Are alternative cryptocurrencies worthwhile?

By Zachary Gruskin Cryptocurrencies, Darkcoin, Litecoin, Dogecoin, Blackcoin

Bitcoin is the first true cryptocurrency, it was created in 2008 by Satoshi Nakamoto and since then has become extremely popular. Over $8 billion is invested into Bitcoin today, and there are over 60,000 Bitcoin transactions per day. Just about any product or service in the world can be bought with Bitcoin. The popularity of Bitcoin has led to numerous alternative cryptocurrencies, which are essentially copies of Bitcoin with some unique attributes.

The first alternative cryptocurrency is Litecoin, which launched in 2011. The experience of using Litecoin is nearly identical to using Bitcoin, it has the same wallet and similar protocols. The major difference is Bitcoin uses the SHA-256 hashing algorithm, while Litecoin uses the Scrypt hashing algorithm. Hashing algorithms are the backbone of cryptocurrency, they ensure that all transactions that occur on the network are secure and legitimate. Litecoin was created when graphics processing units (GPUs) and central processing units (CPUs) were becoming obsolete for Bitcoin mining. Mining is the process by which computers solve hashes, and when they find the correct hash they earn cryptocurrency. Mining is essential, since it confirms recent transactions. Without mining the Bitcoin network would stop working. Currently the reward for finding the correct Bitcoin block hash is 25 Bitcoins ($15,500), so mining can be quite lucrative. In the early days of Bitcoin all you needed to mine was a CPU or GPU, which are found in most computers. However application specific integrated circuits (ASICs) which were made specifically to mine Bitcoin caused GPUs and CPUs to become an obsolete method of mining around 2011-2012. It was no longer profitable to mine Bitcoin with a CPU or GPU after that point, instead it cost more for electricity than the Bitcoin generated. This was a major problem for the Bitcoin mining community, since people had invested large amounts of money into GPU mining farms. Litecoin was made specifically so GPUs and CPUs would have something they can mine profitably, since at the time Litecoin was launched there were no ASICs which could mine Scrypt cryptocurrencies. Litecoin quickly became popular as all the Bitcoin GPU miners switched to Litecoin. Currently $265 million is invested into Litecoin, making it the most popular cryptocurrency aside from Bitcoin.

After the success of Litecoin hundreds of alternative cryptocurrencies were created, if not over 1000. Most of them were clones of Litecoin with slightly different attributes. For example, Dogecoin is pretty much exactly the same as Litecoin, aside from having a different logo. Dogecoin is based on the doge meme, which is a picture of a Shiba Inu dog sitting on a couch. The doge meme was very popular at the time Dogecoin came out, and Dogecoin became an internet sensation. The market cap of Dogecoin peaked at $90 million, making it the 3rd most popular cryptocurrency behind Bitcoin and Litecoin. A large community formed around Dogecoin, as well as a burgeoning economy. However Dogecoin failed to become widely used as a currency, there are few products or services you can buy with Dogecoin. For the most part Dogecoin was used to tip people on the internet. Tipping Dogecoin is psychologically much more satisfying than tipping Bitcoin. For example, if you tip someone $1 that amounts to 0.0016 Bitcoin, while $1 equals 4000 Dogecoins. Dogecoin remains popular to this day, but due to the lack of real economic uses it has been inexorably losing value. Dogecoin has lost roughly 86% of its value since it peaked in February, and now has a market cap of $22 million. This is a common trend for alternative cryptocurrencies, they will become very popular shortly after being released, but then slowly wither away until they become worthless.

Not all alternative cryptocurrencies are simply clones of Litecoin. One of the most popular cryptocurrencies today is Darkcoin, and it uses the X11 hashing algorithm instead of Scrypt. X11 uses 11 different hashing algorithms in succession, making it more secure than Scrypt or SHA-256. Also X11 is far more efficient for GPU and CPU mining than Scrypt, it uses less energy and has a higher hash rate. X11 was created for the same reason Scrypt was created. Earlier this year Scrypt ASICs hit the market, and they have taken over Scrypt mining. Mining Scrypt cryptocurrencies with a GPU or CPU is no longer profitable. This was a big problem for miners who built up GPU farms for Dogecoin and Litecoin mining. Currently there are no X11 ASICs, so mining X11 with a GPU or CPU is more profitable than mining Scrypt. This has resulted in most GPU miners switching from Scrypt to X11. It is likely that X11 ASICs will be created in the future, but there is no sign of them yet.

Aside from using X11, Darkcoin is also unique because it makes transactions untraceable. When you send Darkcoin it is 'mixed', making it nearly impossible to figure out where it came from. This makes Darkcoin ideal for people who want to remain anonymous when buying products or services. When Darkcoin launched in April it had a market cap near $3 million, but it quickly became popular and reached a market cap of $66 million in June. This led to huge profits for early adopters of Darkcoin. Since then the price of Darkcoin has been steadily declining and now the market cap is near $30 million. It seems to be following the trend of most alternative cryptocurrencies, it had a short burst of popularity and is now inexorably losing value in the long term.

