Alt-coins and Bitcoin: how they work together

About 6 months ago I wrote a piece on altcoins and why I think they are around. Since writing that not only has the price of both alt-coins and bitcoin increased dramatically, but the altcoin to bitcoin ratios have increased.

litecoin

LTC/BTC all-time exchange ratios

It is clear that altcoins do have individual value of there own outside of bitcoin, but they are part of a greater overlapping network of digital currencies.

Many people trade in both bitcoin and altcoins, but how many trade in only altcoins? The vast majority of altcoins have bootstrapped themselves to have value because of the insanely low valued transactions that you can do now with digital currencies. Currently you can buy 100 dogecoin for $0.06 (it was more than 10x lower than that in october)–and remember those dogecoin can be subdivided the same amount as bitcoin (0.000001).

This can occur because bitcoin exist. Unlike in 2011 when if you wanted to get any kind of digital money, you had to wire money to Mt. Gox. It was the bullshit that we put up with to get our hands on this stuff in 2011–and it was worth it. There was no way to do transactions for a tiny amount on the internet before bitcoin–now you can.

With that being said, it is also clear that altcoins have a value outside of bitcoin. Not only are several large exchanges starting to allow altcoin to fiat withdraws, but there is real economic activity preformed with only altcoins.  The dogecoin community has done of several fund raising efforts using their currency. It is hard to say how much of this value came from dogecoin being able to bootstrap value off bitcoin, but it is clear not all nor none, but somewhere in between.

Specialization

ugh, dogecoin

I personal have a distaste for Dogecoin. I find it immature and dislike how it pokes fun at cryptocurrencies in general, but perhaps that is also why some people love it. Who am I, or anyone else for that matter, to say what should or should not have value? In the case of Dogecoin I can see someone in the future make an amazing financial tool to teach kids how to use digital money. It can use that fun, immature, generous identity of Dogecoin to be a place that dogecoin can specialize, and how many other altcoins can specialize as well; through find a niche.

In the post that I linked to at the top I pointed out how Litecoin could be used as a sort of bitcoin insurance. Most of that is simply due to the second mover advantage that litecoin has in the world of digital currencies and the perception of litecoin being the silver to bitcoin’s gold. Other currencies can specialize in the same way (and have with their own unique attributes to do so), but the real question is more if we are going to see marketmakers do this. I think we will, but it may take a few years for any of the altcoins to gain their own independent traction, and to find where they really fit.

The Alts I’m putting my money on:

1) Peercoin

PPC/BTC all-time chart

PPC/BTC all-time chart

The first cryptocoin to have a proof of stake mechanism to it. I believe that this advancement is almost as substantial as bitcoin’s proof of work, in that it preforms the same action, but it is done through holding those coins, not mining. This generates interest that you earn on your peercoins from ‘minting’ them in this proof of stake mode. It’s high transaction fee discourages a bloated block chain, and makes moving it around a lot not too beneficial. I think that peercoin could one day perhaps serve as a much more stable, consistent, slow growing, savings vehicle in the world of digital currencies. It’s hard to see where the future is going to lead us, but I have high hopes for peercoin become the primary savings currency for the internet.

2) Litecoin

This is a gimme. It’s the second most popular cryptocoin and small-time miners seem to enjoy getting to help build the community (similar to how bitcoin was doing a few years ago before commercialization took over). Scrypt miners have just premiered, and I think that this will cause for a dramatic rise in the price of litecoin again, just as it happened after the bitcoin mining race took off. Furthermore, litecoin has some great devs, and litecoin’s creator works for Coinbase. You really couldn’t ask for a more clear sign that Coinbase will be working with litecoin someday soon, and once that happens there are more than 1 million Coinbase users, many of whom do not know about other digital currencies.

Furthermore both Huobi, and BTC China both just added litecoin trading. Keep in mind the last bubble for bitcoin was driven by the Chinese.

Perhaps by 2015 we will see litecoin on Coinbase, or perhaps even Circle, if they ever premier, and then we will see if that near $50 all-time high (ATH) can be kept. If litecoin behaves anything like bitcoin, we should see that ATH both broken, and to never be seen again. Only time will tell.

3) Namecoin

It’s a shitty currency in so far that it is only really a copy of bitcoin.  Where it is brilliant is how it operates as a namespace and domain system, which seems like it could have some real power. Namecoins help power .bit domains, which right now is pretty much squat central, but the idea is right. The world needs a decentralized DNS and namecoin could be it.

OneName.io seems to be the only thing that has been on my radar using namecoin. The idea is right, so we will see where they are in a year.

namecoin

NMC/BTC all-time price

Conclusion

Altcoins have an opportunity to present themselves as unique currencies to bitcoin that do not necessary need to compete with bitcoin. In order for that to happen an altcoin is going to need to develop its own unique identity, and build out its own network separate from that of bitcoin. In someways this is being explored by altcoins like auroacoin, which quite frankly I’m curious to see how it turns out. Perhaps this could serve as a model for States to covert to a digital currency.

In the end it is going to be the unique qualities of the altcoins which will make them successful. If they are to survive beyond the trend of bitcoin, they are going to have to establish their own unique networks or reasons for their existence. It will be interesting to check back sometime in 2015 to see where these coins are and how they are doing.

 

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