Altcoins: Signal or Noise in the Digital Currency Ecosystem?
For digital currencies to fully enter the mainstream and establish themselves as a new asset class, different options need to be available and compelling.
There is no shortage of different coins, tokens, and currencies circulating today. For the most part, though, only a select group have been able to gain any substantial mainstream mindshare.
Where do Altcoins come from, and why?
Altcoins (alternative coins) are said to be any digital currency that is an alternative to Bitcoin. This definition illustrates Bitcoin’s dominance, which, while still maintaining over 50% of the digital currency market’s capitalization, has dropped significantly from a year ago when it held 85% of the market capitalization.
Some altcoins, like Bitcoin Cash, originated from Bitcoin itself, and were created by forking off from the original Bitcoin blockchain. Others were created from scratch, building their own blockchains and protocols.
The most successful altcoins have offered something unique and valuable to users, such as increased privacy, security, or some utility such as the ability to use the token for something specific within the network.
Although there are thousands of altcoins, two popular coins seek to differentiate themselves from Bitcoin by prioritizing privacy and speed.
Monero focuses on security and untraceability, claiming itself as the leading privacy-centric digital currency. Like other digital currencies, the blockchain is decentralized and open, but Monero employs additional mechanisms meant to obscure participant’s information in pursuit of privacy.
Although the perception of privacy is baked into all digital currencies, privacy is not always a default setting.
Bitcoin transactions, for example, are visible for anyone to see. This is historically a strength of Bitcoin, as the transparency of the ledger is an alluring feature for governments and transparency advocates.
Although the transactions are tied only to pseudonymous addresses, if someone were to connect your real world identity to a given bitcoin address, all past and future transactions, as well as your current balance, are open for anyone to see.
Monero, on the other hand, uses privacy technologies to obscure every piece of the transaction puzzle.
Sending addresses are hidden by something called ‘ring signatures,’ meaning that personal information is mixed in with all senders’ information, and can’t be distinguished as belonging to you. Recipient addresses are similarly hidden by something called ‘stealth addresses.’ Even the amount of a given transaction is obscured by using ring confidential transactions.
Where a Bitcoin transaction states which address sent exactly how many bitcoins to the recipient, Monero divulges nothing.
Because of this privacy focused protocol, all units of monero are ‘fungible’ – they can be perfectly exchanged for any other unit of monero. This is important when you consider that if you received bitcoins which can be traced back to some illicit purpose or address, these specific bitcoins can be ‘blacklisted’, and thus, may not be fungible for another unit of the currency.
Monero does provide a mechanism for you to share your transaction details in circumstances that warrant, such as for tax purposes or proving you paid someone. This selective transparency is an example of how altcoins are forging ahead to establish themselves as useful in the real world.
If Bitcoin is considered the ‘gold’ of digital currencies, Litecoin may be the ‘silver’.
Created in 2011, which makes it a de facto veteran in digital currency timelines, Litecoin is based upon the same principles as Bitcoin, with a few important structural differences.
Litecoin’s founder, Charlie Lee, wanted to alter the Bitcoin codebase to accomplish, in his eyes, two improvements. He felt that Bitcoin needed quicker transaction times and the ability to keep the mining process open to people without specialized hardware.
As opposed to Bitcoin’s ten minute transaction confirmation time, Litecoin confirmations take two and a half minutes. This speediness sought to provide a currency which can facilitate commerce in more real-world scenarios, where waiting ten minutes may hinder business.
Besides quicker transactions, Litecoin also sought to ensure that the mining process would remain feasible for any network participant.
In the beginning, Bitcoin mining was able to be done on normal computers. With increased competition, however, miners utilized expensive mining-specific hardware called ASICs (application-specific integrated circuits) which allowed them to out-mine the competition.
Litecoin’s solution was to preclude ASIC-dominance by making the mining process more memory intensive, rather than processing-power intensive which ASICs excel at.
While Litecoin established itself as a currency that can solve some of Bitcoin’s problems, other altcoins which retain the Bitcoin ‘legacy’ have also recently come about. Namely, Bitcoin Cash and Bitcoin Gold, solving for increased block capacity, and more evenly distributed mining, respectively.
Relatively speaking, we are still in the early innings of digital currency creation, and altcoins are frequently launched, with their founders hoping they will gain traction and amass a large network of users.
The most prominent altcoins which have attracted network participants and investors offer real value and solve problems that the market is currently facing.
To the astute digital currency investor, there are, and will be, a plethora of opportunities to find and hold assets with the possibilities of outstanding returns. Although a technical background may help, equally important is identifying a protocol that people, companies, and governments will have uses for in the coming decades.
Combining a strong business case with an experienced founding team are often the ingredients for a digital currency’s success and appreciation. As such, spotting the next big digital currency is akin to discovering and holding companies you believe in: filtering the noise to follow a meaningful signal is still the name of the game.
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