How Do Bitcoin Alternatives Stack Up?

The cryptocurrency Bitcoin has been in the news lately with a sudden surge in value followed by a spectacular crash – not to mention the unfortunate tale of $US4 million in bitcoin on a hard drive that was accidentally dumped in a rubbish tip. Bitcoin was the first widely used cryptocurrency, but few people know it is not the only one. So how do the top five cryptocurrencies by capitalisation compare?

Bitcoin picture from Shutterstock

Bitcoin

The core of Bitcoin is a loose alliance of people ("miners") who process and add transactions to the Bitcoin public record and get rewarded with Bitcoins for their efforts. This process (predictably enough) is called mining. Changes to the mining process are negotiated and when 80% of miners agree, the change becomes mandatory.

This process has worked well because the miners have an interest in keeping a stable reliable system that does not drop in price or go into a bubble then crash. The value of a Bitcoin is set by the market, which is the shared delusion of market players as there is no backing to the currency.

In terms of risk it sits somewhere between the share market, which can drop significantly but seldom to zero, and the derivatives market where you can lose more than you invested.

While Bitcoin transactions are public the true identities can be hidden so it's an easy way to purchase illegal goods or shift money around the world from one Bitcoin wallet to another and then to a normal currency. The low transaction fees and inability to track and tax money also appeals to some.

So why even look at alternatives to Bitcoin? There are two main reasons:

  1. the recent burst of the Bitcoin bubble
  2. there's a problem with the rewards to keep miners in the system. Mining rewards are dropping and eventually there will be no more new Bitcoins mined, as there is an inbuilt limit of 21 million Bitcoins. Will the very small transaction fees be enough to keep honest miners in the system – or will transaction fees need to rise?

Litecoin

By capitalisation, the next biggest cryptocurrency is Litecoin. It's built on Bitcoin ideals but aims to have a wider range of miners with algorithms that do not give a great advantage to hi-tech miners. This aim has been only partially met. Tweaks such as faster transactions and a bigger currency limit also help but the same problems that plague Bitcoin will also affect Litecoin.

While the value of Litecoin jumped 100% in 24 hours at one point, it also dropped 80% over time.

Bitcoin can be converted into other currencies quite easily but to date this is difficult with Litecoin and the other cryptocurrencies, the best path being to Bitcoin then a normal currency.

Peercoin

Peercoin has a built-in interest rate of 1 per cent per year, which is trivial compared to exchange rate movements. Each transaction costs 0.01 Litecoin which does not suit high volume or low value trading.

At present it has a centralised transaction checking system, controlled by Peercoin's creator Sunny King. In theory this will be removed down the track, but for now, it remains.

Namecoin

Namecoin is built on Bitcoin technology but adds a parallel internet which is uncensored and outside government control. While lack of government control sounds appealing it also implies that security exploits will not be blocked by the know-how of big corporate carriers or the government.

As a result Namecoin is a much riskier option than Bitcoin, which does diminish Namecoin's attraction.

Quarkcoin

In concept, Quarkcoin (or Quark) is close to Litecoin. It has faster transaction times than Bitcoin (typically a few minutes versus an hour). Its security algorithms are much more advanced than Bitcoin and this means that normal PCs can be competitive in mining coins. Miners who buy expensive high speed machines for Quarkcoin will have much less of an advantage than those doing the same for Bitcoin.

Does encryption matter?

The new cryptocurrencies discussed here are based on Bitcoin but all have added tweaks which may make them better technologies in the longer term. For now Bitcoin is by far the biggest with about $US12 billion value which is some 16 times bigger than its nearest rival Litecoin. Bitcoin is also a proven technology that has withstood the acid test of many hacking attacks.

In the long-term, a concern is the weakness of the SHA-2 encryption algorithm which is the basis of all cryptocurrencies above, with the exception of Quarkcoin.

For now it appears impossible to crack but who knows what the amazing computer power of security agencies can do now, and what commodity computers will do in five years time. Quarkcoin may be the better long-term bet with its superior security algorithms and faster transaction times.

Now back to you

When should you use a cryptocurrency? If you are an investor who enjoys playing the market then all cryptocurrencies have a lot of ups and downs and if you get it right there is money to be made.

There is a lot of good theory about boom and bust in speculative markets. Expect to lose if you are not a knowledgeable investor who is familiar with charting and market psychology. Margin trading is already happening, so you can profit (or lose) on rises and falls in cryptocurrencies.

There are many tales of fraud and other problems so be very careful and read a lot before you do anything. Some claim the market is being manipulated by big players who can cause booms and busts and make money from it.

The long term investment value of cryptocurrencies is uncertain. The current crop of reports about sudden fortunes being made is in no way a good predictor for the future.

If cryptocurrencies are like other speculative activities, the early players and the big players benefit to the detriment of the late entrants and the small players. Given the recent spike in cryptocurrency values we are most likely past the early entry stage.

There is an increase in real businesses willing to accept Bitcoin and this may help the long term outlook. You can see Bitcoin maps which show businesses that accept Bitcoins, most of which are in the US.

The majority of cryptocurrency activity still appears to be speculative rather than usage as a currency. If this state of affairs starts to reverse then cryptocurrencies may do well; if not then the whole concept may die like the great South Sea Bubble.

Probably the biggest practical use for cryptocurrencies is in international money transfers where the overheads of credit card fees and currency exchange margins are ridiculously high.

Moving your Bitcoins into normal cash still attracts fees of around 5% including buying and selling, so real savings will only be made if your destination is happy to work with Bitcoin.

