Bitcoin might steal all the glory but it's not the only cryptocurrency that you can buy, invest in--or need to know about. With thousands of digital coins now changing hands on exchanges, here are five cryptocurrencies that you must understand:
1. Bitcoin Cash
Bitcoin has a problem. Transactions are gathered into blocks which computer nodes add to the blockchain. But the data in a transaction is now about 522 bytes and each block is limited to just one megabyte in size. So each block typically contains around 1,900 transactions. New blocks are added to the blockchain at a rate of about one every 10 minutes, which means that Bitcoin can usually only handle between three and seven transactions per second. Visa can manage 1,700 transactions per second.
Bitcoin Cash was meant to be the solution. It launched in August 2017 as a fork on the Bitcoin blockchain and can pack eight megabytes of data into a block. That should allow it to handle eight times more transactions per second than Bitcoin. The disadvantage is that the bigger blocks also give more power to large mining companies that can afford more powerful equipment. In practice, Bitcoin Cash hasn't yet taken off fast enough for the extra transaction space to be necessary, but if Bitcoin works as a currency, that capacity will prove vital.
Litecoin was released in 2011 and was meant to complement, rather than compete with, Bitcoin. It's often described as the silver to Bitcoin's gold, but creator Charlie Lee saw it slightly differently. For him, Bitcoin is best used for large transactions while Litecoin would be used for passing small amounts between friends. An alternative way to think of it is as the difference between large banknotes and small change. It's also faster than Bitcoin, with blocks taking 2.5 minutes to process in comparison to Bitcoin's 10. If Charlie Lee is right, though, you can expect to be using Bitcoin to buy goods online or make international payments while Venmoing with Litecoin.
The biggest obstacle to the use of digital coins as currencies has been their volatility. When the value of a Bitcoin can rise or fall by hundreds of dollars in a day, buyers won't want to give them away and sellers won't want to accept them. Until Bitcoin stabilizes it can't function in the way that it was intended. Tether was meant to solve that problem. The biggest of the "stablecoins," Tether is backed by dollars and other assets to ensure that one Tether is always worth one dollar. Users should get the speed and low-cost transactions of a cryptocurrency but the stability of the dollar.
The price for that stability, though, is centralization. Tether was created by the same company that runs Bitfinex, one of cryptocurrency's biggest exchanges. Users have to trust that company with the value of their assets, a reason that many turned away from fiat currency in the first place. (There have been signs that that trust is misplaced.)
But even if Tether itself isn't the answer, the currency has shown the need for a digital coin with a stable value.
The cryptocurrencies we've examined so far have been straightforward. They're supposed to act just like fiat currencies, used to buy and sell goods and services. Ethereum is different. It's a currency used to pay for the Ethereum network. Ethereum tries to replicate the internet's system of servers and clients using distributed computers. Those computers run smart contracts. So someone could use the Ethereum network to install code that manages a shared citybike system. When someone makes a payment, notification of that payment is added to the Ethereum blockchain. The miners who add the blocks to that blockchain are paid in Ethereum. The company that owns the code gets paid. And the customer gets to cycle away.
The value of Ethereum depends on the demand for its use among applications. This isn't a currency that you're going to be using to buy goods in stores, but it could be a currency you use to buy the services that underpin your business.
Libra is the newest coin on the block. In fact, it hasn't even been released yet. It's the brainchild of Mark Zuckerberg, though it will be managed by a consortium that includes banking institutions, venture capitalists, and payment firms including Visa, Mastercard, PayPal, and Stripe. It will be a stablecoin, like Tether, supported by a basket of fiat currencies, so its value will be predictable but it won't be decentralized. Users will have to trust Facebook and its friends to secure the value of the currency and keep the data of their transactions private.
The aim is to create a global, borderless currency that will cost almost nothing to transfer and which can be used online safely. Users of Facebook would be able to buy and make payments without leaving the application. It's not yet clear that it will work, but if it does, it could be the cryptocurrency that changes the way we buy forever.
The author has holdings in Bitcoin, Ethereum, and Litecoin.