By now, you’ve surely heard of Bitcoin and cryptocurrency. During the past few years, these words have become household names, making headlines as the new global cryptocurrency market swells into the hundreds of billions of dollars.
For the good or the bad, Bitcoin generally gets all of the attention from the mainstream media. But there is a lot of experimentation and innovation happening with other forms of cryptocurrency. These other projects are generally lumped into a single massive category and called altcoins, as in alternative to Bitcoin.
While they are lumped together for the sake of definition, there are actually a lot of distinctions among altcoins. So much so that it’s worth taking the time to try and understand how some of these projects work and what kinds of problems they are trying to solve.
The birth of Bitcoin and rise of altcoins
Bitcoin began as a white paper sent to a cryptography email list on October 31, 2008, by the mysterious Satoshi Nakamoto. While the identity of Nakamoto remains a mystery, the paper called Bitcoin: A peer-to-peer electronic cash system changed the world.
By January 2009, Nakamoto released the Bitcoin distributed ledger that acts as the network’s foundation. Soon after, the genesis block, or the very first series of Bitcoin transactions, was recorded. As of mid-2018, more than 500,000 blocks full of verified transactions have been added to the distributed ledger.
Bitcoin is a major innovation for several reasons. In the computer science realm, the launch of Bitcoin brought with it a new way of organizing and interacting with data, which can have implications on all kinds of digital activities ranging from finance and money transfers to personal privacy and identity. While the internet has changed the way people interact, do business, find friends, etc., there is still one big problem. It’s hard to trust information on the internet, and it’s even harder to interact in a secure way with people or businesses without the need for a third-party.
The problem that Bitcoin and altcoins solve Bitcoin and altcoins are trying to create the infrastructure needed to conduct safe and secure transactions in a digitally-native way. At their core, most of these new altcoin technologies are working toward replacing third-parties (such as banks, credit card companies, or any other centralized service that people currently need to interact on the internet) with tools that will allow people to act in more of a peer-to-peer matter, but to be able to do it in a way that protects against theft and fraud.
The main issue with third-parties, or intermediaries, is that they often turn into rent-seekers. Payment services charge high rates, for example. If digital services are not charging up-front fees, they are making money off of users in some other way, such as collecting and selling personal data, or from advertising.
Token economics is another major innovation enabled by the creation of Bitcoin and that is being explored in greater depth by many altcoins. These token economies enable groups of people to create systems of value that align goals or work with economic incentives. Like the idea of creating trusted and secure data without the need for a third-party, creating technologies like Bitcoin and altcoins that allow for people to create sustainable economies will open up new opportunities for secure collaboration that will lead to innovation across sectors such as finance, social networking, communication, and many other fields.
Key cryptocurrency attributes
Before launching into altcoin specifics, it’s important to think about the attributes that define cryptocurrencies. If nothing else, understanding the basics will be helpful when pondering the potential of different altcoin projects.
Not all cryptocurrencies are created the same, but there are enough similarities between most of the key cryptocurrency systems that it is possible to create a list of common crypto characteristics.
- Open source: One of the key characteristics of Bitcoin is that it is an open source network. This means that anyone can copy or clone the underlying computer code and build on top of it. This has happened several times already, most notably resulting in the creation of Litecoin and Bitcoin Cash. Most altcoin systems are built using open source principles and many altcoins are iterations of one another (like Ethereum and Ethereum Classic) or they might be a more specific application built on an existing blockchain. Like the altcoin Auger, which will create tokens that are part of a prediction market that is based on top of the Ethereum, which is a protocol-level blockchain.
- Decentralized: This often refers to the governance of cryptocurrencies. Rather than being run by single entities or corporations, cryptocurrency networks are often operated in a public and permissionless manner, which means anyone with the right kind of computer equipment can download the network and run a node. Decisions about network updates and other important changes are made by the consensus of the network, which can sometimes be challenging. The tradeoff is that the network is distributed and more secure than systems that have single points of failure.
- Peer-to-peer: As mentioned above, cryptocurrencies are designed to operate as peer-to-peer systems, rather than centralized systems. This kind of technology is designed to eliminate all kinds of middle-men and inefficiencies and inequities created by large organizations and institutions.
- Blockchain-based: This almost goes without saying, but it’s an important distinction when thinking about how cryptocurrencies differ from other forms of “digital money.” A blockchain, or a distributed ledger, is the base-layer infrastructure that enables all of the things on this list. Not all cryptocurrencies follow the outline above. Some have deviated from these waypoints to try and create other kinds of tools and models. It’s really important to do research and understand how each coin works and how it compares to other cryptocurrencies.
What are altcoins?
Besides Bitcoin, more than 1,500 altcoins exist. Together they comprise a global cryptocurrency market that as of mid-2018 was valued at over $300 billion.
As mentioned earlier, altcoins can exist in several formats. Some altcoin projects are trying to develop completely new kinds of blockchain protocols. These new protocols are often designed for specific traits. Monero and Zcash, are both new altcoins that were created with greater user privacy and security in mind, but each protocol is built upon different cryptographic principles.
A few altcoins, like Bitcoin Cash and Ethereum, are variants (or what are called forks) of other cryptocurrencies. Bitcoin was forked to create Bitcoin Cash, which enables faster transactions, and Ethereum Classic was forked to create Ethereum after a controversial decision to rewrite some of the transactions recorded on the original Ethereum blockchain.
Other altcoins function more like utility tokens (which in this case means they are not necessarily building their own blockchain, but instead they will operate on top of an existing protocol). In addition to offering digital alternatives to traditional currency, development teams around the world are using distributed and decentralized blockchain technologies to address challenges in computing power, file storage, and other digital bottlenecks with new blockchain-based solutions.
No one can be sure which of these coins will succeed, but this guide was created to introduce a few other cryptocurrencies that might be worth keeping an eye on.
Today, Bitcoin accounts for less than half of the total cryptocurrency market capitalization because of the dramatic growth in altcoins during 2017. Ethereum occupies second place in terms of market cap. As of mid-2018, the price of one unit of Ethereum (known as ether, or ETH) is hovering around $500.
Back on January 1, 2017, the price of one ETH was $8.24. Put another way, if you invested $10,000 on January 1, 2017, that investment would be worth approximately $600,000 today. In about a year and a half, the value of ETH has increased in a way that represents unprecedented gains when compared to any other conventional investment or financial market.
It’s important to remember that not all altcoins are created equal. Some, like Ethereum, have global development teams working on a shared vision and have a strong community supporting those goals. Other altcoins exist as little more than a website and a white paper and they have somehow raised millions of dollars.
It’s really important to do your own research and to understand the technology behind each of these systems. With that said, the majority of the cryptocurrency market is contained within the altcoins that follow Bitcoin.
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