Cryptocurrencies are experiencing a boom similar to the dot-com boom of the late 1990s, with new virtual currencies springing up like mushrooms in a figurative sense. While many of these virtual currencies bring little added value to the table, there are a number of cryptocurrencies which deliver distinct advantages.
Here, moneyland.ch list the pros and cons of popular cryptocurrencies to help you understand what they can and cannot do for you.
1. Bitcoin (BTC)
Bitcoin was the first true cryptocurrency and is still the most widely-used. The basic unit is the bitcoin, which is made up of 100 million Satoshis. Bitcoin is completely open-source and its creator is unknown. It introduced the concept of using a combination of an automated distributed ledger (a blockchain), cryptography and consensus as safeguards against data duplication. If also introduced decentralization of both the issuing of currency and the processing of transactions on a full automated network made up of independent network nodes. It also introduced automated coin generation as an incentive to node operators who provide the computing power required to process transactions. Another feature incorporated in bitcoin was a preprogrammed limit on the number of coins which can be created. This feature has likely had the biggest impact on bitcoin’s use, because it limits the supply of bitcoin. Because bitcoins are required in order to use the service (decentralized value transactions) increased use of the service results in increased demand for coins. When demand outstrips supply, the value of coins goes up. This has made bitcoin extremely popular among speculative investors.
1. Non-proprietary. Bitcoin is not proprietary. No entity owns the bitcoin network. It runs fully self-sufficiently and does not depend on a company, government or central bank. The success or failure of bitcoin is not based on an individual or a company. No one entity can choose whether or not transactions can be processed on the network. This feature sets it apart from conventional payment networks which are run by entities that have the power to choose whether or not a transaction can be processed and to freeze or disable accounts if they so choose. Because bitcoin is not operated by any one entity, it has the potential to be very resilient.
2. High liquidity. As of 2019, bitcoin is by far the most widely-used cryptocurrency. The high demand for bitcoin makes it a relatively liquid asset which means it is fairly easy to find a buyer willing to buy bitcoin from you if you choose to sell.
3. High acceptance. Bitcoin is accepted by approximately 100,000 merchants worldwide, which means you can actually use it to pay for purchases from real-world merchants. Bitcoin is currently the only cryptocurrency which has any significant level of acceptance. Bitcoin is accepted as payment by the municipal government of the city of Zug. It is also accepted by around 100 Swiss merchants.
4. Low inflation. Bitcoins are generated when transaction data is processed to form a block – a collection of data which is added to a distributed ledger known as a blockchain. The generated bitcoins are transferred to the "miner" - the owner of the computer which provided the processing power, providing them with an incentive to process transactions. This system of generating cryptocurrency based on processed transactions is known as proof of work. Theoretically, bitcoin production is limited to a maximum of 21 million bitcoins, which means that as long as there is a strong demand for bitcoins, the currency is more likely to deflate rather than to inflate.
5. Easy to buy. Bitcoins can be purchased through dozens of online bitcoin merchants, wallet providers, brokers and exchanges – many of which offer mobile apps. It can also be purchased at SBB ticket vending machines (6% commission) and bitcoin ATMs (like those operated by Swiss company Bity), or purchased directly from other bitcoin holders.
1. High transaction fees. You are not required to pay fees when you transfer bitcoin. However, paying a voluntary fee provides miners with an added incentive to process your transaction. Because mining is increasingly automated, transactions are normally processed in order of the size of the fee offered. Fees are likely to become more significant after the maximum number of bitcoins has been generated, as miners will no longer be rewarded with newly generated bitcoin and will rely on fees for compensation.
2. Slow transactions. While the transaction process begins instantly, a transaction is only fully confirmed once it has been processed by a node (a miner) and all nodes have reached a consensus that the transaction is legit. After being ordered, bitcoin transactions are held in a mempool until a node which can process them becomes available. When large numbers of transactions are performed by bitcoin users at the same time, the waiting time between the point at which a transaction is added to the mempool and the point at which it is processed can be very long because the computing power made available by miners is limited.
3. Poor fungibility. In order for a currency to be fungible (usable) as a currency, all unit of the currency must be interchangeable. For example, you could not have some “good” 10-Swiss-franc notes which everyone wants and other “bad” ones which nobody wants, or the franc would not be fungible as a currency. Because information about bitcoin transactions – including the sender and recipient wallets and the amount shown – it is possible to link bitcoins back to every wallet from which they were transacted. This is the equivalent of being able to trace a 10-franc note back to each person who used it. If a wallet is blacklisted (by a government, for example), coins which were transacted from that wallet at any point may become undesirable because of their association with the blacklisted wallet – even if they have changed hands thousands of times since. When you hold bitcoins, you risk your bitcoins becoming “bad” bitcoins if a wallet they were once held in is linked to undesirable activity. For this reason, “good” bitcoins – those with a guaranteed clean track record – are more desirable and are worth more than potentially “bad” bitcoins.
