http://blog.aramisw.com/index.asp?action=view&filter=Economics&post=altcoins&creationdate=120724So, recently I started to read about Bitcoins and when I did, I came across altcoins. Those are alternatives to Bitcoins; it is coins that are similar but not the same. Same, same but different. There are several altcoins: Namecoins, Solidcoins, Litecoins etc.
I think I understand why Bitcoins attract users (link) and I think I can see why altcoins could attract some users as well.
There are many reasons as to why people find Bitcoins useable, one being the spreading mistrust in the banking system that has gained momentum after the financial crisis and which is being fueled by the banks own behavior. I am of course referencing the LIBOR scandal and the growing evidence of collusion between the Bank of England and international regulators, including the US Federal Reserve, in allowing the rigging of the London interbank offered rate (link). The reasons as to why people would want to allocate at least a small portion of their wealth into Bitcoins, are many and I listed only a few reasons just to prove the point.
But if people are distrusting the banking system then why should they trust the Bitcoin system? My thinking is that they should not. Nothing in the world of finance should ever be trusted or be based on faith. In my opinion it boils down to risk/reward and not putting all the eggs in the same basket. Thus, if you want to diversify out of the stock market and into cryptocurrencies, then perhaps buying some Bitcoins and some other altcoin is the way to go.
Take gold and silver as an example. People that have wanted to avoid downside risk in the stock market have traded the gold stock market ratio (link). By simply switching between long gold and long a stock index, they have been able to preserve their purchasing power. However gold is inherently volatile, so by combining the gold stock ratio trading strategy with trading the gold silver ratio (link) further profits could be realized.
My guess is that a trader could in a similar way, benefit from switching back and forth between Bitcoins and an alternative coin. When Bitcoin price is overextended, one could switch to another coin and when Bitcoin becomes oversold switch back again. By successfully doing so, one would have found a way to deal with the volatility of Bitcoins, without exposing oneself to the banking system or the stock market.
Being diversified into at least two coins, would also be constructive in managing the risk of a coin coming under attack or being taken down.
I am right now eyeing the LTCBTC ratio with much interest. Perhaps LTC will be short lived, perhaps not, in any case I hope that it survives long enough to give an insight into how an alternative coin behaves in reference to Bitcoins.
