December 14, 2014

The Market for Cryptocurrencies

  • Lawrence H. White

    Distinguished Senior Fellow, F. A. Hayek Program for Advanced Study in Philosophy, Politics and Economics
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Although it is sometimes considered one of a kind, or a first-mover monopolist in the market for cryptocurrencies, Bitcoin is surrounded by effective competitors. Between March 2013 and December 2014, while the market capitalization of Bitcoin grew four-fold, the market cap of other cryptocurrencies (“altcoins”) in the aggregate grew twelve-fold, eroding Bitcoin’s market share to 84% from 95%. Where Bitcoin is a non-profit project, the growth of altcoins has been driven by for-profit enterprises. Altcoins have introduced improvements in speed, robustness, and privacy. Contrary to the predictions of economists who tried to imagine what private irredeemable currencies would look like, cryptocurrencies have attained positive valuations by implementing a nominal quantity commitment with an observable public ledger, rather than by the traditional method of redeemability or a purchasing-power commitment. Cryptocurrencies are not all bubbles, although a number of bubble-like crashes (to below 98% of peak value) can be observed in the record. There is no reason to suppose that the market is plagued either by insufficient competition or by too much competition.