4. Potential for centralization. Bitcoin is based on the proof of work system. In this system, the more computing power a node can supply to the bitcoin network, the larger a share of transactions they can process and the higher their consensus priority in determining whether or not transactions are legit. It is technically possible for a small number of miners (or even a single miner) which provides sufficient computing power to gain control of all or most of the bitcoin network. This would theoretically allow them “spend” coins multiple times because they dominate the consensus. They could also dictate transaction fees because they automatically have first dibs on transactions waiting to be processed. This scenario is known as a 51% attack. In recent years, bitcoin mining has progressively shifted from large numbers of small-scale nodes to industrial-scale nodes with supercomputing warehouses, which is a worrying trend.
5. Environmentally unfriendly. When a bitcoin transaction is performed, a whole new block of data is created and recorded on all computers making up the distributed ledger specifically for that transaction. This process requires a significant amount of computing power, which in turn consumer large amounts of energy. In late 2017 at the height of the bitcoin hype, Digiconomist estimated the annual power consumption of bitcoin at over 29 terrawatthours of electricity per year. For the sake of comparison, Switzerland as a whole consumed 58 terrawatthours of electricity in 2016.
2. Ethereum (ETH)
Ethereum is a cryptocurrency which serves as the basis for transactions within Ethereum – a blockchain-based system on which virtual applications of many kinds can be developed, transacted and recorded. The basic unit of Ethereum is the ether. The flexibility of Ethereum makes it a useful tool for many different applications, going far beyond commercial transactions. It serves as a basis for decentralized programs (known as dapps). The Ethereum cryptocurrency serves as the medium of exchange between tokens used by Ethereum-based programs.
1. Strong growth potential. The versatility of the Ethereum platform presents strong potential for growth in many different fields of computing. Unlike bitcoin, which can only be used to transact and store value, ethers power the Ethereum system which can be used for innumerable applications. It also serves as the basis for transactions in the tokens used by Ethereum applications. That means its success or failure is directly linked to the adoption of Ethereum as an operating system for decentralized applications. The more applications are created and the more widely they are used, the stronger the demand for Ethereum will become. However, there is no preprogrammed absolute limit on the amount of ethers which can be mined.
2. Liquidity. Ethereum is one of the most widely-used cryptocurrencies. It can be bought and sold on numerous marketplaces, and is relatively easy to sell.
3. Easy to buy. Like bitcoin, ethers can be purchased in many different ways, including at bitcoin ATMs from bity.
1. Semi-proprietary. Although the Ethereum system itself is not owned by a specific entity, it is developed by the Ethereum Foundation, a Swiss non-profit organization which holds a large stake in the system in the form of ethers. Further development of the Ethereum system – and therefore the Ethereum cryptocurrency – is directly linked to the Ethereum Foundation and to key developers. This dependence could arguably affect Ethereum’s resilience.
2. Low acceptance. Very few merchants – both in Switzerland and abroad – accept ethers as a medium of payment.
3. Environmentally unfriendly. Like bitcoin, Ethereum is resource-intensive. Digiconomist estimated the annual power consumption of Ethereum in late 2017 at around 10 terrawatthours.
3. Ripple (XRP).
Ripple works differently to bitcoin in that it was developed as a medium of exchange between different currencies – similar to the Special Drawing Rights (SDR) issued by the International Monetary Fund. Unlike bitcoin, monero, litecoin and many other open-source cryptocurrencies, the Ripple network is proprietary. It is owned and developed by a private company.
1. Corporate backing. Ripple is backed by a number of global banks which are interested in using a neutral cryptocurrency to streamline interbank and international transactions. The potential cost-savings provide an incentive for banks are other financial services providers to adopt the system.
2. Regulated. Because Ripple is operated by a commercial company and used by commercial banks, it is designed and adapted to suit regulatory environments. This makes it appealing to investors who are looking for a regulated cryptocurrency to invest in.
1. Proprietary software. Ripple is proprietary, so its success and continued operation is entirely dependent on the success of the Ripple company.
2. Poor acceptance. Ripple is designed to facilitate transactions in established currencies – not to settle payment of purchases directly. For this reason, Ripple currency units are not generally accepted by merchants and it has little value as a stand-alone currency.
4. Monero (XMR)
Monero is an open-source cryptocurrency which is designed to be a fungible currency. Based on the bitcoin source code, monero includes many additional features which make tracing transactions difficult. Like bitcoin, it uses proof of work mining.
