Alternative Currencies
Overview
Bitcoin was the first true digital currency, launching in 2009. Since then, the world of cryptocurrencies has become very crowded! As of September 2017, over 866 currencies exist for a total market capitalization of $110 Billion! Bitcoin is the largest cryptocurrency, with Ethereum and Ripple (XRP) rounding out the top three. 99% of the coins out there are ambitious projects with little more than a white paper, but there are some truly innovative solutions as well that will complement Bitcoin in the future.
Top 5 Digital Currencies
The creation of Bitcoin was a breakthrough in technology, cryptography, and finance. The underlying blockchain technology is set to revolutionize many industries, including financial technology (fintech). Since Bitcoin is an open source protocol, the magic of how it works is open for all to see. This has led to many ambitious projects being started off of the same general principles. One such project is Ethereum.
Ethereum Logo
Ethereum was not designed to be a store of value like Bitcoin. Ethereum was created to bring “smart contracts” to the blockchain. Simply put, Ethereum lets you program on the blockchain. This allows simple programs, like the creation of payments that release when certain conditions are met, all the way up to worldwide distributed computing networks to solve highly-complex problems. Ethereum also allows for the creation of new cryptocurrencies on top of its network. It has become very easy to launch a new currency, which explains why there are so many!
It’s important to do your own research if you dip your toes into alternative currencies (often referred to as “alt-coins”).
I’ve laid out some basic principles for analyzing alt-coins and hand-picked a couple good projects. If you’re truly interested in alternative currencies, give us a call!
Building a Portfolio
First off, let’s dispel one thing. You can’t really diversify all that much with cryptocurrencies. If you own 100 coins, you’re likely no better protected during a big downturn that if you owned a handful. Think of it like this, if your entire stock portfolio was in tech companies, you’re not well diversified. Sure, you’re not bankrupt if one tech company goes under, but tech stocks all share some similar attributes, and you’d be exposed to a big downturn in that sector. A truly diversified portfolio would include small cap tech stocks, blue chips, real estate, gold, etc. In the big picture, cryptocurrencies should be a small part of your overall financial picture.
Where do I buy these “alt-coins”?
If you’re like most users, you likely got your Bitcoin on Coinbase. Coinbase currently trades Bitcoin, Ethereum, and Litecoin. If you want to trade other currencies, you’ll have to create an account on another exchange, like Bittrex.
Bittrex Logo
Bittrex trades hundreds of currencies, but does not accept USD deposits. So, to fund your account, you can transfer BTC from Coinbase of one of your other wallets. Simply send the BTC to a provided deposit address and within an hour or so you’ll be ready to trade. Most alt-coin markets are based in BTC, so the prices for the alt-coins will be listen in BTC.
Unlike Coinbase, where you simply enter how much BTC you want to buy or how many USD you want to spend, you’ll actually be seeing a live book of active trades. Here, you can place limit orders, where you set how many coins you want to buy and the highest price you’re willing to pay.
If you’re uncomfortable using exchanges, there are other options include ShapeShift and Changelly. These services let you exchange BTC directly for alt-coins, but be aware that you’ll likely pay higher fees for the convenience.
What alt-coins are out there?
Ethereum
Ethereum brings smart contracts to the blockchain. Ethereum has near limitless potential for the creation of decentralized apps. Ethereum is also used to create many new currencies (in the form of ERC-20 tokens). Ethereums one “killer app” has been its ability to facilitate Initial Coin Offereings (ICO’s). Often, you need to own Ether in order to participate in an ICO.
Ethereum was dubbed “Bitcoin 2.0” by many and exploded in value in 2017 to become the number 2 cryptocurrency by market cap. It should be noted that the main developer of Ethereum did not intend for Ether to become a store of value. Instead, it’s an incredible sandbox for new decentralized projects. It should be noted that Ethereum does not have the security track record of Bitcoin, having been compromised in the past and hard-forked.
