Substitution Principle

A substitute good is one that can be used in place of another. As the price of a product rises, at some level people either move to substitutes or cease use altogether.

While a substitute would be less desirable at the same price as the original product, its lower price offsets this preference. In this manner the presence of substitutes reduces demand for the original good. The substitute competes with the original just as does increased supply of the original.

Given that a coin has fixed supply, it is commonly assumed that no supply side increase can reduce upward price pressure. As shown in Stability Property, Bitcoin integrates transfer fees which necessarily rise with use. This unique characteristic creates downward price pressure by reducing demand. But this rising cost also makes substitutes viable, creating downward price pressure by effectively increasing supply.

There is nothing preventing the evolution of multiple similar coins. It is possible for these to exhibit nearly indistinguishable monetary properties, minimizing the substitution tradeoff. As shown in Consolidation Principle, there is always pressure toward a single money, as this eliminates the exchange cost. However this pressure is at odds with rising costs, and at some level of use must give way to substitution (or disuse).

There is a theory that since creation of new coins costs nothing, the substitution principle implies that Bitcoin must become worthless due to unlimited free supply. This ignores the fact that Bitcoin requires people pay to use it. This is as true for a second coin as it is for the first. Yet increasing supply reduces demand. At some point demand is not sufficient to produce/secure more supply, and as such the theory is invalid. This is the same relationship that holds with commodity monies and indeed all products.

Maximalism is a public relations effort to discourage the formation of substitutes for a given coin. To the extent this is successful it may benefit existing owners by restricting supply and subsequently elevating price. However as people fail to find close substitutes, activity moves to more distant ones. In the case of electronic payments this is generally state money. Proponents of maximalism often express the contradictory theory that other coins cannot be competitive with their preferred coin. If this was the case there would be no reason to advocate for a single coin.