A cryptocurrency refers to a decentralized payment system that allows people to send currency over the web without the necessity for a trusted third party. These transactions are always cheap and free in most cases. It is considered to be virtual or digital and has its security enhanced through the use of cryptography. This security feature makes the currency difficult to counterfeit. It is not issued by a central authority. It is therefore immune to government manipulation or interference. Nowadays there are many kinds of cryptocurrency, with over 700 different cryptocurrency projects functioning, and counting.
Bitcoin was the first such currency to capture the public imagination and was launched in 2009. Bitcoin’s success brought about the cryptocurrency boom we now see today. Other similar and at times competing currencies such as Litecoin, Ether and Monero, offer different advantages to their users. These projects built upon the principles of cryptocurrency, and morphed into highly sophisticated tools that serve as more than just a means of exchange.
Types of Cryptocurrency
Bitcoin, the original cryptocurrency is based on an algorithm called SHA-256. This was originally created by the NSA to overcome a weakness in the first generation of SHA-1 algorithms. Today there are many coins using SHA-256 as well as other types of algorithms that each offer an “improvement” on Bitcoin’s code like scrypt, scrypt-jane and prime algo.
Total decentralization is the main feature of most cryptocurrencies. As a result, there is no specified central point of authority. This is possible since everyone taking part in the transaction has a full copy of the required transactions. This creates a resilient network that cannot be changed or reversed by any policy in the transaction. Governments and banks are now trying to incorporate the technology, effectively aiming to create loosely centralized cryptocurrencies for their own purposes.
High level of anonymity
All Bitcoin transactions can be traced. It is one of the features of the blockchain, although tracing these transactions might be impractical in many cases. Bitcoin offers its users a degree of pseudonymity, which serves to protect the identities of the people who make transactions over its blockchain. Some newer cryptocurrencies have various mechanisms to afford their users complete anonymity. These new systems could be exploited by criminals since it involves borderless, anonymous transactions. It is difficult to report and trace criminal activities within such cryptocurrencies. Bitcoin is now widely monitored by law enforcement, making it an unlikely tool for criminal use.
Cryptocurrencies have made the transfer of funds between different parties much easier and faster. The transfers are facilitated through the use of private and public keys that enhance security. Fund transfers using cryptocurrencies involve minimal processing fees. As a result, users can avoid the steep fees that most financial institutions and banks charge for wire transfers. Regardless of its benefit to the user, this form of fund transfers has a major drawback. It is virtual and does not have a central repository. Therefore, the digital cryptocurrency balance of the user can be easily wiped out whenever the computer crashes. This is why the users need to have a back-up copy of all the transactions they take part in. Additionally, the prices of cryptocurrency rely on demand and supply. Therefore, the rate at which they can be exchanged with another currency can fluctuate widely.
Below is a description of the top cryptocurrencies in the market according to market cap.
Bitcoin was the first cryptocurrency to be introduced in the trading market in 2009. Currently, it is the most popular cryptocurrency since it is accepted as a payment in an ever growing number of establishments both on and off line. It is accepted by the NBA’s Sacramento Kings in exchange of merchandise, tickets and food for example. Most vendors and retailers including Amazon accept Bitcoin for many of their transactions. Bitcoin is quite volatile since it was able to rapidly increase in value from about $100 in October 2013 to $1200 in December 2013. Surprisingly, it encountered a sharp decline back to $600 in January 2014. Despite its popularity, not everyone is enthusiastic about it. For instance, the governments have banned Bitcoin transactions within their sovereign territories. It has however become popular in the P2P dominated web and has been used to purchase every item that allows its use. Bitcoin ATM’s are also being installed all over the world, making local currency accessible to all bitcoin holders. Read our Bitcoin guide.
Litecoin was designed to provide its users with an alternative cryptocurrency that is mined on a similar protocol to that of Bitcoin. It is easier to mine, has four times the maximum coin supply as compared to bitcoin – with 84 million coins to be mined – and can be attained easily by the consumer. It does not compete with Bitcoin but rather complements it. The computers used in mining Bitcoin can also be used to mine Litecoin without decreasing the efficiency required in Bitcoin mining. Regardless of the similarities, the list of customers accepting litecoin payments is not as long as that of Bitcoin. Learn more about Litecoin here.
It is a revolutionary blockchain that goes beyond simply enabling P2P transactions. The Ethereum blockchain allows anyone to program smart contracts on it – self executing contracts. The cryptocurrency that powers Ethereum is called Ether, and it is currently the second most valuable cryptocurrency by market cap. Ethereum also allows people to program tokens on its blockchain, which in effect act as another kind of cryptocurrency for specific purposes like distribution of dividends to investors. Read our guide to Ethereum and Ether here.
It has attracted less media attention than the other cryptocurrency. It ranked second to Bitcoin according to its market cap and has evolved to popularity without the help of Bitcoin. The Ripple network has been used severally to exchange any type of currency whether cryptocurrency or traditional country currency. Ripples XRP serves as a bridge that allows for exchanges to take place on this network. This is because users are required to spend a small amount of it in order to complete a transaction. According to the last update, over 7.2 billion of XRP has been distributed to its users. Read everything you need to know about Ripple here.
Developed to give its users complete anonymity, surpassing bitcoin’s pseudonymous nature. It effectively protects the identity of people who make transactions with it, making it very difficult for law enforcement to trace users and transactions. As a result, it became the cryptocurrency of choice in the dark web, but it is not alone. Other cryptocurrency projects like Shadowcash and Zcash also offer complete anonymity, albeit with different mechanisms. Nevertheless neither has ben able to threaten Monero’s popularity. Monero currently rounds up the top 5 cryptocurrencies by market cap. Learn more about Monero Here.