The Litecoin disruption | FT Alphaville

The Litecoin disruption

When things get too expensive, imperfect substitutes become increasingly appealing.

It happened to oil with natgas and shale. It happened to gold with copper and silver. Now it seems to be happening with Bitcoin as well.

So while Bitcoin traded through $1,000 on Wednesday (depending on which exchange or service you use to acquire Bitcoin: it was $1,035 on MTGox, $922 on BTC-e at pixel time), more interesting is the recent surge that’s taking place in the value of alternative crypto currency Litecoin:

(Chart via Cryptocoincharts, the blue line indicates the hash difficulty.)

And this illustrates yet another weakness of the “Bitcoin will take over the world” theorem. As Bitcoin gets more and more pricey, new entrants will be exposed to lower future gains versus early entrants, so it becomes increasingly attractive for them to pump up alternative instruments from a low base than it does to risk a correction in the former.

In short, committing $1,000 to Litecoin at $25 per coin, to receive 40 coins, on the hope their value will ascend to $50 per coin, seems a fairer deal (relative to early $1 investors) than sticking $1,000 into Bitcoin, receiving one coin, and hoping the price will now go to $2,000.

The mental block is your gain relative to that of earlier investors who gain exponentially more with every dollar move than you.

Given that all these virtual currencies are replicable, there’s no stopping a slew of alternatives popping up every time the entry costs become too high relative those to early adopters.

No-one wants to be a latecomer, and you don’t have to be if everyone collectively decides to pump up Litecoin instead.

As for when Bitcoin will finally stop its mad ascent, we’d speculate it might be whenever any of three conditions are met:

1) China liberalises the exchange rate, and the Chinese premium (USD cash-out option) vapourises.

2) ASIC miners lose their competitive advantage, something which could be indicated by the operating margin for older, non ASIC miners, returning to positive territory (chart via Blockchain):

3) Litecoin (or some other crypto alternative) becomes a greater pulling power.

One last rogue condition: when a government decides to launch its own e-money equivalent.