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NEW YORK (InsideBitcoins) — While demand for bitcoin has grown rapidly since 2012, few people are aware other cryptocurrencies are gaining popularity, as well. A Bank of Canada white paper shows the cryptocurrency market is becoming increasingly competitive. Neil Gandal and Hanna Hałaburda, the authors of the working paper, are confident there is enough room for multiple cryptocurrencies.
The digital currency market is still in its infancy, which makes it difficult to predict its future role in the global economy. The Bank of Canada commissioned research to predict its sustainability.
The authors studied cryptocurrency prices over two time frames: May–September 2013 and October 2013–February 2014. They found bitcoin prices became much more volatile during the second time frame, which they attribute to growing popularity of other digital currencies. Prices of other digital currencies increased more against the dollar than bitcoin in the second period, indicating the cryptocurrency market is becoming more competitive.
Bitcoin monopoly may be drawing to a close
“In our interpretation of these results, it seems that on the one hand, Bitcoin, via its initial popularity, “opened up” the market for cryptocurrencies in general,” the authors wrote. “At the same time, it enjoys a first-mover advantage in an environment with network effects. In the long term, it is not clear whether this advantage will be sufficient to keep the dominant position.”
The authors predict that there will be room for multiple cryptocurrencies as well as currency networks and bitcoin’s monopoly could draw to a close. They cited a BusinessWeek article from April showing many businesses prefer litecoin as a low-cost alternative to bitcoin.
“Litecoin right now is where bitcoin was the same time last year,” Michael Curry, co-founder of Vault of Satoshi told BusinessWeek. “As people are becoming more familiar with bitcoin, they are starting to see there are other coins out there.”
Can cryptocurrencies coexist?
Other economists have debated whether multiple cryptocurrencies can coexist, but Gandal and Hałaburda’s research is the most conclusive. In February, the Institute of Economic Research and Hitotsubashi University released a working paper titled “Is Bitcoin the Only Cryptocurrency in the Town? Economics of Cryptocurrency and Friedrich A.Hayek.”
Mitsuru Iwamura and Tsutomu Matsumoto, the authors of the paper, speculated that bitcoins will eventually be replaced by other cryptocurrencies:
“Bitcoin will be taken over by other cryptocurrencies with similar but somewhat improved technical as well as security structures in the future,” they wrote. “It does not necessarily imply that one empire is taken over by the other. We would rather expect many cryptocurrencies to coexist around the world.”
Iwamura and Matsumoto offered little evidence to support their bold claims. They cited substantial market capitalizations among other crypto currencies, but didn’t use arbitrage models to evaluate their long-term sustainability. They also offered no evidence to show that bitcoin would eventually be replaced by other crypto-currencies.
The Bank of Canada paper made a more compelling argument by analyzing price trends, arbitrage opportunities and impacts of different networks. Gandal and Hałaburda are confident other cryptocurrencies will be viable alternatives to bitcoin.
Written by Kalen Smith