Why Only One Cryptocurrency Can Win and Why it’s Going to be Bitcoin

Money invested in one currency is money not invested in another currency. Devices used to mine one currency are devices not used to mine another currency.

The more money is invested in a currency, the greater are the amounts one can buy or sell without drastically changing the price and the greater are the incentives to protect it.

The more computerpower is used to mine a currency, the safer it is.

Thus if two cryptocurrencies are technically equal, the currency with the greater market capitalisation and the greater mining power invested in it will win.

What if different cryptocurrencies are good for different people?

Only investors matter - Zcash might be better for drug dealers but a drug dealer has no reason to sell drugs for Zcash if there’s no investor that wants to buy the Zcash from him. Neither has he any reason to keep the Zcash himself, if it’s not the best store of value.

Someone who needs a turing complete scripting language for some reason won’t be able to use Ethereum, if no one wants to buy it. (And both these currencies have a potentially infinite money supply, so they are horrible stores of value.)

Then why do these cryptocurrencies have value at all?

They are bubbles - People don’t buy them because they are the best store of value, but because they hope that someone else will buy it from them in turn.

Why Bitcoin is going to win

Suppose someone created a technologically superior cryptocurrency. The bitcoin investors who recognize its technological superiority now have two choices:

  1. They can hard-fork bitcoin to adopt the new cryptocurrency’s features. After a hardfork there are essentially two currencies, oldcoin and newcoin, and everyone owns as much of them as they owned of bitcoin. It succeeds if more oldcoins are sold for newcoins than newcoins are sold for oldcoins. Then, even people with no interest in the technological difference will start selling their oldcoins for newcoins.
  2. They can sell their bitcoins and invest in the new cryptocurrency. This only succeeds if more bitcoins are sold for the new cryptocurrency than not sold for the new cryptocurrency. Only then would people with no interest in the technological differene start selling their bitcoins for oldcoins.

Thus hard-forking bitcoin is easier than replacing it with an altcoin.

Written by WeUseCoins on November 22, 2016.