Bitcoin and Cryptocurrency Technologies

Comparing altcoins: other indicators. ​There are several other indicators we can look at. Changes in an
altcoin’s exchange rate over time gives us clues about its health, and tends to correlate with changes
in its hash rate over long time periods. Exchange volume on various third‐party exchanges is a
measure of activity and interest in the altcoin. On the other hand, the volume of transactions that
have been made on the altcoin’s block chain doesn’t tell us much, since it could simply be users
shuffling their own coins around in their wallet, perhaps even automatically. Finally, we can also look
at how many merchants and payment processors support the altcoin — only the most prominent
ones tend to be supported by payment processors.
The economic view of Bitcoin‐altcoin interactions.​The relationship between Bitcoin and altcoins is
complicated. In one sense, cryptocurrencies compete with each other, because they all offer a way to
do online payments. If there are two standards, protocols, or formats in competition that are roughly
equivalent in terms of what they offer, then one of them will usually come to dominate, because of
what economists call “network effects.”
For example, Blu‐ray and HD‐DVD were in fierce competition in the mid‐to‐late 2000s to be the
successor to the DVD format. Gradually, Blu‐ray started to become more popular, in large part
because the popular PlayStation 3 console functioned as a Blu‐ray player. This made Blu‐ray a more
attractive format for movie studios and this popularity fed on itself: as more movies were released for
Blu‐ray, more consumers bought stand‐alone Blu‐ray players, leading to more movie releases and so
on. Similarly, if your friends all have Blu‐ray players, you’d want to buy one yourself rather than a HD
DVD player because you’d be able to easily swap movies with them. Within about two years, HD DVD
was a historical footnote.
Sidebar: who wins the race?​Long before HD DVD, there have been countless examples of
technological standards which rapidly lost out to a competitor and slid into obscurity, from
Betamax analog video tapes to Russian gauge railroad tracks. If you’ve never heard of these,
network effects are the reason why. Sometimes, like in the case of Thomas Edison’s direct‐current
power grid vs. Nikola Tesla’s alternating‐current power grid, the winner (AC) was determined by
overwhelming technical superiority. In many other cases though, such as Betamax tapes losing to
VHS tapes, the loser may have actually been technically superior, with network effects being strong
enough to overcome a slight technological disadvantage.
This line of reasoning suggests that one cryptocurrency will dominate — presumably Bitcoin, which is
far and away the most popular one today — even if some successor systems could be argued to be
technically superior. But that would be an oversimplification. There are at least two reasons why
competition between cryptocurrencies is not as hostile as the competition between disc formats.
First, it’s relatively easy for users to convert one cryptocurrency into another, and for vendors to
accept more than one cryptocurrency, which means that multiple cryptocurrencies can more easily
coexist and thrive. In economics terms, cryptocurrencies exhibit relatively low ​switching costs​.
Compare to DVD players, where most people really don’t want two bulky machines in their home and
can’t convert their existing library of discs if they change to a machine which plays the other format.
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