The frustration of not buying into Bitcoin is palpable (a kid I interviewed for a story for the Financial Review in April bought in at 0.10c), and is matched only by the excitement at the prospect of it rising a similar amount again. But I suspect the trend will go the other way.
Bitcoin has been compared to gold. It has value only so long as we agree it does, it is limited in quantity and you can use it as a medium of exchange.
Bitbugs should be so lucky. Centuries of alchemy has brought us no closer to replicating gold, but bitcoin’s properties are visible, public and replicable.
Anyone can make their own currency. And given the upside, thousands will.
If the elusive Satoshi Nakamoto (inventor of bitcoin) kept just one percent of the globe’s bitcoins for himself, he’d have 120,000 of them, worth $120 million; [the total stock of bitcoins will grow until it reaches 21 million and can be found here.]
The prospect of that sort of cash for free is a powerful motivator and so the field of virtual currencies is suddenly really really crowded.
There’s around 60 listed on an exchange called cryptsy, and that’s even before the crazy bitcoin price action of the last few weeks, which will no doubt tempt otherwise serious sounding people to wade into the waters. Some of the replacements will offer better features than Bitcoin, which many people fear could be hacked.
In this scenario, the only advantage Bitcoin retains is having been the first.
Bitcoin is unlike Microsoft, which was able to use first mover advantage to generate network effects and lock-in in the market for Windows.
A trailblazing and widely-cited paper on first mover advantage says a first mover advantage only offers opportunities to get an advantage.
“Unless a firm has the expertise, resources and creativity necessary to exploit these opportunities…being first to market will produce neither sustainable competitive advantages nor desired performance outcomes.”
Given bitcoin is a peer-to-peer system, its ability to coordinate expertise, resources and creativity may be very limited.
Agree? disagree? share your thoughts below.