercedes just car not real différence
visa master card …. and many other
you never go in super market you see 1 choice by product lol ? ^^
in france the color yellow = adultary ^^ maybe we like more litecoin just for this … ^^
2 coin is the real minimum ^^
after iam ok for say 99% of altcoin is joke
but litecoin is on way for stay near 10% of bitcoin in marketcap for long term and i think is not bad news for bitcoin ^^
Would be interested on hearing your opinion on CounterParty (XCP)
Sorry, I don’t know that one. There’s just so many of these things! I have been looking at MaidSafe recently and I think they might have come up with something that makes sense though. 🙂
There are reasons why bitcoin might fail and another altcoin might succeed. The entire edifice is based on the code, which may have vulnerabilities that are not known. As far as I know, bitcoin does not even have a technical specifications document. What lies beneath is a matter to discover. One of Vitalik’s main issues with creating ethereum is that the bitcoin code is simply too jumbled up. even simple arithmetic operations are a pain (What I remember him saying, please take with a pinch of salt, I may have misheard him)
Crypto currencies are shares in a community that are being disbursed at a certain predetermined rate or some known function. The participation in the community is what counts. There may be communities that are simply better than the bitcoin community. Their altcoins would still maintain value.
Bitcloud shows us the possibility of proof-of disk space. There was a comment I had read on bitcointalk.org a long time ago that an ideal crypto coin would try to balance processing power, bandwidth, uptime, disk space and such factors that any network considers important. You may choose to believe that bitcoin would be able to adopt any such innovation. I think that without the miners’ consensus, it would not be possible and miners would not give up their expensive investments in a purely processing power based currency.
I’m keen on also checking out maidsafe when they come out with their proof-of-recourse network. This is just the beginning of crypto currencies and incentivised networks. We have a long way to go.
I see a number of dangers ahead for ฿itcoins and a number of problems to solve. I am confident that the ฿itcoin community will solve them, but who knows.
For example the current increase in mining power is unsustainable. What usually happens in markets is a concentration, so if the ฿itcoin community does not find a way to solve the 51% issue, perhaps a proof of stake instead of a proof of work coin might succeed eventually.
Another issue is the number of transactions the system is capable of handling. Right now ฿itcoin can compete with Western Union, but Visa and Mastercard handle 10.000 times more transactions per time. There may be ways for systems to handle this, perhaps by aggregating transactions, but right now ฿itcoins cannot really handle that number of transactions and ฿itcoin is not suited for true micropayments.
Granted ฿itcoin has a strong first mover advantage, but only time will tell…
What about the deflationary nature of bitcoin? How can an economist think that bitcoin has any chance of beating the USD in the velocity of money category, which, as hopefully you know, is pretty damn important for a functioning economy using that currency.
You should take a deeper look into BitShares, specially to the BitShares-X project.
It seems that my comment hasn’t made it here. That’s the trouble with free speech these days, it can get deleted.
Great article! I hope I’m not too late to get a reply.
I was wondering what you think about the continued utility of an altcoin as a trading pair with bitcoin on exchanges for the purpose of arbitrage? I know a number of “professional” bitcoin traders use litecoin as an exchange medium for arbitrage between different exchanges due to faster confirmation times compared to bitcoin and the fact most exchanges require money wires which are very slow and have very high fees.
Of course this is a very limited use but an important one. Arbitrage between exchanges increases liquidity, shrinks buy-sell margins, and allows people to buy and use bitcoins without worrying about using the “wrong” exchange and loosing money (eg. If I bought my bitcoin on coinbase at $1000 but the merchant I want to buy from uses bitpay and their rate is $990 I don’t want to feel “cheated” out of 1%).
If/when the price of bitcoin stabilizes, arbitrage opportunities will naturally shrink and possibly the largest exchanges will agree to either carry out arbitrage themselves (like with fiat currencies), or agree to use some digital stand-in for USD that either they or their customers can move freely. That said, we are not in one of these situations right now, so it seems like at least one altcoin will survive for the time being.
