Since bitcoin's code is open source, anyone can copy it, make a
few adjustments, and release a brand new digital currency. This
is being done weekly, and now there are dozens of them. Some
more popular altcoins are Litecoin, Darkcoin, Nxt, Counterparty,
Dogecoin and Namecoin.
The largest of them, Litecoin, has a market capitalization more
than twenty times smaller than Bitcoin's. The third largest coin is
a quarter of Litecoin's size.
The network effect is what sets bitcoin apart. It's the large
amount of existing users that gives it value, not the technology
itself. When someone gets interested in digital currencies,
downloads a wallet and exchanges fiat, there are much better
options for bitcoin than for any other digital currency. Therefore
it is natural for a new user to adopt bitcoin rather than any
alternative. Developers and entrepreneurs observe the large
influx of new users, and so they focus primarily on bitcoin. As
the networks grows larger and larger, it gravitates toward a
natural monopoly.
A related effect is the social chain reaction. In certain segments
of society, a new user of bitcoin tells about it to more than one
other person on average, who in turn tells it to more than one
person, and so on. In the beginning it spread like this among
those interested in monetary policy. They were amazed to see a
digital alternative to fiat. Then it spread to traders of illegal
goods on the online Silk Road marketplace, presumable for
bitcoin's anonymity. Now it is becoming common among
bloggers and other producers of online content to ask for
donations in bitcoin. Online merchants increasingly accept
bitcoin through services such as BitPay and Coinbase. These let
the merchant use the local currency while bitcoin serves as the
payment protocol. They choose it because it saves costs.
