April 7th, 2013 by Dissolving Dollars
Perhaps the real flip-side of Dissolving Dollars is Rising Crypto Currencies. Therefore, I want to get more into exploring the growing world of crypto currencies on this blog. Bitcoin has a younger sibling: Litecoin. Litecoin is essentially a kind of silver, while Bitcoin is a kind of gold. However, unlike silver and gold, the ratio between the two is only 4 to 1. I wouldn’t be surprised if Litecoin makes its way to parity with Bitcoin, both in market cap and acceptance. A parity market cap with $150 Bitcoin would mean about $37 Litecoin. Currently, Litecoin is trading at about a tenth of that. And rumor has it that Litecoin will soon start trading at Mt.Gox. Some speculate that the recent big price run-up of Litecoin has been instigated by Mt.Gox buying up a Litecoin reserve to get Litecoin up and trading. You can trade Litecoin today at BTC-E, but funding a BTC-E account with something other than Bitcoin is not easy (which is why Bitcoins are always cheaper at BTC-E).
Litecoin, development wise, is about where Bitcoin was two years ago. What Litecoin offers is a Bitcoin alternative. It most notably offers an alternate encryption. The market won’t want to put all its eggs in the same basket, which is why Litecoin is perhaps a valuable compliment to Bitcoin. In the chance that there is a problem with Bitcoin, there is Litecoin. So, I could imagine in the future–if cyrpto currencies take off as I suspect and hope they will–people holding near equal amounts of Bitcoin and Litecoin in terms of purchasing power (and maybe there will be a third or forth main option too). And if crypto-currencies really become the new gold standard, then, relative to today’s gold prices, an equally distributed market cap between Bitcoin/Litecoin compared to gold today would mean that by the time all coins have been mined there’d be an equivalent price of $200,000 per Bitcoin and $50,000 per Litecoin. (It is estimated that there has been about 160,000 metric tons of gold mined in the history of mankind. One metric ton is 32,150 ounces. At 1,600 per ounce, that equals a total value of $8,230,400,000,000.)
Beyond Bitcoin/Litecoin, I can see perhaps a kind of Creditcoin coming into existence that uses finite crypto currencies as reserves. The Creditcoin system would allow people to produce their own credit based on their Bitcoin/Litecoin reserves. In turn, everyday transactions would take place in Creditcoin while savings would be in Bitcoin/Litecoin. Borrowing beyond a 1 to 1 ratio would accrue interest. That interest would be paid from the debtor’s reserves automatically and distributed to the balance of everyone else’s reserves. The interest rate could easily be calculated by the system itself and could constantly adjust based on credit relative to reserves and length of time the credit is outstanding. Plus, individual reserves could be tied to a kind of reputation system that monitors a person’s credit worthiness based on past behavior relative to the unique codes of that persons reserves; the system would thus adjust credit limits accordingly and encourage holding onto the same reserves (digital wallet) for extended periods of time to build a good credit reputation.
I think the make or break of crypto currencies will depend not on what incompetent governments try to do to ruin the systems but instead on how the credit system is worked out. There is a system called Ripple that factors in credit, but I don’t know enough about it to comment on it. Nonetheless, if, like the crypto currencies themselves, the credit system is open source, peer to peer, decentralized, and the rules are built into the system, then crypto currencies will be the backbone of the monetary system of the future…which will take the power away from centralized sources like governments and banks. It is that potential future that has me excited about crypto currencies.