What pressure prevents alternate currencies from completely diluting bitcoin?

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Looking into LiteCoin a bit makes me wonder: if LiteCoin were to gain transaction, what's stopping a 3rd, 4th, and 5th currency from gaining traction as well? Wouldn't this effectively eliminate bitcoin's ability of being a "deflationary currency" because other equivalent currencies can be created without end?

The mere fact that nothing else has approached the same popularity as Bitcoin leads me to believe that there is some sort of pressure preventing an explosion of multiple digital currencies.

I know there already are several alternate currencies, so why don't they have the effect of diluting bitcoin as I expect they would?

Cory Klein

Posted 2013-11-15T19:22:51.127

Reputation: 533

1Here is a related chart. – Cory Klein – 2013-11-15T19:27:08.267

Answers

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That pressure is purely market opinion of each currency as it comes into the public view.

F.A. Hayek argues that competition among currencies is beneficial for the economy and a useful means for fighting inflation of currencies. See Choice in Currencies.

Bitcoin by the very definition of its protocol is, in the long term, a deflationary currency. This is a fundamental quality that the introduction and rise of competing currencies - many of which will be modeled after Bitcoin - cannot change. Bitcoin cannot be diluted, because bitcoins cannot be arbitrarily added to circulation on a whim. Those who may have this power are under tremendous public scrutiny and would have a gargantuan task of persuasion ahead of them, should they choose to attempt to sway Bitcoin users' opinion.

Competition among the various alternative cryptocurrencies remains a topic of considerable debate, but the market cap chart to which you linked in your question comment indicates that someone finds value in these alternative currencies based on their merits.

Colin Dean

Posted 2013-11-15T19:22:51.127

Reputation: 6 834

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Now, for some speculation: see my answer to the closed question, In the end, will there be only one?, in which I reference Garzik's Theory.

– Colin Dean – 2013-11-16T02:19:57.963

Another way to phrase "fighting inflation of currencies" in such a way that it effectively applies to Bitcoin as well would be: "fighting sabotage of currencies through artificial devaluation because of central interference." – Colin Dean – 2013-11-16T18:39:24.647

The way I see it, several months after this answer, is tha main crypto-currs. will specialize: Bitcoin as a main store of value and main entrance from fiat to the crypto-coins world, Dogecoin for charity donations, Protoshares and kin as shares of the DACs, etc. Any coin not in a niche use enforced by its community will disappear or be used only for speculation. – Joe Pineda – 2014-03-09T01:34:32.453