Bitcoin has hit the headlines by smashing the $17,000 barrier but there are countless other cryptocurrencies out there. Thousands of them, in fact. Why?
Bitcoin has struck back with a vengeance. The cryptocurrency is on a bull run that has seen it break through the $17,000 barrier and it doesn’t look like it will be slowing any time soon. This is great news for investors and speculators who have bet on Bitcoin, either via futures trading or consumer-oriented retail accounts.
But Bitcoin is far from the only currency out there. There are literally thousands of cryptocurrencies. The question is: Why?
Bitcoin Can’t Solve Everything
Bitcoin was the first blockchain-backed cryptocurrency to be built and functions as an excellent store of value. This has helped it build brand recognition to the point where cryptocurrency and Bitcoin have become synonymous for casual observers.
Despite this, there are a large number of other cryptocurrencies, dubbed “altcoins,” which makes up approximately 35% of the crypto market.
A large number of these altcoins came about during the ICO boom of 2017 and were security tokens. The vast majority of these ICOs were based on a flimsy premise at best or were outright scams at worst.
Around 86% of these projects lost value compared to their initial offering. The failure of many altcoins has become a running joke in the cryptocurrency community Bitcoin enthusiasts will often disparagingly refer to altcoin projects as “sh*tcoins.”
This analysis is a little unfair and overlooks a number of promising cryptocurrency projects that have the potential to change the world:
Ethereum Is Building the Backbone of the Crypto Economy
Controlling around 11% of the crypto market, Ethereum is one of the most important altcoins. Rather than acting as a store of value, Ethereum is essentially a platform upon which other projects can be built using ERC20 tokens and smart contracts.
The vast majority of DeFi (decentralized finance) projects are built using ERC20 and Ethereum will likely remain the backbone of the cryptocurrency ecosystem for some time.
This also means that a large number of altcoins are in-fact built on Ethereum, and contribute to the platform’s growth through transaction fees. Currently, Ethereum is facing challenges thanks to its own success. In particular, the Proof of Work consensus (PoW) has proven to be a key bottleneck.
To address this problem, the platform is rolling out a 2.0 update which will allow Ethereum holders to “stake” their tokens in order to validate smart contracts, in exchange for interest or rewards. This should make transactions on the Ethereum blockchain far faster and cheaper.
Ripple Is Bringing Blockchain to Banking
Perhaps the biggest challenge for Bitcoin (as currently with Ethereum) is processing transactions. When usage on the network increases, the transaction costs increase accordingly. This means that it can become slow and expensive to make even small transfers. This is where Ripple comes in.
Rather than use a Proof of Stake system that Ethereum is transitioning to, Ripple is designed to supplement existing payment systems by creating a network of direct asset transfers. Ripple has already been adopted by banking giants like Santander and is a solid example of how altcoins can provide real utility.
And The Rest
However, a big reason that so many cryptocurrencies exist is because they are very easy to create. So before you run off to throw money at the next shiny project remember: just because something says blockchain on the box, doesn’t mean that it’s a good project.
Read. The. Whitepaper!
Also, keep in mind that for the time being, Bitcoin will remain the number one crypto for most investors.
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