There is only a finite demand for P2P currency. That demand has to be spread between P2P currency units that are issued. The spreadout won't be uniform (e.g. Bitcoins are $90 and Litecoins are $0.65 at the moment), but there is a conjecture that the competitors will become better and gain more market share.
Why? Who says the competitors will be better? You're defeating your own point.
You're saying it's possible to extend Bitcoin by making nearly-identical alternatives, thereby bypassing Bitcoin's 21million limit, and in the same breath you're saying that the new currency will be different and better and gain marketshare on its own, which means it's
not Bitcoin.
It is possible that there are people who would otherwise buy Bitcoin, who would prefer some features in another system more.
You are actually missing the KEY POINT, which is barrier to entry. Replacement goods have low barriers to entry.
If there is an exchange rate from currency A to currency B, then the barrier to entry is nearly zero. Merchants will accept as many currencies as they can.
That is why I say real-time market exchange at POS is a crucial factor. Surely some aspiring entreprenuer will provide it, if not already.
People should be dumping Bitcoins and buying Litecoins like mad right now. Those who do are going to make a big arbitrage when the rest of the herd catches up to this reality.
But the competitors can't all be the same. You are correct someone won't go buy Litecoin if it is just an exact copy of Bitcoin.
So each competitor has to have a few compelling features. I don't know how many such features are possible. The market will tell us.
So I am saying that not everybody buying Bitcoin now or in future, is getting exactly what they want from Bitcoin. Competition will come (I hope).
So if I create a better Bitcoin and I debase mine more than Bitcoin does, Bitcoin will suffer a debasement of the market.
See, that's an oxymoron. Either the new currency is identical to Bitcoin, which means it's extending the money-base and creating inflation, or it's unique enough to be "a better Bitcoin", which means it's not Bitcoin and cannot extend the Bitcoin money-base.
Study "replacement good" in economics.