Gadfly: Bitcoin hot - unless...

(iStock)
(iStock)

New York - Bitcoin is hot, except when you compare it with ethereum or litecoin or bitcoin cash or some other digital currencies. Then it's just lukewarm. And that could be a problem.

The price of ethereum, the second-largest digital currency after bitcoin, is up nearly 9 100% this year to a recent $735. Litecoin is up just more than 5 600%. Bitcoin cash, an offshoot of bitcoin that was introduced just this summer, is already trading at more than $2 400 for each virtual coin.

All of this makes bitcoin's 1 400% increase this year look puny. And remember that the stock market and probably many 401(k)'s are up a paltry 20%. And you thought you were having a good year.

The reason the steeper climbs of ethereum or litecoin have not received the same attention as bitcoin, or the stock market for that matter, is because they don't matter as much.

The market cap of ethereum is just more than $70bn, compared with nearly $250 billion for bitcoin and more than $20 trillion for the US stock market. So a 20% rise in the US stock market adds more than $4 trillion in wealth, or 57 times the amount that was created by ethereum's rise. Bitcoin has added $200bn in wealth this year. 

Still, bitcoin supporters have pointed to the rise of ethereum and litecoin, and now the hundreds of other digital rivals, as good news. It shows that more people are adopting digital currencies and that the technology has the potential to overtake the dollar, gold or other traditional currencies as an investment. And that might be true for the technology, but it could be a problem for everyone who has jumped into bitcoin.

Coinmarketcap.com, a website that tracks bitcoin and its rivals, has a chart that shows their market values. At the beginning of this year, bitcoin made up nearly 90% of the total value, or all of the money that has been invested, in digital currencies.

As of Monday, though, bitcoin's share had shrunk to just 43%. And the decline appears to be accelerating. It's lost a third of its market share in December alone.

The problem has to do with one of the main investing arguments for buying bitcoin - that it is a great store of value. But if more and more people are choosing to store the money they put into digital currencies in places other than bitcoin, that raises the question of just how great a store of value bitcoin is.

Another issue is that the amount of bitcoin is supposed to be capped at 21 million, which theoretically should prop up its value. But if other digital currencies are increasingly seen as rivals or even substitutes for bitcoin, then that 21 million cap becomes meaningless.

The good news for bitcoin investors is that it has managed to maintain its dominance over its rivals when it comes to transactions. Just more than 85% of transactions in digital currencies are being done in bitcoin, compared with just 5% for ethereum, despite the recent rise in fees for using bitcoin.

So bitcoin can still make a case that it's a better means of transaction than its rivals. But when it comes to being a store of value, bitcoin is increasingly being outsold.

*This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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