In the Wake of The Fall of MtGox

Bitcoin / Litecoin / Namecoin: The Single Pool Theory

Namecoin_South_Africa_Very short article this week.  I have read an article that poses a few interesting points: Cryptocurrencies as a Single Pool of Wealth.

In this article Gennady Stolyarov II makes an interesting case that (a) all cryptocurrencies combined should be a taken as a singular pool of wealth, and (b) the barrier to cryptocurrency inflation is the combined total of all computing power to mine coins for all cryptocurrencies.

Overall his article is well written, and reasonably insightful.  He states a few important factors that lead to these conclusions.  First, the majority of the underlying code for each cryptocurrency is largely the same (despite some small differences).  Second, currency exchange is largely indifferent to which currency is which.  Yes, they are valued differently, and you can leverage the difference in exchange rates to generate some income, but for the most part it doesn’t make a difference if I hold 1 BTC, or 20 LTC.  They are, in essence, interchangeable.

It’s these factors that lead him to believe that all the coins should be seen as one store of value, and that inflation through introduction of more coins (such as we saw with the addition of Dogecoin) is only tempered by the mining abilities that our systems currently have.  And, those abilities are subject to Moore’s Law.

While he does believe that there is a chance for this to change by the introduction of a coin with specific features that might make it more interesting (say better security), there are a few factors that I think the article does miss.  The largest of these is in the idea that all coins are basically equal.

My argument here goes to the argument I have been making for a long time: Namecoin does something different by tying virtual assets to the currency.  This opens a door to new possibilities where currencies may have specific usage in different market segments, as I have already suggested.

I would also suggest that currently acceptance is a soft feature that has yet to be replicated with any coins beyond Bitcoin.  At this point, a new coin cannot be introduced that will have the same acceptance with vendors that Bitcoin does.  Until there are enough services out there that are able to get larger companies like to accept their currency, there is a major barrier.

And finally, I would suggest that there is a level of politics that is going to take a role in all of this.  Just because Bitcoin manages to gain acceptance in most countries, doesn’t mean alternate currencies will gain the same level of acceptance automatically.  There will probably be a lot more scrutiny of each coin that appears.  My bet is that Bitcoin, Litecoin, Namecoin and possibly Peercoin have a good shot at government acceptance.  However, any later-moving, smaller market coins are likely to have more difficulties.  But, that’s just a speculation at this point.  But we’ve already seen the difficulties that Bitcoin has had in China and other countries.

So, the factors that will differentiate the coins are likely to not just be based on their algorithms, or the amount of hardware that can be thrown at them.  There are plenty of other factors that will, in the long run, be factors that will differentiate their potential and value.

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