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.
Bitcoin was the first electronic currency to use blockchains – distributed databases which record transactions on multiple computers across a network to prevent cryptocurrency data from being copied or transferred multiple times. Thanks to heavy publicity and its relatively long history, bitcoin is the most established and well known cryptocurrency. As of late 2017, the average ask price of 1 bitcoin is more than 8000 Swiss francs.
1. High liquidity. Thanks to the international popularity of Bitcoin, the cryptocurrency enjoys a strong secondary market. That makes it relatively easy to sell unwanted bitcoin.
2. High acceptance. Bitcoin is accepted by approximately 100,000 merchants worldwide, which means you can actually use it to pay for purchases.
3. 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 far more likely to deflate rather than inflate.
4. Easy to buy. Bitcoins can be purchased at SBB ticket vending machines (6% commission), at Bitcoin ATMs operated by Swiss service providers Bitcoin Suisse and Bity (both charge a 5% commission), or directly through the Bitcoin Suisse and Bity portals. Bitcoin Suisse charges a lower 3.6% commission for bitcoin purchases made through its online retail platform, and lower, custom commissions for high-value purchases.
1. Low acceptance in Switzerland. Less than 100 Swiss merchants accept Bitcoin, making it even less useful as a means of payment than regional Swiss community currencies.
2. Volatile rates. Thanks to a strong history of gaining value, bitcoin is most popular as an investment vehicle. However, whether prices remain high depends on many factors, including demand and competition from other cryptocurrencies. Investing in large amounts of bitcoin only makes sense if you have a high risk tolerance and risk capacity.
3. Transaction fees. You are not required to pay fees when you transfer bitcoin. However, paying a voluntary fee provides miners with an 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.
4. Transactions are slow. While the transaction process begins instantly, it takes some time before a block is generated and added to the blockchain – especially if no transaction fee is paid. A transaction is only fully confirmed once its block has been created.
5. Transactions are not anonymous. All bitcoin transactions are posted on a public ledger, and using the listed wallet IDs, it is possible to trace transactions you make back to you. This could potentially open the door for data harvesting.
6. Potential for a monopoly. Bitcoin is based on the proof of work system. In this system, the more computing power an entity can supply to the bitcoin network, the larger a share of transactions they can process and the more bitcoins they generate. 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 to dictate transaction fees for lack of competition. In recent years, bitcoin mining has progressively shifted from small-scale miners to large-scale computing warehouses.
7. Environmentally unfriendly. When a bitcoin transactions 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, 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.
Ether is the virtual currency used to transact value within Ethereum – a blockchain-based software platform on which virtual contracts of many kinds can be developed, transacted and recorded. The flexibility of Ethereum makes it a useful tool for many different applications, going far beyond commercial transactions. As of late 2017, the average ask price of 1 ether is around 360 Swiss francs.
1. Strong growth potential. The versatility of the Ethereum platform presents strong potential for growth in many different fields of computing. Because ether is the currency in which value is transacted on Ethereum, a growth in Ethereum use will likely result in a growth in the use of ether as a currency.
1. Low acceptance. Very few merchants currently accept ether, both in Switzerland and abroad.
2. Environmentally unfriendly. Like bitcoin, Ethereum is resource-intensive. Digiconomist estimated the annual power consumption of Ethereum in late 2017 at around 10 terrawatthours.
Litecoin is built on the same technology which powers bitcoin, but uses reduced code which enables faster transactions and requires less resources to process. As of late 2017, the average asking price of 1 litecoin is around 70 Swiss francs.
1. Fast transactions. Because litecoin blocks require less processing power to generate, transactions can be recorded across the network at relatively high speeds. This allows transactions to be confirmed faster than what is possible with bitcoin.
1. Inflation. Litecoins are created in the same way as bitcoins. The difference is that a maximum of 84 million litecoins can be generated, which is a much higher number than the maximum of 21 million bitcoins which can be generated. Because more litecoins can be created, the value of each unit will likely remain lower unless demand increases significantly.
2. Lower liquidity. Litecoin is not as popular or well known as bitcoin, so selling your litecoin can take some time.
3. Poor acceptance. Although litecoin is more widely accepted than many other cryptocurrencies, it is still far from being a practical currency for everyday spending. Acceptance in Switzerland is almost null.
Ripple works differently to bitcoin in that it was developed as a medium of exchange between different currencies – similar to the Special Drawing Rights issued by the International Monetary Fund. Unlike bitcoin, litecoin and many other open-source cryptocurrencies, Ripple is proprietary software which is owned and developed by a private company. As of late 2017, 1 Ripple was worth approximately 0.23 Swiss francs.
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.
1. 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.
Digital Cash, or Dash, is a cryptocurrency designed to offer similar benefits to those provided by cash. It is developed and distributed by the U.S. based Dash Foundation. As of late 2017, the average ask price of 1 Dashcoin is around 550 Swiss francs.
1. Privacy. Dash is built around the concept of privacy, and comes much closer to delivering full anonymity than most of its cryptocurrency counterparts. Wallet IDs are not listed on the public ledger and decentralized anonymization technology makes transactions difficult to trace.
1. Poor acceptance in Switzerland. Only a handful of Swiss merchants currently accept Dash as payment. However, a number of cryptocurrency debit cards (including Bitwala and Wirex cards) can be linked to a Dash wallet and used to make payments at merchants which accept Visa or Mastercard.
2. Low liquidity. Selling dash is not as simple as selling bitcoin because demand is not as high. Dash is not well known or established in Switzerland. If you plan to buy Dash as an investment, be prepared to wait some time before you find a willing buyer.
Dogecoin (XDG) was born out of the merger of a cryptocurrency and a popular Internet meme. But in spite of its beginnings as a humorous marketing gag, the cryptocurrency has developed a strong following. As of mid-2017, the average ask price of 1 dogecoin is approximately 0.0014 Swiss francs.
1. Fast transactions. Dogecoin blocks are created faster than those of many other cryptocurrencies, allowing transactions to be confirmed within a short time-frame.
1. Inflation. Dogecoin miners are rewarded with generous amounts of dogecoin for each block created. There is not absolute limit on the amount of dogecoins which can be created. While these attributed keep the value of dogecoin low, they also allow for ongoing inflation which encourages circulation. This has led to dogecoin being widely used for small transactions like tips, while other cryptocurrencies are generally hoarded by investors hoping for an increase in value.
Peercoin (PPC) 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 less computing resources. As of late 2017, the average ask price of 1 peercoin is more than 1.50 Swiss francs.
1. You earn interest on peercoins you own. Your peercoin wallet must remain connected to the peercoin network in order for changes to be tracked for proof-of-stake processing. In exchange for accepting this demand, peercoin owners are rewarded with annual interest equal to 1% of the peercoins they own. New peercoins are generated or “minted” to pay this interest.
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. Distributed control. While bitcoin processing (mining) has largely been concentrated in the hands of a few big players with the money to obtain the computing power required, peercoin processing can be performed on any computer and is carried out on the devices of peercoin users. So control of the network is determined by how many peercoins you own, rather than by how much computing power you bring to the table.
4. Environmentally friendly. The fact that peercoin is processed on user devices rather than by third parties and that processing requires little computing power removes the need for power-hungry computing warehouses. This makes peercoin more environmentally friendly than data-intensive cybercurrencies like bitcoin.
1. Transaction fee. 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.
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 marketing appeal of dogecoin, the anonymity of dash, and the interest earnings 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 a few of these virtual currencies rise and many fall. Like other alternative currencies, cryptocurrencies are only backed by 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.