Most traders ignore this vital truth about altcurrencies

I’ve been want­i­ng Ron­PaulCoin(RPC) for some time. I’m not bull­ish on the cur­ren­cy, in fact, I think it’s a bad idea. Nam­ing a cur­ren­cy after a per­son­al­i­ty, espe­cial­ly a liv­ing one (Tes­la­coin could be kind of cool) is a ter­ri­ble idea. But espe­cial­ly because Ron Paul is such an anti-fiat-cur­ren­cy gold­bug, I thought it would be fun­ny to have one RonPaulCoin.

Back when Ron­PaulCoin was trad­ing around $18 it was too much, even for the nov­el­ty. I mined it for a lit­tle while, but it became clear that the val­ue would just con­tin­ue to drop, so I sold my RPC for Bit­coin and called it a day. Even when it came down to $3.50 I was still skep­ti­cal that I real­ly cared enough about it to spend even that much on it. So a cou­ple of weeks ago I put in an order on Crypt­sy for a sin­gle RPC (actu­al­ly 1.001 RPC so that I could pay for the trans­ac­tion fee for with­draw­ing my coin from the exchange). I put that order in at about 85% of the then-cur­rent trad­ing price — about $1.24.¹

Today that trade went through. Ron­PaulCoin dropped from $1.83 to 78¢ in less than a day, and most of that drop hap­pened in the space of an hour. As some­one was sell­ing RPC at pro­gres­sive­ly low­er and low­er prices, my auto­mat­i­cal­ly set up trade went through.

Los­ing 46¢ in val­ue is not a huge deal, but this one sell-off made me curi­ous and I checked the val­ues of oth­er alter­na­tive cryp­tocur­ren­cies. It appears that there was a big sell-off of alt-coins on Crypt­sy between 8am and 10am PDT. The clus­ter, all in one brief time peri­od, makes me sus­pect that this was one per­son dump­ing their altcoins.

Here’s a sample:

The total vol­ume for all of these is about ₿7.75, or a lit­tle less than $5,000. It seems total­ly plau­si­ble that this was most­ly the result of sales by a sin­gle indi­vid­ual. Heck, that’s not even a very big set of trades.

I don’t have enough mar­ket cap data in front of me to chart out the mar­ket cap loss­es from this one sell-off, but as an exam­ple, some­one sell­ing $2,500 worth of DOGE­Coin cut $2.3 mil­lion out of DOGE­Coin’s mar­ket cap. $410 worth of Dig­i­tal­coin dropped DGC’s entire mar­ket cap by $179 thou­sand. Rel­a­tive­ly small sales (and pur­chas­es) have large effects on the over­all price (and there­fore mar­ket cap) for two rea­sons: first because so many peo­ple are spec­u­la­tive­ly hold­ing on to coins (hop­ing that they will increase in val­ue) the per­cent­age of coins actu­al­ly for sale at any time is very small; and sec­ond because there are so many cur­ren­cy exchanges that a small num­ber of trades can cause a big change in price at one exchange. How­ev­er, peo­ple see that hap­pen in one exchange and the effect rip­ples to the oth­er exchanges as peo­ple buy, think­ing that they will be able to sell at the high­er price at the oth­er exchange or sell .

It’s impor­tant to note that not all of those have stayed low — for exam­ple Dig­i­tal­coin has since recov­ered to ₿0.00008895, and that is in a very short peri­od of time. But it looks like some­one just dumped a bunch of alt­coins in favor of BTC and LTC. BTC is up slight­ly against USD today, but there’s no way to see what the Crypt­sy effect was and it is like­ly neg­li­gi­ble. On Crypt­sy, LTC rose dur­ing this time from ₿0.0263610 to ₿0.02704350. That dif­fer­ence is local to Crypt­sy and seems to be adjust­ing. None of this is real­ly any more than a blip on the radar in the big picture.

What it means

How­ev­er, this event illus­trates the prob­lem with alt­coins: the only way to get val­ue back out of most of them is to sell them on an exchange, so their abil­i­ty to act as a store of val­ue is ten­u­ous at best. This accu­sa­tion could be lev­eled at Bit­coin as well, but in fact it is pos­si­ble to buy a lot of goods and ser­vices with Bit­coin. Some­one want­i­ng to get out of the Bit­coin mar­ket could spend their Bit­coin on sub­scrip­tions to dat­ing sites, com­put­ers, web­site host­ing, bul­lion, piz­za, drugs (alleged­ly), or whatever.

The point is not how much stuff you can get with Bit­coin, but that liq­ui­dat­ing Bit­coin does­n’t have to deval­ue the cur­ren­cy. Pur­chas­ing goods and ser­vices with a dig­i­tal cur­ren­cy makes the cur­ren­cy more desir­able in the real world where­as sell­ing it on an exchange just drops the val­ue of that currency.

It’s easy to boil this down to the idea that high­ly spec­u­la­tive cur­ren­cies with­out back­ing have high volatil­i­ty. That’s true, but a bit sim­plis­tic. It’s not just reg­u­lar volatil­i­ty, what we’re look­ing at is insta­bil­i­ty and vul­ner­a­bil­i­ty to large changes by small causes.

When eval­u­at­ing the long-term via­bil­i­ty of any cryp­tocur­ren­cy² the most impor­tant thing to ask is: what goods and ser­vices can be bought.

There­fore, I real­ly only have con­fi­dence in a small num­ber of currencies:

• Bit­coin
• Lite­coin (though I have oth­er rea­sons for dis­lik­ing Litecoin)
• Dig­i­tal­coin³
• Doge­coin (I hate Doge­coin but I can’t ignore that it has got­ten trac­tion in goods and services)
• Name­coin (though large­ly lim­it­ed to domain names in a TLD that most peo­ple don’t and can’t use, the val­ue is indeed linked to the blockchain)

There are of course oth­er rea­sons to invest in an alter­na­tive dig­i­tal cur­ren­cy. I like Peer­coin for the way in which it is set up — a very small rate of infla­tion is, despite what many (with whom I agree) say about the dam­age caused by infla­tion, a healthy thing in a cur­ren­cy. Vert­coin has a lot of poten­tial because of the secu­ri­ty that comes from its use of mul­ti­ple algo­rithms. How­ev­er, these fac­tors are only rea­sons that a par­tic­u­lar cur­ren­cy might be adopt­ed for gen­er­al trade at some point in the future. In oth­er words, the suc­cess or fail­ure of a dig­i­tal cur­ren­cy will always come down to what peo­ple can buy with it. Every­thing else is speculation.