If nothing else, altcoins fighting for being number 2 will encourage more innovation that could be implemented into bitcoin in the future. Altcoins primarily being non-ASIC mineable encourages average individuals to actually go at test these new innovations since they can try them out on their own computer instead of purchasing an expensive mining rig.
None of the current ‘coins’ will ever gain mass adoption. Bitcoin and all the alts based on it are merely the first step along the way to independent currency.
Bergstra & Weijland argue that bitcoins (and by extension alt coins) shouldn’t be called crypto-currencies, but money-like informational commodities. As commodities, many of like quality can exist in equilibrium and network effects wouldn’t completely wipe them out.
What you seem to miss is the fact that different communities have different needs and different views on the world.
E.g. dogecoin definitely has value for many people because they are using dogecoin in a different way than they are using bitcoin. They are doing things with dogecoin that they would not do with bitcoin, so THEY clearly see the value of dogecoin – which does not mean that YOU have to see value in the coin.
Doge makes cryptocurrencies more fun and attractive for newcomers, who I think find some staunchiness with Bitcoin’s core crowd that is unappealing. For this, it has value for now in doing the introductions.
But at the core, it is a thinly disguised Litecoin clone and nothing more. Eventually, its day will come.
myriad my friend survival of the fittest
http://www.reddit.com/r/myriadcoin/comments/21kzpv/a_letter_from_the_myriad_team_to_the_community_by/
I think you are spot on.
You articulate very well what I say to people from the Bitcoin community whenever I have a chance. I tend to call altcoins “borderline scams”. I stop short from stating that they’re outright scams because, in fairness to many altcoin believers, some of them do not seem to have been developed with malicious intent, but only economic ignorance, and thinly-veiled greed, or a political agenda usually devoid of virtue.
The quicker altcoins fall, the better for Bitcoin and everyone, as these leeches stop preying on resources and investment that the Bitcoin network require in order to mature and thrive.
Great article. A couple of caveats.
There is still optimism for Mastercoin as smart contracts implemented over the Bitcoin blockchain has an arguable chance of real commercial success.
NXT with its 100% PoS might prove a cheaper network in the long-run, but its highly concentrated distribution must deter many investors.
Regarding Namecoin coins; I disagree that the coins are parasites. They are, as you rightly point out, tokens for using the Namecoin network. They need to exist for use of the Namecoin blockchain to have an independent pricing mechanism. Affixing them to Bitcoin through a protocol hack would be very difficult and not as efficient as just having Namecoin tokens float on exchanges.
Regarding Ethereum; I have to call you out a bit regarding your understanding of the Bitcoin core protocol.
The Bitcoin network does not support certain seemingly straight forward features out the box. They “can” technically be implemented but their absence to this day is a good indicator of the cost of implementing them. Some very simple examples;
1. Multisig.
2. Blockchain based two factor authentication withdrawals (actually this one has no known Bitcoin strategy.
3. Workable anonymity
Multisig has in principle been available for a while, but only recently have implementations become available. I dare you to make a multisig address and send money to it, much less actually develop decent multisig solutions for things like escrows. Eventually these things will exist, but after SOOO much trial and error.
Blockchain based two factor authentication would be that the block chain would first flag an account for some time before releasing money from it. This would be done to prevent theft from long term savings wallets. Any suggestions as to how Bitcoin scripts would even try to do this?
CoinJoin is a great concept, but again relies on additional infrastructure in the form of mixing software and CoinJoin meeting servers. Zerocoin is also a great suggestions but will likely never make it into Bitcoin.
All three these points are crucial to Bitcoin’s long term viability and are the subject of massive amounts of work going into private businesses and open source projects.
Ethereum can implement all of the above features right out the box because of its flexible design. Even if you don’t see the value of that, keep in mind that Ethereum can interact with Bitcoin, providing a usefulness for the contracts on it and a base price for the Ether they consume to run. Given that over time it will be easier to implement things on Ethereum and then settle in Ether, where do you think the network effects will shift to?
