Cryptocurrency – Should You Invest? (Part II)

by Joran Teijema

 

Have you ever wondered about the specifics regarding cryptocurrency, or whether you should invest in it? Read this article and its prelude, here, to learn more about it! Let’s get started:

Which Cryptocurrencies are there?

Bitcoin:

Bitcoin is a digital currency created in January 2009, which follows the ideas set out in a whitepaper by the mysterious and pseudonymous developer Satoshi Nakamoto, whose identity has yet to be verified. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by what the previous article discussed, a decentralized authority, unlike government-issued currencies.

There are no physical bitcoins, only balances kept on a public ledger in the cloud, that – along with all Bitcoin transactions – are verified by a significant amount of computing power. Bitcoins are not issued or backed by any bank or government, nor are individual bitcoins valuable as a commodity. Despite not being legal tender, however, Bitcoin charts high on popularity and has triggered the launch of hundreds of other virtual currencies, collectively referred to as altcoins.

Altcoins:

Altcoins are the other cryptocurrencies launched after the success of Bitcoin, generally selling themselves as better alternatives to Bitcoin. The term “altcoin” is encompassing, referring to all cryptocurrencies other than Bitcoin and containing their own individual types, with “alt” standing for “alternative.” As of early 2020, there were more than 5,000 cryptocurrencies by some estimates; according to CoinMarketCap, altcoins accounted for over 34% of the total cryptocurrency market in February 2020.

The success of Bitcoin as the first peer-to-peer digital currency paved the way for altcoins, allowing them to build a platform that targets the perceived limitations of Bitcoin. An altcoin must have a competitive advantage to succeed against Bitcoin, though many are built upon the basic framework provided by Bitcoin in the first place. This ultimately means that most altcoins are peer-to-peer, trying to offer efficient and inexpensive ways to carry out transactions online. Even with many overlapping features, however, altcoins vary widely from each other.

Types of Altcoins:

As altcoins evolved, distinct categories emerged; those that will be covered in this article include mining-based cryptocurrencies, stablecoinssecurity tokens, and utility tokens. There is some movement toward separating most of these concepts from altcoins altogether. If that trend continues, altcoins might refer only to mining-based cryptocurrencies other than Bitcoin.

Mining-Based

These altcoins have a mining process by which new coins are generated by solving challenging problems to unlock blocks, and are more similar to Bitcoin than other altcoins. Most of the top altcoins in early 2020 fell into this category, meaning that multiple types of altcoins fall into the category of mining-based. Ethereum was the best known of these sorts of altcoins as of February 2020.

Stablecoins

Stablecoins seek to improve on Bitcoin by reducing volatility. In actual practice, this is achieved by tying the value of the coins to existing currencies. Popular choices for backing altcoins include the U.S. dollar, the euro, and gold. Facebook’s Libra is by far the most famous stablecoin, even though it had not launched yet as of January 2020. The “stable” aspect of the name comes from the stability that would be provided by verified, physical currencies, such as dollars or gold.

Security Tokens

These altcoins are linked to specific businesses, and they often launch in an initial coin offering (ICO). Security tokens resemble traditional stocks, and they often promise some type of dividend, such as a payout or ownership in a business.

Utility Tokens

Utility tokens are like mining-based altcoins; they ecompass various types rather than existing as one specific cryptocurrency. Utility tokens provide a claim on services and are sometimes sold as part of an ICO, with Filecoin being an excellent example. Filecoins are designed to be exchangeable for decentralized file storage space, giving them their name.

If you enjoyed these articles, feel free to email Wesleyan IT Students with your takeaways and any further questions you might have!