Edward Schaefer

2013 has been quite the year for Bitcoin. We have seen exponential growth in Bitcoin’s exchange rate and extensive coverage in the media. Another phenomenon we have witnessed this year is the proliferation of alternative cryptocurrencies, five of which we’ve provided below. What all of these cryptocurrencies have in common is that they rely on a decentralized network to keep track of transactions, and their scarcity and security is based on cryptography.

Note: All figures from coinmarketcap.com

Litecoin

Price: $25.26
Market Capitalization: $600 million

Of all the competing cryptocurrencies, Litecoin is the most similar to Bitcoin. It has been thought of as silver to Bitcoin’s gold, or MasterCard to Bitcoin’s Visa. It has also managed to gain the second-highest market capitalization next to Bitcoin. One key difference includes a different hashing algorithm designed so that mining Litecoins won’t result in a similar hardware arms race to the one Bitcoin is currently involved in. Litecoin mining these days involves rigs of video cards, or GPUs, similar to how Bitcoin mining was a few years ago, until its ASICs (application-specific integrated circuits) were designed from the ground up to mine Bitcoins. Litecoins also feature faster confirmation times due to shorter and faster block rewards. Litecoin is scheduled to produce 84 million Litecoins, four times as much as Bitcoin’s 21 million.

Peercoin

Price: $6.26
Market Capitalization: $131 million

Peercoin’s distinguishing feature is that it uses a method called proof of stake as part of its mining, or as Peercoiners often like to say, “minting.” Proof-of-stake rewards minters for the Peercoins they hold over time. This is measured in “coin days,” one coin day being equivalent to holding one coin for one day, similar to how a kilowatt hour is defined as using a kilowatt over the course of one hour. So the more coins you hold over a longer time, the more Peercoins you receive through minting. This is in contrast to most cryptocurrencies’ proof-of-work mining, which rewards miners based on how much computing power they contribute to the keeping track of transactions. Peercoin also uses proof-of-work mining in conjunction with proof-of-work minting, although Peercoin is programmed to eventually rely only on proof-of-work mining. The maximum limit for the number of Peercoins is 2 billion, which is so much higher than Bitcoin’s 21 million that it encourages inflationary pressure, which counterbalances the deflationary pressure caused by everyone trying to mint Peercoins by holding onto them.

NXT

Price: 4.1 cents
Market Capitalization: $40 million

Nxt is most similar to Peercoin in that is utilizes proof of stake to generate more coins, but unlike Peercoin, it uses proof of stake exclusively. The only way to get more Nxt coins is to hold them or exchange them in a process dubbed “forging,” in contrast to Bitcoin mining and Peercoin minting. This has a “green” appeal in that it requires no massive, power-consuming hardware rigs, just a small program that will run on pretty much any modern computer. This also has the practical appeal of not requiring users to invest in the extra hardware and electricity. Instead, you merely exchange something for your initial Nxt coins. Nxt’s developers also pride themselves on having written the Nxt code from scratch, while most alternative cryptocurrencies were developed from using Bitcoin’s code as a basis.

Namecoin

Price: $6.73
Market Capitalization: $52 million

Namecoin is similar to other cryptocurrencies, but with the additional feature of being a way to register domain names. Instead of .com or .net, Namecoin domain names have the .bit extension. Any method of registering and controlling a domain name is called a domain name system, or DNS. The current method of domain name registration is regulated by a nonprofit organization called the Internet Corporation for Assigned Names and Numbers, or ICANN. Because ICANN is a centralized organization, it ultimately has power over domain names and can shut down websites for political or other reasons. But because Namecoin is a decentralized network, no one is in control of it. Just like Bitcoin is a decentralized network that takes the power away from banks and other financial institutions, Namecoin is a decentralized network that takes the power away from ICANN or any other centralized DNS organization. Namecoin is also traded for its own sake, just like Bitcoin. It’s just like any other cryptocurrency but with the added feature of a decentralized DNS system, which amounts to more “intrinsic value,” which everyone is looking for.

Dogecoin

Price: 0.045 cents
Market Capitalization: $11 million

Dogecoin is a cryptocurrency inspired by the “Doge” Internet meme. Compared with the other cryptocurrencies, Doge is most similar to Litecoin. It uses scrypt, the same cryptographic function as Litecoin. A total of 100 billion Dogecoins will ever be mined, which is even more than Peercoin, yet because the block reward is so large and frequent (every minute), Dogecoin miners have already mined almost 25 billion Dogecoins, almost 25% of the total. While Doge gets my vote for the best Internet meme of 2013, you would think that a cryptocurrency wouldn’t manage to go far based on novelty. Yet Dogecoin’s market capitalization is almost $7 million. Wow.

Regards,

Edward Schaefer
for The Daily Reckoning

Ed. Note: Is a cryptocurrency war around the corner? Maybe, maybe not. But the prospect is intriguing. When markets are allowed to operate freely, it’s always fun to watch. For the most up-to-the-minute info as this story develops, check out the FREE Tomorrow in Review email edition, right here, and make sure you’re ahead of the curve no matter what happens.

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Edward Schaefer

Edward Schaefer has been interested in the economics, technology, and politics of cryptocurrencies since buying his first Bitcoins in 2011. Most of all he is interested in trading, investing or mining his way to more fortune by any legal means necessary, or at least any means which is not yet explicitly illegal. In his spare time he enjoys playing guitar and pretending to understand philosophy.

  • M

    Peercoin is not inflationary. You failed to mention that the transaction fees that are generated are destroyed instead of going to the miners, which will offset the minted coins.The 2 billion coin hardcap will take a thousand years to mint.

  • DoUevenDOGEbro

    to the moon!

  • http://about.me/tysonayoung Tyson Young

    Dogecoin! To the Moon!

  • Sarth

    I can see Nxt is definitely going to become a new Bitcoin, because it is really fast and has cheap green network. And Nxt has also many new features. Withe the new code, it will be a new leader, next generation of cryptocurrency. Here is a comparation Nxt vs Bitcoin: http://oi44.tinypic.com/2e67x3q.jpg

  • Jim Bob Johnson 2nd

    Worldcoin should be considered here as well, lots of infrastructure going in that supports its use as an actual medium of exchange. Most of these other coins don’t have USD exchange capability or POS applications in development.

  • ggaabe

    These suggestions make it hard to take the author seriously. Dogecoin? Nxt? Really? NXT value is massively manipulated on a private exchange and not even really worth that much.

    You should probably look at cryptedge to learn how cryptocurrencies really establish value.

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