Cryptocurrencies, which refer to a type of virtual decentralised digital currency, have exploded in popularity in recent years. The best-known and most famous cryptocurrency is that of Bitcoin, which has been in existence since 2009, after being launched by the mysterious Satoshi Nakamoto. Compared to traditional currencies, such as the US Dollar or Euro, which are administered by centralised banking systems, cryptocurrencies such as Bitcoin rely upon a peer-to-peer network of computers, in a similar manner to file-sharing networks. Whilst from an investment perspective, Bitcoin is notoriously volatile in comparison to other traditional, well-established assets including gold and the US dollar, remarkably, the value of just one bitcoin has recently risen above the US dollar equivalent of $5,800. This is despite Bitcoin suffering a large crash in value in 2013.
Bitcoins are generated mathematically through the completion of increasingly difficult tasks; however, there is an upper limit and only a maximum of approximately 21 million Bitcoins can be in existence. This means that the currency cannot be quickly devalued in the same way that a traditional currency can be devalued centrally. The underlying peer-to-peer network is used to monitor all Bitcoin transactions, including the creation of Bitcoins and the exchange of Bitcoins. Bitcoins can be exchanged for traditional currency using specialised exchanges, or can be transferred between individuals, who keep Bitcoin in software “wallets”. However, whilst the surge of interest in Bitcoin, and usage, has been nothing short of remarkable (indeed, the popularity of Bitcoin has resulted in the rise of specialist physical Bitcoin ATMs worldwide, and particularly in the USA and Europe: recent figures suggest that an average of three Bitcoin ATMs are being installed per day), Bitcoin is not without its limitations. For example, the creation of new Bitcoins is now extremely computationally demanding. In the past, individuals with relatively accessible powerful gaming computers were able to create Bitcoins, however, it is now almost impossible for individuals to do so without specialist hardware and not even gaming machines with multiple graphics cards can provide the necessary computing power. Given the difficulty in creating new Bitcoins and the extremely prohibitive cost of purchasing existing Bitcoins (the value of one Bitcoin has increased by a remarkable 470% in the last year and a cost of approximately $5,800 per Bitcoin is the highest exchange rate which the popular cryptocurrency has ever reached), investors are now beginning to consider other cryptocurrencies, although as over 1000 cryptocurrencies are now available, which currencies could Finnish investors potentially consider? We briefly summarise several popular Bitcoin alternatives (which are commonly known as “altcoins”).
Litecoin is another peer-to-peer cryptocurrency, which was released in 2011 and is very technically similar to Bitcoin. However, there are several subtle differences between Bitcoin and Litecoin, including in the capability of Litecoin to allow higher transaction volumes and faster confirmation times compared. There are also differences in the underlying algorithm: Bitcoin relies on the SHA-256 algorithm (a consequence of this approach is that this greatly increases the difficulty level in solving the mathematical problems which allow for the generation of new Bitcoins) whilst Litecoin runs on Scrypt: this means that it is easier for problems to be solved. Litecoin blocks are generated every two and a half minutes as compared to Bitcoin’s ten minutes; also, Litecoin has a larger coin limit of approximately 84 million coins. Additionally, Scrypt is open source and the underlying software code can be run, modified and copied by users. Compared to other currencies, Litecoin is more transparent, due to the capability for independent parties to verify the underlying source code. Currently, one Litecoin is worth approximately $64 and Litecoin has a market cap of somewhere in the region of $540 million, which is significantly less than Bitcoin’s $10 billion market capitalisation. However, Litecoin can still be mined using specialist computers with multiple GPU (graphics processing units) cards, whereas this is no longer realistically possible with Bitcoin.
Another popular alternative to Bitcoin is Ethereum; however, Ethereum goes beyond functioning as a digital currency and instead operates as a full software platform, where developers can build and run decentralised applications (which are known as “Dapps” and where the code runs on the blockchain network; similar to the internet) for specific purposes. This flexibility even extends to running smart contracts on the Ethereum network. The currency within Ethereum is known as Ether and currently, one Ether is trading at a equivalent of approximately $315. In terms of market capitalisation, Etherum is second after Bitcoin and has a capitalisation of approximately $4.5 billion, however Ethereum was recently split into Ethereum and Ethereum Classic.
Whilst Bitcoin and Ethereum are the most popular and well-known cryptocurrencies, there are more recent cryptocurrencies which are not yet as well-established. One such cryptocurrency is ZCash, which is another open-source, decentralised currency, where the major distinction is in the level of privacy which ZCash provides users with. As is the case with Bitcoin, all ZCash currency transactions are recorded within the blockchain, but crucially, the level of privacy is much greater as important details including the amount of ZCash transferred, the sender and the recipient are all considered to be private and can be hidden. ZCash has been only active since October 2016 and since transactions can remain private (since they allow users to “shield” their transactions) the main attraction is in the level of encryption behind the transactions. However, this feature is not enabled by default and users have to actively opt-in to this feature: as a result, only 28% of transactions are currently shielded in this manner. ZCash has a total available currency of approximately 21 million coins and current market rates show one ZCash coin to be trading at approximately $226.
Dash (which is formerly known as “Darkcoin” until early 2015 and is short for “Digital Cash”) is another cryptocurrency where the focus is very much on privacy and anonymity. The major distinction of Dash is that all transactions are essentially untraceable, due to Dash’s reliance upon a decentralised master network. Interestingly, the model behind Dash splits the rewards gained from blocks between miners, masternodes and a decentralised budget system; indeed, Dash operates as a decentralised autonomous organisation and both self-governs and self-funds the Dash network. Dash currently has a market capitalisation of over $1.4 billion and one Dash coin is currently equivalent to approximately $310.
Monero is similar to Dash in that privacy is placed at a premium. Monero is a cryptocurrency where all transactions cannot be traced, and interestingly, the high level of privacy is enabled by default. Monero does this though an innovative mixture of ring signatures and stealth addresses: these are randomly-generated single-use addresses which are created for each and every transaction. Importantly, no transactions which are conducted using Monero can be traced back to either the payment sender, or the payment recipient. Monero differs from other Bitcoin-style currencies due to its reliance upon a CryptoNite protocol. Monero has been available since 2014 and can be mined either by individuals, although specific hardware is not required to facilitate the mining (this is unlike Bitcoin, for example) or through participation in mining pools. Investors should be wary of the fact that Monero is particularly volatile and one Monero coin has fluctuated between a minimum of approximately $0.25 as of early 2015 and a high of $60, which occurred earlier this year. Current market rates suggest that one Monero coin is equivalent to just under $92.
Ripple is a cryptocurrency which operates very differently to Bitcoin and other altcoins since crucially, Ripple does not require mining as a method of confirmation. This means that the required computing power is dramatically reduced, but the network latency is also dramatically reduced. The major distinction of Ripple is in that it is a real-time currency exchange, real-time gross settlement system and remittance network, which is decentralised and cannot be shut down. The main selling point of Ripple is that it allows instant, low-cost global payments and has been adopted by banks and other financial companies as settlement infrastructure. There is a maximum supply of 100 billion Ripple coins and one Ripple coin is equivalent to approximately $4.37. Ripple has been around since 2012 and currently has a market capitalisation value of approximately one and a quarter billion dollars.