I have often had to field the question, “Does the fact that Bitcoin can be cloned threaten its long-term viability?”
The stock answer from the community is, “No,” due to the “Network Effect.”
While I agree with that statement, there is more to the story. Let’s take some time to explore the curious world of competing digital currencies.
Bitcoin is odd to begin with; it is something that is scarce at the unit level, but can be copied at the program level. The situation seems even more absurd when you realize that the ability to simply copy and counterfeit Bitcoins is inversely proportional to the number of Bitcoin client copies extant. The more you copy/paste the software onto machines around the world, the more astronomically difficult it would be to successfully “copy” a Bitcoin.
But what happens when you copy the Bitcoin protocol itself, make a few tweaks in terms of confirmation time and mining nuances, and then rename the software “Litecoin.” Well, congratulations, you’ve just made an alt-coin.
Usually, when people are asked something like, “Why is Apple larger than Microsoft today?” they will respond with qualitative differences in superiority. “Apple products are sleeker, more intuitive, have better support, etc.” So why isn’t Microsoft beating Apple in certain product categories? “Because it’s different.”
Yet, ask the same question about alt-coins, “Why won’t Litecoin compete strongly against Bitcoin?” and the answer is, “Because it is the same.” Now, that’s a head-scratcher.
So we get the feeling that currencies aren’t quite like companies in this way. There must be something else that makes “sameness” a potential recipe for failure. What we mean to say is that Litecoin has no differentiating features significant enough to allow it to target digital currency novices, nor current digital currency users in a new way, EXCEPT…yes, there is one exception – Litecoin offers the potential to be an early adopter.
Most Litecoin users that I know will say things such as, “I’ve got about 250 Bitcoins and 500 Litecoins… just in case.” In fact, I’ve heard this phrase “just in case,” so many times that I’ve considered labeling “LTC,” “JIC” from now on (no disrespect meant to the LTC true believers). It’s being used as a backup of sorts, as protection against unforeseen events.
However, when I visit btc-e.com to see what’s new with Litecoin, I am presented with a different story. While there really are Litecoin enthusiasts who truly believe in its long-term viability, most of the gossip in the chat box is focused on short-term LTC/BTC trading. And a smaller, but non-trivial component openly plots episodes of LTC pump-and-dumps.
This fact helps me to address the apparent contradiction of being pro-Bitcoin and (mildly) anti-Litecoin, when they are pretty much the same thing. Luckily, the answer was staring us in the face the whole time, it is the Network Effect.
Because of its early mover advantage, Bitcoin has attracted both core and ancillary developers like a vacuum cleaner. The Bitcoin ecosystem is teeming with genuine efforts to turn the fledgling crypto-ledger into a global, viable, currency. There is a positive feedback loop causing people to join today because people have joined in the past, at a faster rate than any other alternative currency. This gives users confidence that Bitcoin has the potential to actually thrive in the marketplace someday.
But I don’t see the same happening with Litecoin. That doesn’t mean it won’t happen eventually. I can imagine that if Bitcoin prices plateau many years from now, that it will also serve to make alt-coins even more attractive as growth vehicles. This would present a new set of issues related to the pseudo-inflation of crypto-currencies (how’s that for a dissertation title?), but it is unclear today how this would unfold, or how it would affect the market leader, Bitcoin.
In conclusion, I won’t dismiss Litecoin offhandedly. As a free-market currency advocate, I have to remain somewhat agnostic about the whole thing, even if I do continue to entertain a kind of secret hope that it will just go away.
At this point, I can almost hear the digital voices of proponents of other alt-coins besides Litecoin: “You’ve completely ignored all of the other alt-coins. Litecoin isn’t the only one, and you failed to mention the strongest contender of them all, PPCoin!”
You’re right. I didn’t mention PPCoin. That’s because it will be featured in it’s own upcoming story: “The worst-named competitive digital currency that you’ve maybe heard of.”