There’s a growing number of cryptocurrencies other than Bitcoin and although they’re all similar, each is unique in its own way. Understanding these differences can be very helpful since it allows us to find unique opportunities.
Bitcoin was the first cryptocurrency to be created. And it’s still the most popular, which is one of its biggest advantages. Remember that if something is scarce and valued by many, then it’s the same as money. Bitcoins are scarce (there’s an algorithm that determines their growth and only a set number of Bitcoins will be created) and their popularity has given them an economic value. Additionally, its algorithm has the potential to be used as an alternative method for financial transactions.
Of course, Bitcoin is just a software algorithm. True, there’s a lot of mathematics behind it, but it’s basically software. And many Bitcoin alternatives have been created, some of which are also very popular. Some are just copies and others have undergone technical modifications to increase their security or simply change the speed at which the number of cryptocurrencies in circulation grows. Currently, there are over 740 cryptocurrencies in use, although only 10 have a capitalization of over 10 million dollars.
The differences lie in technology and economy
All of these have something in common: they are based on a decentralized algorithm (P2P), (P2P), which does not have a central issuer. For all other parameters, whether technical or economic, there is the potential for variations.
One of the first technical modifications made when creating Bitcoin copies was the transaction verification algorithm (basically what miners do, verify transactions for the good of the community in exchange for a small commission, and from time to time new coins are randomly created to increase the monetary base). Bitcoin uses the SHA-256 hash. Other currencies such as Peercoin and Namecoin do the same.
One of the first technical modifications made when creating Bitcoin copies was the transaction verification algorithm
This hash algorithm has the drawback of being vulnerable to mass attack using specific ASICs. That’s not to say that there’s no security, instead it means that being a miner with specifically designed hardware is profitable. As a result, we hear about miners that fill entire rooms with specific hardware to mine more cryptocurrency than their competitors.
Some think this is a bad idea since the coins are overly dependent on large professional miners (although there are others who believe that this is good because it is very difficult to attack the currency when there are so many people spending money and resources to correctly mine it). First Litecoin and then Dogecoin replaced the hash algorithm with scrypt, which isn’t as effective with specific ASICs; instead, anyone with a PC can have a certain degree of success. This means that anyone can mine from their home without investing very much money.
This has its pros and cons. Litecoin and Dogecoin currencies have fewer large miners, instead these are more spread out. Bitcoin has a very powerful base of miners, although it is more concentrated. Let’s not forget that mining is important for the currencies, since the miners verify the financial transactions. The problem is that almost all of the currencies are deflationary and when new coins are no longer created many professional miners will disappear (since it will no longer be worthwhile to live off the transaction commissions if there is no new monetary basis). In theory, for hash scrypt based currencies these miners will still exist, given that the installed capacity isn’t as large and there aren’t as many professional miners; instead there are many amateurs who devote a portion of their free computing power to mining.
As we have seen, creating cryptocurrencies is very easy and, as a result, there is a wide variety of currencies. We have discussed Bitcoin, Litecoin, Dogecoin, Peercoin, Namecoin… but there are many more. The fact is that any currency is easier to mine initially, when the monetary base is growing quickly, and if you mine a new currency it is easy to quickly accumulate capital. However, your cryptocurrency will not be worth much if it’s not successful. There is definitely a get-rich-quick culture behind this.
If you want to be a cryptocurrency miner keep the following tips in mind: first, forget about well-established currencies: earning money is very complicated (but it’s not completely out of the question, prize horses always tend to win); second, forget about currencies with an SHA-256 algorithm like Bitcoin: as the popularity of the specific hardware increases, we will be left behind; third, research new currencies and whether these have any interesting economic features (for example, Peercoin was of interest because the money supply grows endlessly with a target inflation rate of 1%; until that time, every currency had been deflationary since these had a maximum volume).
What are the most innovative cryptocurrencies?
At an innovation level there are a few currencies that I find truly interesting, although it might be a bit late to mine them due to their high number of users:
· Peercoin: The first one that was designed without an initial limit; instead it has a target inflation rate once a certain point is reached of 1%. This makes it very scalable and its use could become very popular.
· Auroracoin: It is bound to become the new currency of Iceland. It is 50% pre-mined and that amount is distributed in Iceland among the citizens who requested it. Interestingly, Iceland has had problems with its currency recently and the lack of trust in a traditional currency could promote the use of this cryptocurrency.
· Litecoin: This was the first major copy of Bitcoin. It improved certain things, such as transaction approval time, and it was the first to use scrypt, with which mining with ASICs isn’t as effective. However, due to its popularity, the main mining of this currency (and despite not offering significant advantages) is done with custom equipment.
· Dash: This is a newer cryptocurrency (2014) that uses a hash algorithm composed of a combination of 11 algorithms (called X11), and therefore direct mining with ASICs doesn’t offer any advantages. Additionally, it is optimized for mining via CPU without excessive energy spending. Currently, it is the fourth currency in overall volume and its growth has been spectacular.
· Dogecoin: It started as a joke, but the people behind it know what they’re doing. They’ve made changes to the algorithm to prevent distributed mining, causing many professional miners to abandon it. It’s an inflationary currency that decreases over time. In 2015 inflation will be 5.2%, but it will continue decreasing (for example, in 2035 it will be 2.5%).
· Monero: This is one of the currencies under the CryptoNote protocol, which adds anonymity to the transactions and is the algorithm used by most cryptocurrencies. Currently, it is number 11 in terms of capitalization and is not optimized for use with GPUs, but instead CPUs, which benefits amateur miners.
· Zerocoin: This actually isn’t a currency, instead it’s an extension that adds anonymity to Bitcoin (or any other currency). Maybe someday it will become an independent currency; we will have to watch it closely since it’s very popular, but the currency still doesn’t exist. The first to mine it will earn a great deal of money… if it becomes a currency, of course.
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