The great alt-coin rush seems to be a fine illustration of Milton Friedman's views on privately-issued inconvertible fiat money. As long as the reigning intrinsically valueless currency like Bitcoin, Litecoin, and others have a positive price, individual issuers will have an incentive to (almost costlessly) copy and paste new clones into existence in an effort to capture the premium.
I take two things from this. Either we're still in the short run, and Bitcoin's price will eventually get knocked down to zero.
Alternatively, something else is at work. It could be that cryptocoins are not indistinguishable fiat monies as per Friedman's theory but rather are heterogeneous and differentiable. Multiple carbon copies of Bitcoin are simply not enough to arbitrage away the original's value because the earliest mover has superior features compared to late moving clones. To begin with, incumbents like Bitcoin and Litecoin have already attracted a large mining community. The hashing power that the miners bring with them makes the coin more secure against 51% attacks, or forks, than upstart coins that don't have the same degree of mining power. So while the source code for a clone may be identical to the original, the degree of security inherent in each is very different.
Secondly, incumbents will tend to be more marketable. Merchants may have begun to accept them, securities might be denominated in them, and formal exchanges like MtGox offer direct convertibility into US dollars. This liquidity does not emerge in medias reas, or on its own, a fact that puts Bitcoin and Litcoin clones at a disadvantage. Like the security problem above, the liquidity hurdle is difficult to overcome because, chicken-and-egg-like, you can't become liquid or secure without users, but if you're not liquid or secure you don't attract users.
It appears that Milton Friedman is wrong, at least for the time being. Despite the recent onslaught of competing alt-coins, privately-issued fiat currencies like Bitcoin and Litecoin are still worth many millions of dollars. I suppose we'll have to wait another few years to see if Friedman is wrong not just about the short term, but also the long term. Until then, I'll throw in my chips with Friedman. Bitcoin's biggest competitors probably haven't arrived yet.
http://jpkoning.blogspot.com/2013/06/milton-friedman-and-mania-in-copy-paste.html
