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Cryptocurrencies – An Overview of the 10 Most Important Ones

Forms of investments and strategies

An overview of cryptocurrencies

12 minute read

A cryptocurrency is a digital currency that does not exist in form of coins or bills, only as book money. Cryptocurrencies differ in their characteristics and by the projects behind them. Since this year at the very latest, they are experiencing a breakthrough in the financial world. By now, even professional investors are active in this sector because of its high growth rates and yield opportunities.

However, it can be difficult for private investors who want to participate in the boom to get an overview of the world of cryptocurrencies. After all, more than 1,300 cryptocurrencies are being traded publically. Backing them are many very interesting projects; unfortunately, however, several of them are frauds. Therefore, it is worthwhile for investors wishing to invest part of their capital in this highly speculative and volatile segment to look at the most important cryptocurrencies.

 

Bitcoin is the pioneer of cryptocurrencies. The digital currency was launched in 2008. The inventor goes by the pseudonym Satoshi Nakamoto. To this day, it is unclear who exactly laid the groundwork for Bitcoin. Bitcoin is a peer-to-peer (P2P) network based on blockchain technology.

All transactions with Bitcoin occur completely digital, encrypted, and without third parties. Every transaction is recorded in the blockchain to be tracked this way. The blockchain is a distributed ledger, meaning that it is a form of digital cash ledger used as proof that a transaction took place.

Bitcoin (BTC) is traded publically since 2009 and has achieved an unrivaled price development. For a long time, the price fluctuated around the USD 100 mark until it had a breakthrough in November of 2013 and BTC rose to more than USD 800. Though it went back downhill, 1 Bitcoin never fell below the USD 200 mark again. It wasn’t until January of 2017 that Bitcoin breached the USD 1,000 threshold.

Since then, Bitcoin has been running an amazing race: within less than a year, the price increased eight-fold to nearly USD 8,200 per BTC today – with a rising trend. By now, Bitcoin has a market capitalization of more than USD 136 billion and is thus responsible for more than half of the total volume of around 257 billion. During peak times, Bitcoin reaches a trading volume of up to 5 billion dollars a day.

 

This year, initial coin offerings (ICOs) were all the rage. It’s a new form of startup financing, especially for startups whose business model is based on cryptocurrencies or blockchain. In June and July of 2017 alone, ICOs raised more venture capital for startups in early phases than classic VC funds, according to the investment bank Goldman Sachs.

This is where Ethereum comes into play: Most ICOs are run via the Ethereum blockchain. Ethereum is a distributed ledger, which makes it possible to install, manage, and conduct so-called decentralized applications (dApps) in one’s own ledger.

Ethereum uses the cryptocurrency Ether (ETH) as a form of payment to process transactions. Ethereum also popularized the principle of “smart contracts.” These are automated contracts that fulfill themselves once pre-defined conditions are met. Usually, this is a pre-determined amount of Ether that needs to be paid for the contract to be fulfilled.

Ethereum co-founder Vitalik Buterin is something like the poster child of the crypto-scene. With Ethereum, the young Russian-Canadian programmer and his team of developers want to improve upon the weaknesses of the Bitcoin blockchain. Today, Ethereum processes around 500,000 transactions a day – more than all other cryptocurrencies combined.

After spending a lot of time around USD 1, the price for Ethereum shot up in early 2016. Since then, Ether is noted around USD 418 per ETH. At nearly USD 40 million, Ethereum has the second greatest market capitalization of all digital currencies. On busy trading days, up to USD 2 billion worth of Ether change hands.

 

Bitcoin Cash (BCH) is a cryptocurrency that resulted from a split of Bitcoin, a so-called “hard fork,” on 1 August 2017. Reason for this split was the block size increase for the Bitcoin blockchain from 1 MB to 8 MB. This increase allows Bitcoin Cash to process up to eight times as many transactions in the same time as Bitcoin, which is limited to a maximum of seven transactions per seconds due to constraints in the program code.

The separation was initiated by some network participants in order to scale Bitcoin and thus make it usable for a larger group of people. Since both blockchains were identical until the time of the split, all Bitcoin users automatically received the same amount of Bitcoin Cash on 1 August 2017. This can be compared to a kind of dividend payment for all Bitcoin holders.