1. Fungibility. The addresses of sender and recipient wallets are not shown in the public ledger, as they are with bitcoin. This information is encrypted and can only be seen by the sender and recipient. Monero also makes use of transaction mixing. In this process, the address of a senders in a transaction is mixed with multiple additional addresses, making it more difficult to trace a transaction to a specific wallet. These features are aimed at making monero a fungible currency by preventing the tracing of transactions to specific wallets.
2. Easy to buy. Monero can be purchased through many online exchanges, as well as at bity ATMs in Switzerland.
3. Non-proprietary. Like bitcoin, monero is open-source and is developed by a community of volunteers. Its development is not dependent on a company or foundation. There was no pre-mine which means there is no entity which holds a large share of monero coins (this could create a conflict of interests).
1. Low acceptance. Currently, very few merchants accept monero as payment for goods and services.
2. Regulatory risk. Like bitcoin, monero was developed to provide a decentralized currency with which to transact and to store wealth without censorship. Monero’s privacy-centric features take it a step further than bitcoin in this regard because they allow for more anonymity than bitcoin. Naturally, a censorship-resistant currency is likely to be unpopular with some governments. This means that investments in monero bear a certain amount of regulatory risk because government regulations can affect its user base.
5. Peercoin (PPC)
Peercoin was one of the first cryptocurrencies to introduce the proof of stake concept. This system tracks changes to existing data about peercoin ownership, rather than recording each transaction in full across the distributed ledger. This allows for faster processing times and requires fewer computing resources. There is no preprogrammed limit on the number of peercoins which can be minted (mined).
1. All wallet holders can mine. Peercoin users can choose to allow the network to use their computing power to process transactions. When your peercoin wallet is connected to the peercoin network, the network makes use of the computing power provided by your computer or other device in order to process transactions. The more peercoin you hold, the more transactions are processed using your computing power. In exchange for providing the network with computing power, you are rewarded with automatically-generated peercoins in the form of annual “interest” equal to 1% of the peercoins you own.
2. Fast transactions. Thanks to proof of stake technology, peercoin blocks are created more quickly than those of many other blockchain-based currencies. That means payments can be confirmed rapidly.
3. Environmentally friendly. Peercoin transactions require far less computing power than bitcoin transactions because less data is included in blocks. Because it can make use of computing power which would otherwise be wasted, peercoin is more environmentally friendly than data-intensive cybercurrencies like bitcoin.
4. Less vulnerable to centralization. Participation in proof-of-stake networks is based on the number of coins held – rather than the computing power provided (as is the case with bitcoin mining). It is theoretically possible for an entity to gain control of the network by holding 51% of all coins or more, but this scenario is far less likely than 51% attacks on proof-of-work networks.
1. Transaction fees. Peercoin has a fixed transaction fee of 0.01 peercoins per transaction. This fee can become an issue if you make large numbers of transactions, so it limits peercoin’s usefulness as a means of settling everyday payments. However, this fixed fee is also an advantage in that you know how much you can expect to pay. Bitcoin, on the other hand, lets you choose whether or not you want to offer a transaction fee to miners – but if you do not offer to pay a fee then your transaction may not be processed.
2. Social issues. Peercoin rewards nodes based on the amount of coins in their wallets. This benefits the wealthy (in coins) by default, which may be a concern for socially-minded investors.
3. Low liquidity. Peercoin is not as widely used as bitcoin and Ethereum. The lower demand makes it less liquid as an asset. Peercoin is also not traded on as many exchanges or offered by as many brokers as bitcoin and Ethereum.
4. Low acceptance. There are few if any merchants which accept peercoin as payment for goods and services.
Each of the cryptocurrencies listed above brings interesting ideas to the space. Unfortunately, there is no one cryptocurrency which enjoys the acceptance of bitcoin, the flexibility of Ether, the anonymity of monero, and the environmental friendliness of peercoin. However, you can use different cryptocurrencies for different kinds of transactions.
The cryptocurrency industry is in its fledgling stages, and the coming years will likely see some cryptocurrencies rise and many others fall. Like other alternative currencies, cryptocurrencies are only backed by demand from the community which uses them – not by taxes, industry, commodities or any other guarantees. If you want to be part of the cryptocurrency experiment, make sure to keep both eyes open and understand that virtual currencies can skyrocket, stagnate, or become worthless overnight.
If you want to buy cryptocurrency as an investment, consider spreading your investment across a number of cryptocurrencies to minimize the risk of loss should a specific currency fail. It can be helpful to approach cryptocurrency investments in the same way you would approach investments in illiquid, exotic national currencies which have potential for rapid gain in value but also a high risk of total failure.