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Bitcoin, alt-chains, and fiat money

An "alt-chain" is any alternative to the flagship cryptocurrency, bitcoin. New alt-chains pop up all the time. Terracoin debuted just last week, and the month before an alt-chain called PPcoin began.

Most alt-chains are similar to bitcoin. Indeed, some are identical. From what I've read, terracoin developers just took the bitcoin source code and copied it, modifying only the name. PPcoin makes some changes to bitcoin's methodology by adopting a different method for adding to the blockchain, the cryptocurrency's digital memory of transactions. But the concept is the same.

PPcoin and terracoin join a long list of alt-chains that have emerged since bitcoin became popular in 2011, including namecoin, litecoin, solidcoin, Ixcoin, IOcoin, liquidcoin, geist geld, solidcoin, devcoin, tenebrix, fairbrix, and more.

Below is a chart of the market capitalization of bitcoin and its largest alt competitors, as well as the date they debuted. You can see that bitcoin is both the largest in terms of market cap and the oldest. Market capitalization is calculated by taking the number of coins in existence and multiplying this by their value in $US. A number of alt-chains have been delisted from public cryptocurrency exchanges like vircurex and BTC-e, so I've been unable to get a market cap for them. But you can assume they're more or less worthless. As for the alt-chains that continue to be listed, only litecoin comes even close to bitcoin's market cap, and even then it's little more than a nugget in comparison. Note that the scale on the chart is logarithmic.


The emergence of bitcoin alternatives ties into the theory of fiat money. Fiat money is an intrinsically valueless token that serves as a medium of exchange. Central bank liabilities like US paper dollars are not fiat. Central banks hold assets that have been ring-fenced from their parent, the government. The paper issued by a central bank is backed by those assets. What makes bitcoin and its alt chains truly unique is that they're the world's first fiat monies. There is neither assets to back these coins, nor do they serve as useful commodities in a non-monetary setting.

Intrinsically valueless and replaceable tokens that trade at positive prices should quickly collapse in price. That's because there are significant arbitrage profits in generating copies of these fiat tokens and selling them. The emergence of so many alt chains is testimony to these competitive pressures. Just start your own alt-chain, call it something.coin, "pre-mine" 100,000 coins for yourself, make the chain public, and sell your coins to latecomers.

That bitcoin's price hasn't collapsed yet could be due to a number of factors. It would seem that brand name is important in the cryptocurrency market. People are hesitant to switch out of tried-and-tested bitcoin into new alt-chains. Secondly, liquidity is sticky. There are difficult-to-harness network effects involved in becoming a liquid item, so just creating something entirely similar to bitcoin (except in name) isn't sufficient to attract participants away from bitcoin. Creators of new alt-chains must also promote that coin's liquidity in order to take away from bitcoin's franchise. Lastly, things take time. My hunch is that bitcoin still has a positive value because proper competition will take a few years to truly develop. Let's see where we are in December 2013.
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