By now, Bitcoin Cash has the third largest market capitalization of all cryptocurrencies at USD 28 billion. On average trading days, almost USD 4 billion worth of Bitcoin Cash is traded. Bitcoin Cash started at an issue price of just under USD 280 per BCH. The digital currency is currently listed at around USD 1,700 per BCH.

 

Ripple (XRP) is a decentralized blockchain network for global payment transactions. It is a public database with a register of account balances. Every Ripple user can view the register, which contains not only account balances but also offers to buy and sell goods and currencies, in real time. The Ripple network can handle about 1,000 transactions per second. The network supports any fiat currency (dollar, euro, yen) as well as cryptocurrencies such as Bitcoin.

Ripple is a favorite for many large banks. In April of 2017, the company announced that 75 banks were already using the payment network, including industry giants like Bank of America, the major Swiss bank UBS, and the Spanish institute BBVA. Ripple was able to win over banks for two main reasons: international payments can be processed faster via the blockchain and transaction costs are significantly lower than before.

The Ripple network’s internal cryptocurrency is called Ripples (XRP). At USD 0.24 per XRP, the price is comparatively low, which is due primarily to the high supply, around 38.6 billion Ripples, in circulation. Ripple is the fourth largest cryptocurrency with a market capitalization of about USD 9.3 billion and an average trading volume of about USD 270 million.

 

Dash is a peer-to-peer based open-source cryptocurrency. Its function is comparable to that of Bitcoin. Compared to Bitcoin, however, transactions are not publicly visible in the blockchain; instead, they are private. In addition, 10% of income from the mining of new coins is retained for development and marketing work.

However, Dash is heavily criticized in the crypto world. For one, Dash does not solve any of the software problems that cryptocurrencies have to deal with. The main point of criticism, however, is of the founder’s actions when launching the digital currency. When Dash first launched under the name Darkcoin, 2 million coins were created and distributed among the founders within two days.

Since the total amount of coins that can be created is limited to 8 million coins, the founders have secured control over a quarter of all coins. The digital currency has changed its name twice since launching to mask this “birth defect,” going from XCoin to Darkcoin to Dash. Several voices on the Internet call Dash a scam and a pyramid scheme and warn investors against investing.

Nonetheless, Dash was able to establish itself among the top 10 cryptocurrencies thanks to skillful marketing ploys. Dash is currently the fifth largest cryptocurrency with a market capitalization of around USD 4.3 billion and an average trade volume of USD 153 million. The price of Dash fluctuated around USD 3 for a long time until it shot up early 2017 along with the general cryptocurrency boom. Dash’s current price is USD 557.

 

Litecoin (LTC), like Bitcoin, is a peer-to-peer network and an open source software project. Litecoin exists since 2011, making it one of the oldest cryptocurrencies. Litecoin is an early fork of Bitcoin; however, it is not a “hard fork,” but a so-called “soft fork.” This means that the Bitcoin protocol was copied with a few alterations to improve weaknesses of the original cryptocurrency, especially in order to increase the transactions in the network.

The primary difference between Litecoin and Bitcoin is in the creation of new blocks in the blockchain. While Bitcoin creates new blocks every 10 minutes, Litecoin can create them every 2.5 minutes, which allows for quicker transaction confirmation. As a result, the maximum amount of coins is significantly greater. While there is a maximum of around 21 million Bitcoin (the last Bitcoin is estimated to be generated in 2130), the limit for LTC is 84 million.

Litecoin ranks 6th among all cryptocurrencies with a market capitalization of around USD 4 billion and an average trade volume of USD 350 million. Litecoin’s price fluctuated around USD 3 for a long time until strong demand – the digital currency is particularly popular in Asia – and the general crypto boom resulted in a rapid price increase in 2017. Today, LTC is listed around USD 74.

 

Monero (XMR) is an up-and-coming cryptocurrency. It is a decentralized and anonymous digital currency which, unlike Bitcoin, does not enable tracking of transactions. While Bitcoin’s blockchain lets every transaction be attributed to a wallet, Monero does not, which is intended to strengthen the users’ anonymity.

