That is the topic of my latest Bloomberg column, here is one excerpt:
Alt coins may be effective hedges for at least two reasons. First, the value of the coin may depend on how well the original rules for the coin were written, or how well it is governed in the case of managed coins like Ethereum or Ripple. Those factors may be fairly independent of what’s driving returns in traditional stocks and bonds, which in turn creates an opportunity for diversification.
Under these scenarios, alt coins are primarily stores of value rather than media of exchange. There is a notable tendency for exchange media to consolidate into a dominant currency in a given geographic region. But the very large number of financial assets in the world shows that thousands of stores of value can coexist and compete without much consolidation.
Second, alt coins to some extent are used for money laundering. If you think the world might be moving toward greater authoritarianism, the demand for money laundering could go up, to evade capital controls or asset restrictions. The value of alt coins would rise in turn, and that means alt coins would provide partial insurance against this very possible but unpleasant future path.
There is much more at the link. Overall I believe it is a mistake to focus too much on the medium of exchange function of such coins (“Can I use it in the store? I heard there are some food trucks taking Bitcoin!”, etc.). Instead think of them in terms of services offered. A new coin also may back, complement, and introduce a new protocol, though I didn’t have space to cover that in the column.
A few of you have asked me about the recent Bitcoin fork, here is one technical look at the issues.
I am struck by the notion that, of the two forked assets, the old-style, slow, and “immutable” Bitcoin retained most of the market value and trading interest. While that happened for a few reasons, I wonder if the market isn’t telling us that, at least when it comes to selecting the most dominant asset, it prefers a “rigid coin” to a coin managed by a company such as Ethereum or Ripple, or to a coin “managed” by votes and forks. In other words, the governance problems with coins may be larger than we had thought, and voting may deepen rather than solve those problems. The market seems to like fairly rigid constitutions. And for all the pledges made by company-run coins, is there really no way for those companies — in their post-founder futures if not now — to pursue their own interests over those of other coin holders and users? Since Benjamin Klein (1974) or earlier, we have known that is a classic problem with non-convertible private monies.
To what extent does the market prefer the “dogmatism” of classic Bitcoin to the discretion of private management? Not long ago, I had edged toward the view that Ethereum and its neat properties will displace Bitcoin, but now I suspect both kinds of coins will persist.
The brilliant Matt Levine will make your head spin.