Ripple (XRP)
Ripple, the company, is bringing blockchain to the banks. Ripple’s native currency, XRP, is capable of and incredibly high number of transactions per second. Ripple’s main focus is to facilitate inter-bank transfers, both domestic and international. ACH and SWIFT bank transfers can take days to process, and work on ancient technology. It is clear that banks are embracing blockchain, but it is unclear if there will be serious buy-in to XRP.
Ripple is not decentralized like Bitcoin, and coins have been pre-mined. A significant amount of coins are held for future sales to large investors and for the developers.
Litecoin
Litecoin is a fork of Bitcoin’s code, and is often seen as the silver to Bitcoin’s gold. Litecoin is smaller, with a more distributed mining base. Due to the decreased size, Litecoin is often able to push through software changes faster than bitcoin, as evidenced by the activation of Segregated Witness (SegWit).
Monero
As an alternative to Bitcoin, there are several cryptocurrencies that are built from the ground up with privacy in mind. The biggest player in privacy-oriented crytocurrencies is Monero. Amazingly, Monero also uses a public blockchain and distributed consensus to verify transactions. The key difference is in the transactions themselves. Monero uses ring signatures and ring confidential transactions to obfuscate the amounts, origins and destinations of all transactions.
Ring signatures are a powerful application in cryptography. A ring signature is a type of digital signature that can be performed by any member of a group of users to create a transaction. However, to an outside observer is is impossible to determine which member of the group actually made the transaction.
Zcash
Zcash is a cryptocurrency that provides the option of “selective disclosure”, which gives users to option to conceal the sender, recipient, and/or amount being transacted. Zcash uses a breakthough in the field of cryptography called “Zero knowledge proofs”. These proofs allow users to prove knowledge about hidden information without revealing the information itself. The specific zero-knowledge proof used in Zcash is called “zk-SNARKs” (zero knowledge succinct non-interactive arguments of knowledge).
In order to use zero-knowledge proofs, the founders of Zcash needed to effectively create a master private key. If this master private key were to be discovered by a bad actor, unlimited Zcash could be created, possibly without anyone knowing that the network had been compromised. To combat this, the founders of Zcash went to great lengths to generate the key in such a way that no single person would ever see the entire key, and that the key would be destroyed after creation. They even documented the whole process, and WNYC’s Radiolab even put out a podcast on it.
The encryption used in Zcash and some other cryptocurrencies is truly bleeding edge, and many believe has not been vetted enough to be used for some applications. Bitcoin, in contrast, relies on established cryptographic primitives which have been used by governments and major corporations for data encryption, digital signatures, and many other uses.
Others
There are a handful of other cryptocurrencies that are worth looking into. For more information, contact bitconsult for deep-dive analyses into individual coins.
How do I keep track of my gains/losses?
There is a great app called Blockfolio that lets you enter all of your orders and view your balances in real time.
Blockfolio App
Initial Coin Offerings (ICO’s)
Want to be the first to own a brand-new currency? Then participate in the highly speculative world of ICO’s! Many new projects are choosing to raise funding by offering their coins to investors by using ICO’s. ICO’s are like IPO’s (Initial Public Offerings) except they are highly unregulated. Many countries are starting to take a hard stand again ICO’s as they are raising quite a bit of money and often times offering little more than a token and an idea.
When you participate in an IPO on the stock market, you’re buying shares in a company that is just going public for the first time. These shares could eventually represent a share of company profits (dividends) and often contain voting rights. In the world of ICO’s sometimes you’ll see similar characteristics. For instance, Golem (GNT) is building a decentralized supercomputer network. If you own the tokens, you’ll get a share of company’s profits in the future. However, you’re taking a big chance that the company will become profitable and you often have no voting rights.
ICO’s and altcoins may bee deemed securities by various agencies. When analyzing an ICO, you can apply the Howey Test to help determine what you’re dealing with.
Tread very lightly with ICO’s. Do your own research or contact bitconsult before diving in.
Want more information? Check out our resources page!