If litecoins ends up beating bitcoin you will have no faith in crypto? Sounds like you don’t have much now. Competition is the main driving force in this world. Without it innovation remains stagnant. The strong will survive and crypto currencies will evolve as long as there is competition. I didn’t liquidate my 401k and take a massive penalty when Facebook overtook MySpace and I’d didn’t shake my trust in social networks. The thing I want most in a crypto is decentralization of coin ownership and creation. I chose vertcoin though I also own bitcoin, litecoin, and aurora coin. I have the most faith that Vert will be decentralized.
I agree substantially with this critique – though I still think (and perhaps hope) that there is still a point in the space of possible altcoins that can act as a yin to Bitcoin’s yang.
There needs to be something that pushes up against bitcoin – something better to trade against than the USD or gold or whatever.
You are incorrect about Ethereum/Mastercoin. Ethereum itself is not meant to be a currency, but a platform on top of which distributed applications can be created, as well as intelligent contracts and autonomous financial agents that can do anything you can define mathematically. The Ether is much more meta and not meant as a spending or saving coin, it is just what these DAPPs and other instruments ride on top of.
While one can create basic currencies within Ethereum, this is hardly the vision, and would be ultimately pointless to do so for all the reasons you suggest above. Ethereum is to stocks and assets what Bitcoin is to the Dollar.
If not this, then how do you propose we issue say, company stocks, and other financial instruments with a basic currency like Bitcoin? You can’t, and Bitcoin was never designed to. This would be like writing a stock certificate on the back of a Dollar bill.
I agree with most of this article as far as the clone coins go, but on this point it seems like you did little research as to what Mastercoin and Ethereum actually are. Just junk clones with extra features they are not.
Author: XRP is not an altcoin. It is not based on Bitcoin/Litecoin and it serves a completely different function. The purpose of XRP is as an asset within the Ripple network with no counter-party risks.
You need to research the value of IOUs and how they are completely different from Altcoins and are backed in some form or another in a very different way. See XNFTrading, Ripple Singapore, Gecko Coin, for some examples of utility.
I was gonna donate to the author, but all I have are Fedora Tips and Dogecoins.
I expect the majority of altcoins to just die, but I can actually see a role for a few alts. Dogecoin has very fast confirmation and each dogecoin has a small value giving it a large psychological boost. Using several crypto coins (easy to transfer from coin to coin) together make money laundering super easy. Altcoins give developers a way to try other ideas. Coin inflation rates also may greatly affect their value…who can be sure of the best rate? I suspect Dogecoin may have a big advantage at the end of this year in that area, which is why I am 95% Bitcoin and 5% Dogecoin right now. If I am wrong, I lost 5% of my investment, but if I am right, Dogecoin may end up with a market cap equal to 10-20% of Bitcoin. Time will tell.
If we had an alternate Internet that could be dedicated to streaming media and wasn’t constrained by the limitations of the protocols and hardware that drive the current internet/web, a lot of the barriers to innovation, bandwidth and speed might be lifted and we’d be enjoying 2k streaming video right now (or very soon) and before long, 4k.
There is value in more than one network of hardware. Bitcoin fanatics are exclusionary because they feel alt coins remove “market cap” from Bitcoin and therefore, depress prices. That’s their only concern…profit. But from a technological standpoint, having alternative networks is fantastic. It drives innovation, keeps the Bitcoin developers innovating (and actually absorbing some innovations from other coin developers) and a strong secondary network allows another platform for the development of blockchain-based products and services.
The calls from people who want to see the death of alt-coins are not technologically motivated…it’s greed, pure and simple.
Namecoin is Bitcoin – do your homework !
You know, the new concept of implementing ‘side chains’ to the main Bitcoin block chain may make altcoins just another feature [http://www.mekanikalblog.com/2014/04/altcoins-may-become-side-chains-to-main.html]
So, basically, Altcoins have no value because you say so. Yet, there they are, existing with value.
Who cares? Some of these alts are faster and better than bitcoin. I doubt any will overtake it anytime soon, but you never know. In any case, why try and fight them? We should embrace them and acknowledge that a number of currencies of different types/specification/ups/downs can co-exist.
