Bitcoin Facing Increasing Competition from Other All-Digital Currencies

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Bitcoin has revolutionized the concept of currencies. While currencies have traditionally been backed either by a commodity, such as gold, or a national government, Bitcoin is 100% digital and is created through a peer-to-peer network of online users. No national government or any other central party can control the value or even creation of Bitcoins. Instead, the online community itself regulations and creates Bitcoin. Now that Bitcoin has challenged the very concept of currencies, other digital currencies are looking to challenge not only traditional currencies, but Bitcoin itself.

The biggest challenger at the moment is “Litecoin”, an all digital currency created by ex-Google software engineer Charles Lee. Litecoin promises to address some of the underlying issues with Bitcoin and aims to be a more viable and stable currency. So far, Litecoin has attracted the interest of various companies, investors, and others. Still, Litecoin is not nearly as popular as Bitcoin and a Litecoin currently sells for about 2.5 dollars.

One of the biggest criticism leveled at Bitcoin is that there are simply too few Bitcoins available to work as a sustainable currency. Currently, there are about 11.5 million Bitcoins available in the market, and over the next couple hundred years, the amount will rise to 21 million. Satoshi Nakamoto, the mysterious creator of Bitcoin, wrote the code for Bitcoin to top out at 21 million coins. It should be noted, however, that Bitcoins can be divided into smaller subunits, just as a dollar can be broken into cents.

Some critics have charged that 21 million is simply too small and number, and that Bitcoin prices will rise too high to effectively work as a currency. With one Bitcoin currently selling for over 100 dollars, they may be on to something. At the same time, Bitcoins have become so difficult to mine that only professional miners with expensive mining rigs can mine Bitcoins and produce a profit. Mr. Lee has charged that these circumstances will ultimately restrict Bitcoin’s potential both as an investment and a currency.

Mr. Lee aims to address these concerns through his Litecoin currency. While Litecoin is heavily based on Bitcoin, there are some important differences. For one, there will be 84 million Litecoins available for mining. These coins will also be mined at a faster rate, with a new block of coins coming into creating every 2.5 minutes, vs. Bitcoin’s 10 minutes. Also, Litecoin uses its own mining algorithm, referred to as “scrypt”, which will be more friendly to non-professional miners.

Yet, it’s worth questioning if Charles Lee didn’t misinterpret the strengths of Bitcoin as its weaknesses. Nakamoto specifically designed Bitcoin production to taper off and supply to be limited in order to preserve the value of the currency. Also, by making Litecoin more accessible to everyday computer miners, the currency might actually undercut its value. Further, because Litecoin will not taper off as quickly, and more Litecoins will be available, prices could remain suppressed.

Nakamoto designed Bitcoin production specifically to taper offer in order to increase the coin’s value over time. This is probably the same reason Nakamoto designed Bitcoin mining to become more difficult over time. A decreasing trickle of Bitcoins into the market should ensure that prices move upwards. For these reasons, Bitcoin might actually emerge as the winner in any peer-to-peer currency wars. Bitcoin has been designed specifically to increase in value over time, indeed this is one of its main benefits vs. traditional currencies that lose their value to oversupply and inflation.

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Brian Booker

An international financial analyst and writer. He has consulted for the Malaysian government, various MNC's, and other organisations. He focuses on currencies, commodities, and emerging South East Asian markets.

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