Crypto Currencies Deciphered

Crypto Currencies Deciphered



Every day it seems crypto currencies are coming more into vogue and taking steps toward ubiquity.

For those who may not know what crypto currencies are, they are a peer-to-peer, decentralized, digital, alternative currency that rely on cryptography to produce the currency itself, as well as to validate transactions of the currency.

In short, they are currencies that are not controlled or manipulated by any central authority, where peers act as both the suppliers and consumers. They are also – for the most part – digital (though, if one is more comfortable, certain crypto currencies do offer physical units).

Now that you know a bit about crypto currencies (or at least have a rudimentary base), here are my top five options for crypto currency.

1. Bitcoin

Bitcoin is the godfather of crypto currency. It was the first crypto currency and also has the largest market capitalization – upwards of $2 billion.

Bitcoin was developed by a mysterious developer known only as Satoshi Nakamoto. It first became available in 2009, when one BTC was worth about a nickel. Currently, the price of one BTC is hovering around $200.

Bitcoin, unlike its crypto-counterparts, is accepted by numerous notable vendors, including Reddit, OKCupid, WordPress and China’s most popular site, Baidu. There is also a growing list of brick-and-mortar stores that accept Bitcoin for payment.

Though Bitcoin’s growth is certainly a positive, it also has some negative consequences. For example, every Bitcoin transaction must be stored in the block. Per its design, a particular transaction block can only be 1 Mb. This means that as more and more transactions happen, the blocks will fill faster and some transactions will have to wait for the next block to be processed, which will delay those transactions. (A great technical explanation of Bitcoin is available from Khan Academy).

2. Litecoin

If Bitcoin is gold, then Litecoin just may be silver.

Litecoin was developed to improve on Bitcoin. For example, the average Bitcoin transaction takes about 7-8 minutes to be confirmed. The average Litecoin transaction, however, takes about 2-3 minutes to be confirmed. A large reason for this is that a new Litecoin block is generated every 2.5 minutes, while a new Bitcoin block is generated every 10 minutes.

Another difference is the amount of the currency that will be produced. In an effort to combat hyperinflation, Satoshi Nakamoto capped the amount of Bitcoin that will be created: the amount of new Bitcoin created will be halved each year until there are 21 million BTC. The amount of new Litecoin created, though, will be halved every four years until there are 84 million Litecoin. This isn’t necessarily a positive or a negative on Litecoin’s part, since Bitcoin can be divided into parts (.5 BTC, .1 BTC, etc., all the way down to .00000001 BTC), but it does mean that 1 BTC will likely always be worth more than 1 LTC.

The final major difference is a very technical one. These coins are created through a process called mining. Essentially, miners solve complex math problems and are then issued a certain amount of the currency for doing so. This provides an incentive for people to mine. Bitcoin uses SHA-256. This requires people to get special hardware for their computers in order to be able to mine. Litecoin uses scrypt. This ensures that any CPU can mine Litecoin rather easily.

Litecoin has been around two less years than Bitcoin, having been introduced in 2011. This means that its market capitalization is much smaller – around $48 million – but still, it’s the second largest of any crypto currency.  Litecoin is accepted by many fewer vendors than Bitcoin and is much less readily available through exchanges; therefore, 1 LTC is worth only a fraction of what 1 BTC is worth (currently, 1 LTC is worth about $2.00).

3. Peercoin

Peercoin, also known as PPCoin, is hardly a year old, but it has the third largest market capitalization of any crypto currency, at around $8 million.

PPCoin has a number of features that distinguish it. First, it corrects a problem the developer saw with other crypto currencies such as Bitcoin and Litecoin. Those two have a proof-of-work concept. That is, when Bitcoin updates its blockchain (where the transactions are held), it attaches proof that a Bitcoin belongs to a certain person. Theoretically, one person could take over more than 50% of Bitcoin exchanges and essentially dictate which Bitcoins belong to whom.

PPCoin uses a proof-of-stake concept. That is, when you buy PPCoin, you have bought a stake in the currency. All you have to do is buy the currency to create it. This means that it’s more cost-effective than mining Bitcoin, so PPCoin has lower transaction fees.

There is also no limit to the amount of PPCoin in circulation, although there is technically a limit right now – 2 billion units – but it can be lifted when necessary. Currently, one PPCoin is worth about $0.39.

4. Namecoin

Namecoin is quite interesting. It uses most of the same software as Bitcoin, but is drastically different.

Namecoin is a distributed DNS (Domain Name System), where information about a web address is held within the coin. This essentially makes domain name censorship impossible by creating a new top level domain, which is outside of ICANN control, thus making Internet censorship much more difficult.

Namecoin addresses are .bit and, as of July, there are 78,549 .bit domains registered.

As with Bitcoin and Litecoin, there is a cap on the amount of Namecoin in circulation: 21 million. Namecoin currently has the 4th largest market capitalization of any crypto currency at around $3 million. The cost of one Namecoin is currently $0.45

5. Freicoin

Freicoin is like no other. It has a way to combat a big problem that Bitcoin currently has.

Many people who own Bitcoin are simply speculators. They pump-and-dump, they wait until the Bitcoin prices rises, then they sell; they’re in it simply as an investment. With Freicoin, you’ll have to pay to speculate.

Freicoin charges an annual 4.9% demurrage fee on sitting money. That means, if you don’t spend the Freicoin, you’re going to lose some of it. Some describe it as a “negative interest rate.

There is one problem with this novel idea: there aren’t a whole lot of places to spend it. While the other four currencies are quite well known, at least among the crypto currency world, Freicoin is an underling. Its market capitalization is only 15th among crypto currencies (around $160,000) and one Freicoin is worth only $0.0054. If Freicoin can start to be more widely accepted, however, this incentive to circulate the currency rather than sit on it is a very interesting concept.

From a technical standpoint, it’s quite similar to Bitcoin, but Freicoin also has an avant-garde distribution system. The founders will allow 20% to be mined. The other 80% will be allocated via charitable grants from the Freicoin Foundation.

Freicoin seems to be a bit of a grand experiment and only time will tell if that experiment proves to be a success.

As they are quite new, crypto currencies have their problems. These currencies, especially Bitcoin, are currently highly speculative. They are sitting, rather than being circulated. This makes them volatile. That can be cured, for the most part, by a larger number of vendors starting to accept them as payment.

The security risks are also rather real. The safest place to keep any crypto currency is offline, either in physical form or in a paper wallet. An incredible amount of Bitcoin, Litecoin and the like have been lost to security breaches, as well as to scams.

Crypto currencies are trending toward being the next revolution in money. An independent, decentralized, peer-to-peer currency: it sounds a bit outlandish, but so, too, do most things outside the status quo.

Image credit: CC by Nadav Yacobi

About the author: Alexander Maykowski

Alexander Maykowski is a recent graduate of Marquette University, where he studied journalism and political science. He has an ardent interest in cryptocurrencies (such as Bitcoin) and how they will shape the financial and global landscape in the future.

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