“Tyler Cowen” piece is flawed in many ways. Two of them, I will try to debug below.
Two flaws are pregnant: 1) he mixes Centralized and Decentralized economics. 2) he doesn’t reckon the differences between SHA256 and sCrypt networks.
The first point: he writes “But then the QuitCoin company comes along” and this one (central) company competes with a lower price, forcing Bitcoin (decentralized network) to lower its price. Well, this may work in a centralized economy, where the one supplier can set his price, but this isn’t possible in a decentralized economy. First of all a Central-Coin cannot compete with a decentralized Coin (it misses essential features). And secondly, if QuitCoin would be a decentralized-coin then it cannot set its price (price is pure on Supply-of-many and Demand). Actually, to become a real competitor to Bitcoin, QuitCoin’s supplier-profit (the miners in the decentralized network) should be much higher than Bitcoin’s. The incentive for miners should be higher in order to persuade miners to switch from Bitcoin to another network. Which means an upward price pressure instead of a downward as Tyler Cowen argues.
The Second point: He doesn’t understand what it takes to issue a new decentralized Coin. Sure, Bitcoin is open-source, can be copied very easily, and use top class marketing to promote it. But that will not make a new Coin, let alone be a serious competitor to Bitcoin. No! a decentralized coin needs an as large as possible P2P network of miners (the larger the more secure). This means that tens of thousands, geographically separated, individuals need to invest in costly equipment and electricity to connect to each other and mine the new coins. It took Bitcoin 5 years and more than $200.000.000 (in 2013 alone) to create the network of today. It should be clear that any new coin who wants to compete with (nearly) the same copy of open-source code has a nearly impossible task to gather enough miners for its new network: professional Miners will only join if incentives and success-rate are better than Bitcoin. I see you thinking: but why do we have so many copycat-coins? To answer this you need to separate the two encryption families: The SHA256, which needs extremely expensive ASIC-hardware. And sCrypt which can be mined by common PC’s with a gaming-video-card. Bitcoin is member of the SHA256 family, and because of its hardware costs ($5000 to $13000 per Miner) is run by professionals. These professionals will not easily switch their expensive hardware to a new Coin. And this is why Bitcoin doesn’t have any serious competition within the SHA256-family (PPC is a runner up, but I’m not aware of any shop that accepts them). And be aware: SHA256-hardware, physically cannot be used in sCrypt-networks, the opposite is possible but not profitable at all. The major coin in the sCrypt-family is Litecoin. And yes, Litecoin is a competitor to Bitcoin (which is a good thing). Litecoin is a keeper, it was the first in the sCrypt-family and its network has grown in 2 years time to more than 40.000 Miners (a stable and secure network indeed). In contrast to the SHA256, the sCrypt-family has many copycat-coins. But they all compete with Litecoin (not Bitcoin). Many Litecoin-copycats try to lure Litecoin sCrypt-miners to their coins, but that proves to be hard (but much easier than Bitcoin, due to the fact that many kids and amateurs, switch their relative cheap sCrypt-hardware for a few days to new networks to make a quick buck). In order to succeed, new coins need to attract Miners permanently (for security and supply) and it needs demand (which doesn’t exist if it hasn’t any major improvement). These copycat-developers try pump & dump schemes and are in no way competitive to Bitcoin (in contrast to what Tyler Cowen suggests).
192 Gazza January 6, 2014 at 6:34 am
Total shit, these people think they know it all, so why are we in the worst financial situation ever witnessed, in the modern world you would think these old boys would update their old grey matter…..these brain dead idiots are old and dead wood> NO ONE takes note of them anyway, most of the stuff they bang on about is all cloak and daggers with the grey matter lacking.
Change your record we heard it all before and its so boring.
193 jtd January 11, 2014 at 5:54 am
unconvincing argument and article. I bought more bitcoin after reading it.
194 jack January 12, 2014 at 4:16 pm
500 vs 400 doesn’t matter to anyone when you are talking about a currency. Bitcoin is divisible, and can be made to be infinitely divisible. So if someone wants to spend 400 instead of 500 they will just buy .8 of a bitcoin. There would be no incentive to switch to a different currency. Only price stability or a great new feature would make someone switch, not the value. Doesn’t matter if it’s a million for 1 bitcoin and 1 dollar for another cryptocurrency.
195 jack January 12, 2014 at 4:34 pm
And to the person mentioning greater adoption should mean lower prices…you should read my point above. The value of bitcoins does not fundamentally matter because they are divisible. A bitcoin is not like a house that is difficult to break up into pieces and sell. Bitcoins are divisible at no additional cost to the user, so the supply can accommodate anyone even for very small transactions. Higher price does not mean higher barrier to entry in the case of bitcoin.