Monero also does not have a so-called “rich list” on which the wallets with the largest assets are publicly visible. Due to its strong focus on anonymity, Monero has become notorious as an alternative to Bitcoin in Darknet. In this closed area of the Internet where illegal goods are traded, customers attach great importance to the fact that their transactions cannot be traced.

Monero stands out from other cryptocurrencies not only because of its strong anonymity but also because the algorithm has been optimized for commercially available processors, allowing private individuals to mine coins. Furthermore, the block size can be changed, making it easier to scale Monero than Bitcoin. With a market capitalization of about USD 2.4 billion and an average trading volume of nearly USD 80 million, Monero is currently in 7th place among the cryptocurrencies.

 

NEO is a distributed ledger based on blockchain that is similar to Ethereum. NEO also makes the implementation, management, and execution of decentralized apps (dApps) possible. While these basics are similar to Ethereum, NEO also supports decentralized trade, identification, and digitization of multiple digital assets. Furthermore, it is supposed to be more secure than Ethereum.

NEO is a software project founded by a Chinese company, wherefore many consider it to be China’s answer to Ethereum. The Chinese company wants to disrupt the smart contract market and be a point of contact for large ICOs. So far, three ICOs have been conducted through NEO, which is little compared to nearly 100 that were run through Ethereum. China’s recent ban of ICOs and shut-down of several crypto exchange markets speak against NEO.

An argument for NEO is that the demand for cryptocurrencies is significantly greater in Asia than in Europe and North America. With a market capitalization of USD 2.2 billion and an average trade volume of USD 77 million, NEO is already ranked 8th among cryptocurrencies. After hanging out around USD 0.20 for a long time, the price for NEO profited from the crypto boom and is now listed around USD 34.

 

New Economy Movement (NEM) is a blockchain-based peer-to-peer network that launched in March 2015. It combines the characteristics of a payment system and a smart contract system. NEM’s goal is to provide a sustainable economic order. The maximum amount of NEM coins is set at 9 billion.

The predominantly Japanese team of developers created a model that intends for users to utilize the currency, and not just to hold it for speculation. A consensus mechanism called "Proof of Importance (POI)" calculates an "importance value" for each account. It takes into consideration the account balance, the account activity, and the importance value of the accounts it interacted with.

The greater the importance value of the account, the greater the likelihood to pay transaction costs. Therefore, having a high account balance does not automatically translate into advantages. This should provide motivation for people to actually use the currency instead of holding on to it, thus increasing the currency’s circulation speed. NEM is currently the 9th largest cryptocurrency with a market capitalization of around USD 1.8 billion and an average trade volume of around USD 7.5 million. NEM is currently priced at around USD 0.20.

 

Ethereum Classic is a hard fork of Ethereum. The split occurred as a result of a spectacular hack. It all started with the ICO of a software project called “The DAO,” which collected a sensational sum of USD 150 million within four weeks. The “Decentralized Autonomous Organization” was implemented on the Ethereum blockchain and was supposed to discover and present investment opportunities to its shareholders autonomously.

The organization had no management. Instead, 15,000 shareholders would decide on the investment opportunities through an e-voting system. What started as a revolutionary concept quickly took a threatening turn for the Ethereum blockchain. A security gap in the program code allowed an anonymous hacker to remove USD 30 million in coins from the DAO.

Fortunately, the hack was noticed in time, but to stop it, the Ethereum blockchain had to be tampered with, which is considered an absolute taboo. However, the DAO was so large that it was of relevance for Ethereum’s system, which is why the developers chose to manipulate the blockchain and reverse the hack. The assets of all affected investors were returned, but the intervention divided the community into two camps.

While the hack was reversed for Ethereum, a second variant called Ethereum Classic split off, in which the blockchain continued unchanged. Ethereum Classic (ETC) has a market capitalization of about USD 1.8 billion - in 10th place among all digital currencies. The cryptocurrency Classic Ether is currently quoted at just under USD 18 per ETC. On average trading days, Ethereum Classic has a trading volume of about USD 200 million.

Status as of 24.11.2017 15:32


 

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