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Monetary premiums, can altcoins compete with Bitcoin?

Monetary premiums, can altcoins compete with Bitcoin?

By Checkmate

Disclaimer: Nothing contained in this article shall be considered as investment or trading advice.

Note — This paper now has a follow up study which formalises the findings. Nevertheless, it provides valuable background and the link to the second paper is at the end.

The market for fixed supply crypto assets is viciously competitive as all altcoins exist in the shadow of Bitcoin’s commanding reputation, liquidity and market dominance. Bitcoin’s first mover advantage and hardcore monetary policy undoubtedly makes it the front-runner in a new age of digitally native scarce assets.

The question that continues to attract investor attention is whether altcoins with fixed supplies and deterministic supply curves have even a remote chance of competing or co-existing with Bitcoin. Can these assets become sound money, or do they represent a complete misallocation of capital?

In this article, I compare the observable monetary premium of Bitcoin, Litecoin, Bitcoin Cash, Dash and Decred in the context of the stock-to-flow (S2F) relationship developed by PlanB, who’s research based purely on Bitcoins historical data. This relationship model has shown extremely high correlation factors upwards of 95% and with reasonable verification against many sub-sets of Bitcoin data as well as comparison to the uncorrelated precious metals markets.

Scarcity

The notion of stock-to-flow as a measure of scarcity is a topic of great interest in both the commodities (precious metals in particular) as well as in the fixed supply cryptocurrency markets. Saifedean Ammous explored this concept in great detail considering the historical evolution of money in The Bitcoin Standard, where scarce assets have shown to develop a monetary premium as a result of high stock-to-flow ratio.

Nick Szabo beautifully articulated this idea using the concept of ‘unforgeable costliness’ which d...

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