Another innovation that alternative cryptocurrencies have brought to the table is proof of stake (PoS). PoS cryptocurrencies don't require mining, instead the network runs through the wallet itself. This is far more energy efficient than Bitcoin. Also if you simply keep your wallet open you earn new coins when using a PoS cryptocurreny, like interest from a savings account. Most PoS cryptocurrencies are a hybrid, they will allow mining for the first week or month, and then they switch to PoS. This creates a gold rush of sorts where miners try and get as many coins as possible before mining ends, and leads to a price spike when PoS begins. The original PoS cryptocurrency was BlackCoin, and its market cap jumped from $200,000 to $20 million during the first month after mining ended, leading to massive profits for early adopters. The success of BlackCoin led to numerous copycat PoS cryptocurrencies, and many of them attracted a lot of attention despite being unoriginal.

The story of BlackCoin and its copycats is a common theme in the alternative cryptocurrency world. Generally alternative cryptocurrencies are created for the sole purpose of making money. When a popular and unique cryptocurrency like Darkcoin or BlackCoin comes out, dozens of other developers make copies of it in the hope their coin will become popular too. Usually developers will take a "premine", which means they set aside 1-5% of all the coins in existence for themselves. The developer will then sell the coins once their cryptocurrency becomes popular. This can lead to tens of thousands of dollars of profit for developers. There have been numerous copies of X11 cryptocurrencies, PoS cryptocurrencies, and every hybrid of those imaginable.

Several alternative cryptocurrencies have led to massive profits for early adopters, resulting in investors and miners always looking for the latest alternative cryptocurrency. The hope is that $100 invested into a new cryptocurrency will turn into $10,000 within a month, and this indeed happens sometimes. Every new cryptocurrency attracts investment due to this, even if it is completely unoriginal or badly coded. Essentially people are hoping they can re-live the early days of Bitcoin by investing into a new cryptocurrency before it becomes mainstream. Unfortunately this alternative cryptocurrency fever has attracted scammers. Some scammers hold initial public offerings (IPOs), where they sell their new cryptocurrency for Bitcoin before it is launched, and then they disappear without launching the cryptocurrency. Another common scam is to make a badly coded cryptocurrency and to dump the premine before anyone realizes. An infamous example of this is White Coin, which achieved a market cap of millions of dollars before the developer dumped his premine and disappeared. At that point people realized the code of White Coin was broken, resulting in the price dropping 95%.

Aside from investing in new alternative cryptocurrencies in the hope of striking it rich, the main use of alternative cryptocurrencies is trading. There are several major alternative cryptocurrency exchanges where you can buy and sell Bitcoin for dozens of other cryptocurrencies, and these exchanges are much like the stock market. Prices of alternative cryptocurrencies often rise and fall by 10-50% in a day, resulting in ample opportunity to make money. An advantage of the alternative cryptocurrency markets over the real stock market is they're completely unregulated and trading fees are low (generally 0.1-0.5%). The alternative cryptocurrency markets are like a wild west version of the stock market, insider trading is the norm. It's possible to make a living off alternative cryptocurrency trading, but at the same time it's easy to lose a lot of money.

Thus, after the creation of Bitcoin hundreds of alternative cryptocurrencies were created. These alternative cryptocurrencies are similar to Bitcoin, but have their own unique attributes. Litecoin introduced the Scrypt hashing algorithm, which was far more profitable than mining Bitcoin for GPU miners, since the introduction of SHA-256 ASICs made mining Bitcoin with a GPU obsolete. BlackCoin was the first PoS cryptocurrency, it doesn't require mining which makes it eco-friendly, and at the same time users earn more coins just by keeping their wallet open. DarkCoin introduced the X11 hashing algorithm, which was more profitable and energy efficient than Scrypt for GPU miners, and more secure. Litecoin, BlackCoin, and Darkcoin all became very popular soon after launch, resulting in huge profits for early adopters. This has led to dozens if not hundreds of copies of each of those cryptocurrencies. Developers and investors are always looking to be involved with new cryptocurrencies before they become popular, in the hope of striking it rich. However nearly all alternative cryptocurrencies inexorably lose value in the long term, eventually becoming worthless. The fact of the matter is Bitcoin is already well entrenched globally, and is sufficient for use as a currency, making alternative cryptocurrencies somewhat pointless. Generally the goods and services you can buy with alternative cryptocurrencies are very limited, making them not a true currency. Instead the main use of alternative cryptocurrencies is trading on exchanges. This has become very popular, since trading fees are low and alternative cryptocurrency markets are unregulated. The price of alternative cryptocurrencies often shifts by 10-50% in a day, making it possible to earn a lot of money quickly. Ultimately the only reason alternative cryptocurrencies have any worth is due to speculation. Most seasoned Bitcoiners consider alternative cryptocurrencies to be noise in the background, and recognize that only Bitcoin has real potential to be a global currency.