Cryptocurrencies are fascinating and the appeal of easy money may grab the imagination. If you still fancy cryptocurrencies then do a lot of homework before spending any serious money because there are serious dangers and you could easily lose money rather than make a profit.

Pj Radcliffe is Senior Lecturer in Electrical and Computer Engineering at RMIT University. He does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

The ConversationThis article was originally published at The Conversation. Read the original article.


Comments

    Vote #1 Dogecoin!

      So much crypto! More dig for win!

      So encrypt.
      Many currency.
      Very mine.
      Wow.

      Dogecoin all the way. I already have 3000 of them!

        Dogecoin is Australian made too!

          What site did you buy them on?

    Sounds little subtle Quark advertising to me. Bitcoin is divisible so the 21 million limit is not an issue. Litecoin is the only other credible alternative. Get into premined coins at your ownn peril!

    Nice article, but saying namecoin is riskier is not really a good comment.
    Out of all the other alt coins namecoin is the only that brings something vastly unique to the table.
    Really the riskiest coins are the ones that have the lowest hashrate (which are open to 51% attacks)

    Too right about needing to do your homework before getting involved.

    now B4 I start on my q. yes I know bitcoins encryption isn't 256 blah blah.

    but has anyone actually researched what all this computing power is being used on. I don't buy it for a second that you spending electricity and computing power makes cash. there is something going on with this. and I personally believe this is "cracking something"
    a perfect example was . folding @ home. when you installed an ati card you could allow it when it went to idle to use your gfx card to process proteins. same thing. but I think this is being used for nefarious purposes. everyone is just blinded by the money aspect

      No conspiracy here. All of the mining calculations done are very public information and it is pretty much just boring stuff designed to help process and confirm transactions and such.

      The computing power used here is a deliberate waste to give the coins value. There's no secret end result it's aiming for, it's just verifying the transactions using a deliberately complex algorithm to make it require much more computing power than necessary.

      I wonder how much greenhouse gas has been emitted to "power" bitcoins?

        Not much now since most miners use ASIC's units which use next to nothing.
        tbh I don't think mining bc has any affect at all on the environment.

        The manufacture of 1 toyota prius probably has more affect...

          Well, according to the blockchained.com mining profitability , the latest ($7200US) Avalon ASIC unit consumes 620W. That's a fair bit (similar to 2x 42-inch plasma TVs according to CNet or about 1/3 of a clothes dryer based on Energy.gov, running constantly).
          If you're paying 0.15c/kWh for electricity, you have to run for 347 days to break even for hardware purchase + electricity. That's after you've consumed just over 5,400 kWh.

          I was unable to find any figures on energy cost of manufacturing a Prius, but it may well take more than 5,400 kWh. You can't drive an ASIC, though :P

          (edit: came across as confrontational, which wasn't the intention)

          Last edited 17/12/13 2:18 pm

            Hello Gnoshi,

            Good morning, I found your comment informative and non confronting. :)

        According to This Bloomberg article, bitcoin mining is probably using about 31,000 US homes worth of power.

        Using figures from the US EPA and the above Bloomberg article:
        0.593 metric tons CO2/MWh
        982 MWh/day being used
        Yearly CO2 output from bitcoin mining: 212,548 metric tons
        And for fun ridiculous equivalents: This is like driving a Hummer H2 Adventure around the earth 12,873 times (if you could drive around the Earth) (based on CO2 output of 412 g/km for that vehicle from Energy.eu)

          Note: I encourage anyone else to check my math, since I'm not 100% confident of it.
          Also, you'd have to drive that Hummer at about 2,800 km/h to get around the Earth that many times in a year, so your air drag would increase - doubling of speed ~quadruples drag - so you wouldn't actually have to drive around so many times after all.

            Wouldn't it be better to get more than 1 hummer to do the trip, instead of having to get a super hummer that can travel at 2,800km/h?

              I guess you could do that if you didn't want to do 2,800 km/h in a Hummer. To be fair, you'd start getting heating due to friction well before 2,800 km/h so you might need to tag-team Hummers anyway if you weren't running multiple Hummers in parallel.

      it's an open source code; everybody can look at it; thousands of experts did just that; there's nothing to hide

    How are bitcoins similar to derivatives in that you can lose more than you've invested? If you buy $500 USD worth of bitcoins and the exchange rate drops to Zero you do not lose more than initially purchased...

    Another thing to consider when choosing between these currencies is the liquidity of the exchange.

    Another thing to consider is that when the price of bitcoin was crashing a week or ago I tried to sell mine but the exchange was swamped and couldn't process my sale.

    Luckily its since gone up again to over $1000 and I sold mine, I got in fairly late and paid $300 a bitcoin but still I nice return for two weeks "work".

    A still kept a couple because the best educated guess is that in 1-2 years Bitcoin will either be worth nothing or be worth tens or hundreds of thousands, but only a small chance ~10% of it being successful.

    where dogecoin? much disappoint!

      "Top five"

      Dogecoin is way down the list: http://coinmarketcap.com/

    "In the long-term, a concern is the weakness of the SHA-2 encryption algorithm which is the basis of all cryptocurrencies above, with the exception of Quarkcoin."

    Litecoin uses Scrypt, not SHA-256

      Funny thing: Scrypt is much, much harder to optimise for ASIC because it is memory-heavy rather than just CPU-heavy. (e.g. see comment in IEEE Spectrum)

    You forgot to mention Quark is a pump and dump scam with 70% of coins pre-mined and owned by the creators.

    Bitcoin is awesome, litecoi could soon be awesome.

    ..."purchase illegal goods"...
    Really? Isn't cash as easily untraceable?

    Anyone here experienced in purchasing illegal goods care to comment? :P

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