“Bitcoin is the currency of the Internet: a distributed, worldwide, decentralized digital currency. Unlike traditional currencies such as dollars, bitcoins are issued and managed without any central authority whatsoever: there is no government, company, or bank in charge of Bitcoin. As such, it is more resistant to wild inflation and corrupt banks.” www.reddit.com/r/Bitcoin/

We are now in the ninth year of Bitcoin, the first coins (or “Genesis Block”) having been mined (that is, awarded for solving a computational problem) on January 3, 2009. Yet, Bitcoin has clearly failed to meet the grandiose aims of its advocates. Unlike conventional money, it is not widely used as a means of exchange. And, despite claims that its independence of government would make it a stable store of value, it remains anything but. Instead, the evidence we can find hints that its primary use is to evade capital controls (or, possibly, as an alternative store of value in a repressed financial system). The greatest achievement associated with Bitcoin is not the currency itself, but the blockchain—the distributed ledger technology underlying it—that is now being widely explored in the hopes of slashing costs and improving services in finance and a range of other activities (see our earlier post).

Bitcoin ushered in the era of private digital currencies, also called cryptocurrencies. Today, there are more than 500 “active” examples with a total market value of $16.8 billion (see here). Of these, Bitcoin remains #1, accounting for about 85% of the market (see chart). The advent of hundreds of private entrants into digital coinage should come as no surprise: seignorage (the goods and services that one receives for issuing a widely-accepted medium of exchange) makes currency creation—money printing — a very profitable business.

That Bitcoin would come out on top amid so much competition was not predictable from the early dynamics of the market (see, for example, Gandal and Halaburda). Indeed, digital currency enthusiasts still frequently promote competitors with what may in fact be more attractive features (such as better encryption to ensure anonymity). Nevertheless, at least for now, Bitcoin appears to have benefited from the “winner-take-all” effect that is so common to networks where the more people who use something, the more valuable it is to those who do.

Top 10 digital currencies ranked by market capitalization (Billions of U.S. dollars), 19 January 2017