Bitcoin vs. Altcoin: Cryptocurrency Fundamentals
Bitcoin’s record-setting high in the end of 2017 has sparked increased interest in both Bitcoin and alternative coins, or “altcoins.” On the surface, it can be difficult to tell what sets Bitcoin apart from other, newer cryptocurrencies like Ethereum, Litecoin, and Ripple.
Altcoins rely on related technology; however, they build on Bitcoin’s potential in unique ways, something that is essential to understand as a new crypto trader. This article will give an overview of how Bitcoin works and its relation to altcoins from both a use and an investment perspective.
To understand Bitcoin, you need an idea of the technology which enables it: blockchain. Blockchain is essentially a constantly updating, globally available record of past transactions. One way to think of the relationship between Bitcoin and the blockchain is to compare it to that of the internet and Facebook; Facebook requires the internet to work, but they aren’t the same thing.
Historically, online money transfers were verified by a central authority like a credit card company or bank. While this method is relatively secure, it’s also time consuming, costly, and places a lot of power in the hands of centralized authorities, which can be vulnerable to political shifts and targeted attacks.
Blockchain theoretically solves all these problems by outsourcing oversight to its entire network. Every time a transaction is made, multiple “nodes” within the network approve it and add it irreversibly to a global ledger. New transactions are grouped together and added together as a block onto the historical transaction records.
This chain of record-keeping blocks is what is known as the “block chain.” Because everyone can see this record, it’s really hard to hack into it or make fraudulent transactions without controlling the entire network (which is all but impossible). In this way, it enables peer to peer transactions without the need to trust the person you trade with.
Why did Bitcoin take off?
Bitcoin was created in 2009. It was the first successful experiment in cryptocurrency, and still holds the biggest share of the market. It’s the most widely known and the recent craze has perhaps overinflated its value.
Bitcoin has some design flaws, leaving open the possibility that an improved altcoin could take over its market share. For example, Bitcoin’s blockchain gets clunkier with every block added, so Bitcoin transactions become slower over time. Mining it takes unsustainable amounts of electricity, and because of its instability and the uncertainty surrounding future regulation, Bitcoin is also hard to use as a day-to-day currency.
Blockchain, however, has vast potential applications. In fact, it could potentially disrupt any industry which relies on secure identity verification, contracts, or data transfer of any kind; this is another good reason for investors to look beyond Bitcoin into alternative blockchain-supported companies.
What do Altcoins offer than Bitcoin doesn’t?
In short, they improve Bitcoin and/or apply blockchain technology in new ways. An important note here is that not all altcoins are created equal. The cryptocurrency market is quite volatile. New ICOs (initial coin offerings) spring up every day. In some ways, these can be compared to penny stocks during the dot com boom: some will succeed, even astronomically, but the vast majority will not.
However, many established coins do offer something tangible. Many of them combine other services with cryptocurrency, using blockchain to accomplish goals beyond transfers of value. Important factors to consider regarding altcoin investment include:
- Availability and accessibility (you may have to first exchange fiat currency for Bitcoins, and then Bitcoin for the altcoin),
- Volume (how many people are using them/trust them?) and their functionality.
What are the Top Altcoins and How do They Stand Out?
In this section, we discuss some of the best altcoins currently accepted within the market and the reasons for their wide market acceptance.
Ethereum began in 2013 and now Bitcoin’s closest competitor. Its platform enables the creation of “smart contracts.” In theory, you could eventually use Ethereum to make and enforce agreements with people over the internet without having to trust that they will go through with them, something which has massive implications across virtually every industry.
The platform is powered by the cryptocurrency “ether.” Ethereum/Ether is available on most of the same exchanges as Bitcoin.
One of Bitcoin’s issues is anonymity. Wallet addresses, once made public, permanently reveal the user’s identity and transaction history. Monero fixes this issue by making transactions completely anonymous and untraceable. It does solve the privacy issue, but for this reason is often associated with criminal activity and is more likely to be the target of regulation crackdowns.
Ripple’s technology is a bit harder to understand. It allows people to make transactions using any currency, including fiat currencies like USD. When one person pays into the system using any currency/gold, the person on the other side can withdraw that amount.
What form the payment takes doesn’t matter as long as both parties are willing to deal in that currency. If they don’t use the same currency, the algorithm finds a third party who can trade with both of them in the middle; this creates a “ripple” effect. The system’s currency XLP is also used as a last resort common coin.
Ripple was sponsored by many major institutions including Google and is already being explored by many international banking corporations. In short, it plays with major financial institutions, rather than against them.
Litecoin is a direct attempt to improve upon Bitcoin; it improves speeds considerably by only requiring transactions to be verified with recent blocks, rather than the entire chain. This brings in some other technical difficulties with “orphan blocks” and the like. However, Litecoin is still a popular choice as a fast, functional currency, and is available on many big exchanges as a speedier, more functional alternative to Bitcoin.
Golem uses Ethereum’s smart contracts to allow computers to interact with each other, creating a massive, decentralized global computer using the unused processing power of participating users. In exchange for renting out their computers, users compete for compensation with small amounts of currency. Golem could eventually be used for powerful big data analysis ranging from academic research to machine learning algorithms.
Cryptocurrency creates not only intangible coins but also a new online economy. The above is by no means an exhaustive list and will continue to evolve as the technology changes. However, understanding both what Bitcoin offers and how its altcoin competitors utilize the same technology to offer services in addition to currency can help investors make decisions based not just on current market trends, but rather a more nuanced understanding of the value blockchain currencies will bring to the online world in the future.