Altcoins: What You Need to Know About Cryptocurrency Alternatives

Avery-Taylor Phillips |

Cryptocurrencies are the Wild West of investing. They’re risky, exciting, and for those brave enough to explore them, they might be the key to big returns. While most investors are familiar with the original cryptocurrency, Bitcoin, recent years have seen more digital currencies arise to contend for a spot as the currency of the future. Each of these altcoins — alternatives to Bitcoin — takes its own approach to improving on the Bitcoin.

Why Altcoins?

All alternative coins are based on blockchain technology — a decentralized, distributed ledger that solved the problem of double-spending in digital currencies. The blockchain prevents digital currency holders from duplicating units of exchange, which allows digital currencies to act as a store of value and limits the chances of fraud. Blockchain technology has many applications beyond the simple exchange of currency, however, and the developers of altcoins hope to explore the many ways we can utilize it.

Bitcoin was the first digital currency to utilize the blockchain and is by far the most widely adopted and most popular of the digital currencies. However, Bitcoin isn’t perfect. It comes with its own set of limitations and weaknesses, which many altcoin developers hope to solve. Each of the nearly one thousand altcoins currently available takes its own approach to digital currency.

The major issues with Bitcoin are its slowness and impracticality in retail transactions, a lack of consumer protection, and technical weaknesses that make it susceptible to attacks. Investors in altcoins hope that in the case that Bitcoin suffers a major failing, the altcoin they’ve invested in won’t be subject to the same downfall. Other investors look to the more diverse applications of some of the altcoins available, hoping they will have something Bitcoin doesn’t for the future when cryptocurrencies are more widely utilized. Some altcoins may also have features that make them better suited for a particular niche application.

Applications

Any altcoin that’s developed is done so with the hope that the new cryptocurrency will improve on Bitcoin. “A valid altcoin will often change bitcoin’s rules sufficiently to do something uniquely productive and may have a particular application,” says technology writer Danny Bradbury.

Much of the buzz around altcoins surrounds some coins’ ability to run smart contracts, computer programs designed to enforce the terms of a contract automatically, without room for error. Smart contracts greatly reduce risk and have a wide variety of applications, from insurance, to shipping, to real estate.

Other cryptocurrencies and protocols have been designed to allow users to transact and convert any form of currency — fiat money, frequent flyer miles, even Bitcoin. These protocols help reduce or even eliminate the risks associated with payment processing. Others even have more specific applications, like online tipping or the purchase of specific products.



Ethereum

Ethereum differs from Bitcoin in a big way: it was designed to be much more than a digital currency. Ethereum is a digital platform based on blockchain that is focused on running the programming code of decentralized applications (dapps). Ethereum’s core innovation on existing blockchain technology is the Ethereum Virtual Machine (EVM), a Turing-complete software that runs on the Ethereum network. This means that the Ethereum blockchain includes a full-featured programming language, making it possible to utilize smart contracts.

The Bitcoin is a dapp that allows users to exchange electronic currency. Ethereum enables developers to build dapps that can serve users in many different ways. Dapps utilize smart contracts to facilitate the exchange of anything that has value — like property, content, or shares. Any service that’s currently centralized can be decentralized using Ethereum. This makes Ethereum much more robust than Bitcoin.

Ether is what “fuels” the network. Ether acts as the currency used by developers to pay for transaction fees for services performed on the Ethereum blockchain network, and it also functions as a tradable cryptocurrency that investors can purchase.

Litecoin

Litecoin is an altcoin that’s almost identical to Bitcoin except in a few key areas. Litecoin was developed to improve upon the Bitcoin model. Until the beginning of 2017, Litecoin was the top contender for replacing Bitcoin as the most popular cryptocurrency, until it was displaced by Ether.

Litecoin’s biggest differences from Bitcoin are its faster transaction and processing speed, its larger “coin” supply, and its comparable ease of mining in terms of energy use. This altcoin is often dubbed the “silver” to Bitcoin’s “gold.”

Ripple

Ripple was released in 2012 as a digital currency and payment protocol. Ripple utilizes the same distributed ledger concept as blockchain with the aim of enabling "secure, instant and nearly free global financial transactions of any size with no chargebacks.”

Like Litecoin, Ripple is faster and more energy-efficient than Bitcoin. Unlike Bitcoin’s required centralized exchanges, which opens Bitcoin up to security risk, Ripple was designed to act as a decentralized currency exchange. Ripple also allows for automated scripts; this means exchanges can be conditional, and those conditions can be enforced.

Other Altcoins

Many other digital currencies have been developed beyond these three popular Bitcoin alternatives, each looking to do something Bitcoin doesn’t.

Namecoin was the very first altcoin, designed to decentralize domain-name registration and increase the difficulty of internet censorship. Dogecoin was developed to make online tipping easier and has a large online community of supporters. As of June 2017, Dogecoin had a capitalization of $340 million USD. Auroracoin is a cryptocurrency that was launched in 2014 as an alternative to both the Bitcoin and the Icelandic króna. These are just a very small selection of notable digital currencies among the wide variety of altcoins currently available, each with it’s own unique set of features.

The versatility of blockchain technology and the opportunities presented by its application in our day-to-day lives makes cryptocurrencies and cryptographic protocols highly appealing to both investors and developers alike. Alternative coins give investors plenty of options when it comes to deciding how to begin trading cryptocurrencies. Having an understanding of Bitcoin, its alternatives, and blockchain technology can not only help guide your investment decisions, but also can help you stay informed about a major technological innovation that’s poised to change the way we trade and transact.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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