The Economics of Altcoins

Blockpass
5 min readJan 20, 2018

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There are an increasing number of altcoins and digital tokens being created and made available but, as of yet, there has not been a great deal of investigation into the economics of cryptocurrencies. To date, the majority of research and the main focus of blockchain-based systems has been on their applications to various industries as start-ups and established companies alike seek to harness its security, efficiency and borderless nature to revolutionise current practices.

The big three (at least at the time of writing) are Bitcoin, Ethereum and Ripple — the other’s don’t even come close. However, what is less easy to discern is what the situation will be like in the future. Will the older, more established cryptocurrencies continue to dominate the market? Will the rise of alternatives balance out the shares until we see a situation where more digital currencies have similar market caps? Or, will a new altcoin rise up and displace the current leaders?

Whilst predicting the future is impossible, there are a number of factors that could influence the outcome of the crypto-sphere. One of the main benefits of blockchain technology comes from its security. Due to its use of cryptographic hashes and consensus protocol, a large blockchain becomes virtually impossible to hack or alter. This feature is what gives cryptocurrencies the possibility to hold value: when there is a fixed supply and it can’t be faked, an object has scarcity and therefore can be used to hold value. In order to reach this level, a blockchain needs to have multiple nodes and the more it has the more secure it is. Similarly, the older the blockchain is, the more secure the data stored in it is, as hackers would not only need to change an old block, but generate new hashes for all the blocks after it.

As the more popular and older cryptocurrencies have the largest and some of the oldest blockchains — with Bitcoin as the largest and oldest — it is likely that they will remain key players as people seek to use cryptocurrencies as a form of investment. As more people look to invest, demand will intensify, increasing the price of these cryptocurrencies and making them more desirable to invest in. Additionally, being an infinitely divisible, global and digital option should mean that people are not restricted in investing based on their location or available funds. This should manifest in an overall rise in value of a cryptocurrency over time, which is generally what is being seen in the crypto markets so far.

Source: CoinMarketCap.com

However, cryptocurrency markets are notoriously volatile, with prices drops and rises of more than 10% in a day not uncommon. In this, there seems to be little to no difference in which coin is being considered: what happens to one crypto tends to happen to them all. Price rises and drops are usually linked due to hype and uncertainty surrounding cryptocurrencies being associated with all of them. Regulation from governments is generally looking at cryptocurrencies as a whole as opposed to on a case-by-case basis. This means that reported crackdowns or bans will effect most digital currency in a similar manner. Likewise, when an exchange is hacked, price drops will be seen across the board as investors lose confidence in the safety of their coins.
Given this, it could be questionable as to whether any other digital currency should be needed; however, the purpose behind many alternative cryptocurrencies is to provide access to services or to enable alternative blockchain networks. For any cryptocurrency to succeed when competing against established offers, it will need to provide value or benefits above what is available. A huge number of altcoins are the result of ICOs which then use them to power their networks; because of this, as long as new blockchain solutions are desirable then altcoins and digital tokens may continue to find a place in the market, but more likely for various services rather than investment.

Like any business, some of these will succeed and some will fail. The ones that take off will be the ones that solve issues in a simple and efficient manner whilst being accessible and scalable. Ethereum grew rapidly from its inception due to its provision of smart contracts which opened up blockchain to opportunities beyond financial payments. Even though it now faces scalability questions (as highlighted with the recent cryptokitties problem), the development team is working to improve the platform to meet demand. In light of this, if the development of established blockchains fell behind, then one of the newer cryptocurrencies and blockchains could supplant them, provided they offered vastly improved speed, scalability or services.

Therefore, any flexible and scalable blockchain which gathers enough interest to grow into a secure network has the potential to become mainstream if the existing ones fail to develop fast enough. To some extent this has already been seen with the number of altcoins that are now available. From an initial state of having Bitcoin as the only option, there are now hundreds of coins in the crypto-market, with Bitcoin currently around 1/3 of the market total. Bitcoin could not achieve everything desired or have every gap in the market were filled. If further utility, scalability and innovation of is derived from newer blockchains that require their own cryptocurrencies then these will solidify market share of part of the crypto-sphere. If the underlying blockchain solution is great, then the coin or token will likely succeed.

The relative desirability of the underlying solution is likely to determine the relative size of each coins eventual market share, but investors may choose to put money into newer altcoins if they believe its value will rise rapidly which could cause investment to shift to emerging altcoins in the right situations.
Besides highly scalable solutions and ones that solve key problems, other instances that might disrupt the current trends could include government issued/government backed cryptocurrencies or if a large corporation like Apple or Google implement one.

Until something significant such as the situations described happen, the status quo is unlikely to change, with older, established cryptocurrencies attracting the most news and investment, and numerous altcoins in the periphery, with some investment but not approaching mainstream.

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