Bitcoins and altcoins: What are they and how do they work?

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Bitcoin is the leading light of the so-called cryptocurrency revolution that has captured the collective imagination of the Internet in recent years. Since its mysterious creation in 2009, Bitcoin has cemented its place as the most reliable, trustworthy way to quickly transfer money over the Internet without the traditional need for a bank account or credit card, or indeed, any intermediary at all. As a result, it is now possible for any two people with smartphones, located anywhere in the world, to exchange money as quickly and safely as if they were handing over cold hard cash in person. However. this is just the beginning, as new applications for cryptocurrencies are constantly being discovered and there is a frenzy of enthusiasm to exploit the untapped potential of the technology.

Before reading the rest of this article, you may find it useful to read our previous article about blockchain. This will help you gain a better understanding of the fundamental role blockchain technology plays in creating cryptocurrencies and enabling them to function as they do.


Bitcoin and beginnings of cryptocurrency


The beginnings of Bitcoin are shrouded in mystery because its creator (or possibly a team of creators), who used the pseudonym Satoshi Nakamoto, has never been publicly identified. Satoshi conceived Bitcoin as a way to empower anyone across the world to safely and securely transfer money to anyone else without the high fees and long wait when using an intermediary such as a bank, credit card company or money transfer service.

Bitcoins have all the desirable properties of a money-like good – they are portable, durable, divisible, recognizable, fungible, scarce and difficult to counterfeit. Yet they avoid many of the limitations of traditional fiat currencies. Unlike fiat currencies, Bitcoin is not backed by a particular country, issued by central bank or controlled by any central authority. Instead, it is overseen by a decentralized network which anyone can join and participate in.

This decentralized model allows Bitcoin transactions to be permission less and borderless, they do not require any ID, are censorship-resistant and transactions are irreversible, instant and available 24/7 hours a day, seven days a week, without interruption. Furthermore, due to the cryptographic methods used to create them, no more than 21 million Bitcoins will ever exist, making it impervious debasement as a result of “printing” too many (as can and does happen with fiat currencies).

Bitcoin is the longest-standing cryptocurrency, having operated for nine years, and is thus considered the most secure and reliable form of digital money. It accepted like cash or credit card by over 5000 businesses and retailers around the world and has the most liquidity (ability to be turned into fiat cash) of any cryptocurrency. Bitcoin also has the largest community of developers, Bitcoin miners and users that collectively contribute to its continuation and evolution.


The Rise of the Altcoins

As Bitcoin has grown, a dizzying array of alternative cryptocurrencies have arisen alongside it. Many of them seek to challenge Bitcoin and become the predominant cryptocurrency. Others try to capture a particular niche in the market or provide a particular service. Popularly known as altcoins (alternative Bitcoins), these new cryptocurrencies embraced the innovative blockchain technology underlying Bitcoin and harnessed it to create their own versions, but with new uses and more functionality than the original.

If all of these “coins” are cryptocurrencies, and they can all be used to transfer value over the Internet, then what is the actual differences between them? How would someone know whether it is better to use one altcoin rather than another? Questions like this are currently a subject of heated debate in the cryptocurrency community and everyone has a different opinion on altcoins – some people say they are useful and will become essential and others say they are useless and will become irrelevant.

The term “altcoin” serves as a catchall for the more than 1500 cryptocurrencies, other than Bitcoin, currently in existence. Nevertheless, altcoins can still more or less be defined as decentralized digital currencies, secured through encryption, that use a blockchain-based ledger. It must be noted, however, that many altcoins do not truly meet that definition and are merely masquerading as a real cryptocurrency.


How Altcoins Are Created

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Many altcoins actually piggyback on the original Bitcoin blockchain and use it as the infrastructure on which they build their own cryptocurrency, albeit with different functions and uses. Other altcoins, like Bitcoin's close rival Ethereum, have created their own blockchain infrastructure from scratch. This gives them more control and the ability to incorporate new functions and features beyond the capability of Bitcoin. While Bitcoin is the most successful cryptocurrency so far, it is certainly not without its problems. Due to limitations inherent in its core code, as more and more people use Bitcoin, its transaction times have continued to take longer and cost more in fees. This has certainly taken some of the shine of Bitcoin's reputation as the cheapest and quickest way of transferring money online.

Many of the most successful altcoins were created to fix these issues and have done so successfully enough to attract a core group of developers, users and miners that support their respective coins and help them to increase in value, functionality and popularity. Still other altcoins were created to fill a particular need that Bitcoin and other cryptocurrencies have not sufficiently addressed. For example, altcoins such as Dash or Bytecoin are focused on ensuring user's privacy. Others such as Litecoin or DigiByte boast faster transaction speeds. Bitcoin rival Ethereum was created to provide a platform for creating decentralized applications and smart contracts that have no single point of failure and can function autonomously.


Where to From Here?

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New altcoins are being created on an almost weekly basis and the cryptocurrency sector is growing so fast that it's increasingly hard to keep track of them all. It's almost impossible to predict which altcoins will eventually rise to the top as more and more people see the advantages of cryptocurrencies and begin to adopt them in their daily lives.

The intense competition we currently see between altcoins is exerting strong evolutionary pressures on the development of cryptocurrency. Only the fittest will survive this process of evolution and go on to reshape the financial world over the future. The altcoin market may be chaotic and unpredictable, but it sure is an exciting time to observe it. It's not every day you can witness a wholly new, and completely unprecedented, financial phenomenon grow and evolve right in front of your eyes.