I highly doubt Kodak thought a little phone company called Nokia was going to be their demise! Hasn’t history taught us anything? You can’t resist change. Newer and better things always come to the surface eventually. Things like Blackcoin look very promising.
Daniel you don’t seem to have convinced many people of your arguments? You must be right! Or they are all holding altcoins!
What about coins issued by individuals- like podcasters or artists so that people who have contributed get coins. If the show grows in popularity (liquidity) then the coins equal the value of the content. people can subscribe with the coin by converting bitcoin to it and compensating the artist and the initial fans and helpers without the need for advertising.
To the author. I swear dude, you need to work in another room of your home… I swear I could hear the cooling system of your ASIC boxes in the background while I was reading this article. I appreciate the time you took to write this, now let me tell you why ALL of your predictions are WRONG! There is no accounting for the underlying dynamic of the free market. You can chart results, compare and contrast against all manner of meta-data, or any other set of statistical criterion, and all you will ever be able to do is “SPECULATE”, There havn’t been 100% accurate market indicators since humans deviated from direct peer-to-peer barter of goods on hand… (like 100,000 years ago or so…).
I think it is of note that despite all of your couching, posturing and bloviating, this article lacks any real material or technical basis for your assertion that all altcoins are going to fail. Value is in the mind of the buyer. Always has been, always will be. Don’t feel bad about it, as I see it, your assumptions are most likely the kind of impressions one derives from having lived in an over-regulated, over-manipulated economy their entire lives. It’s ok. Competition can be scary. The truth is there is a planet full of people that by one means, or another have had their demand distorted and marginalized by the Central Banking cabal that has insidiously and violently seized the entire apparatus of this planet’s banking/monetary systems. The period of being able to use such market dominance as a weapon is ending, and Bitcoin and other cryptos are going to show us how to render it obsolete…
-Oz
This doesn’t make sense:
“Currency is liquid if one person can spend it without changing the price, whereas it is volatile if everyone is trying to spend or buy it at the same time. If a currency is volatile because many people are investing in it, then that is a good thing because the currency is becoming more liquid.”
A decent medium of exchange should be liquid and stable in price. I would sure hope that one person spending currency would not change the price! That is a very low bar as criteria for liquidity.
If everyone is trying to spend or buy currency at the same time, that is good, but it doesn’t cause price volatility.
Great Article, it is good to validate that other people have their senses. This is precisely what Coin Shield is for: To absorb Altcoins that are useless helping cover losses, and validate Altcoins that are useful tools in the Cryptocurrency Revolution.
The only reason we have alternative currencies is because of ‘IT’ {internet/info tech} and IT will exist whether you like IT or not, until either the grid goes down or govern-mental affairs bring it down! To suggest IT is anymore ludicrous than ‘fiat’ currencies is simply illogical in of IT self!
DOGE is no more phony than the pyramid printed on the USD – Logic dictates – and NO currency will matter without technology… try exchange your hunter coins when theirs NO FOOD left on or offline, how viable will any currency be then?! Until then, crytpos are no less viable than the people using them or fiat – ‘IT’s called $UPPLY & DEMAND…period
This is nonsense, all of it.
“Everything that can be invented has been invented.”- Charles H. Duel US Patent Office Commissioner. I’m guessing your ability to predict the end of innovation won’t prove to be much better than Chuck’s was. You should check out F.A. Hayek’s “Denationalization of Money”, good read.
It’s too bad namecoin has a fatal flaw that has already rendered it completely useless. Squatters. The inability to renew a name automatically. The ridiculously frequent expiration dates. All of this has led to literally every single possible domain name already being taken, squatted on, and held for ransom/extortion purposes at often 10 times the normal price to register a name. If you make the sorry mistake of registering one that’s available, you will lose it when it comes up for renewal. Because the squatters have bots which immediately grab previously registered names. All of this should’ve been resolved before day one. Now it’s too late. Unless they completely start over and get this crap right from the beginning, namecoin will not succeed.
This is so cute <3