In this article, we will analyze what cryptocurrencies are and how they differ and also tell you what criteria to choose a cryptocurrency for buying or investing.
New cryptocurrencies appear regularly, and they have some advantages over their predecessors. What is the point of creating new crypto projects? Does it make sense to invest in them?
How is bitcoin different from other cryptocurrencies?
During the 12 years of the existence of bitcoin – a pioneer in the world of cryptocurrencies – thousands of competitors have appeared. At the same time, bitcoin remains the most popular token with the highest capitalization in the cryptocurrency market. Now it can be bought on any cryptocurrency exchange or in an exchanger like Shakhta in just a few minutes.
The main characteristics of bitcoin at the time of its appearance were sensational:
Decentralized – information about transactions is stored on millions of computers worldwide that a single center does not control, so it is impossible to prevent bitcoin by the government or central banks; anonymity – transaction data and wallet numbers are available to everyone. Still, the identity of the owners is unknown. These features still form the basis of how cryptocurrencies differ from traditional currencies.
Bitcoin has other influential characteristics:
Emission limited. In the case of fiat money, the central bank can issue more units at any time, affecting their value and exchange rate. The bitcoin code states that the total number of coins will not exceed 21 million. Now on the market, there are both cryptocurrencies with emission restrictions and without them.
They are not tied to fiat money. The cost of bitcoin is not connected to the dollar, euro, or other traditional currency, as well as to precious metals and other material objects; among the thousands of cryptocurrencies currently on the market, those pegged to fiat. They are called stablecoins.
Extraction by mining. The Bitcoin network is supported by the Proof-of-work (PoW) algorithm. In it, powerful computing equipment is needed to create new structures in the blockchain. Network participants (miners) compete for the opportunity to create a new block and calculate the key for it, for which they are rewarded in the network’s currency (in bitcoins). Currently, mining is considered non-environmental since it requires significant energy costs. Moreover, its complexity and cost are constantly growing. Other tokens are mined this way, but mining by the PoW algorithm is how bitcoin differs from cryptocurrencies on the Proof-of-Stake algorithm (more on them below).
How do transactions with bitcoins work?
It is essential to understand that bitcoin has no physical expression. All images of coins with the token logo are symbolic.
Moreover, bitcoins are not sent from wallet to wallet. They are stored in the bitcoin network, and the keys determine their belonging to a particular user. The owner of the coins has two keys: private and public. Their totality is a bitcoin wallet. The public key is similar to a bank account number or an address for sending funds. The private key unlocks unspent funds within the network. If, say, coin holder, Vasya sends 2 of his five bitcoins to Kolya, then he opens them with his private key, and Colin’s public key “attaches” them to the new owner. The rest of the three bitcoins is returned to your account using your public key. There is no “transportation” of money or other entities.
Ether is the first among altcoins.
The term “altcoin” was initially conceived as an alternative to bitcoin. Now I understand it as a variety of cryptocurrencies that appeared after the first. Among altcoins, there are well-known and already reputable and completely new ones.
The most famous altcoin is Ethereum. It has a second place after bitcoin in terms of capitalization. Ethereum is produced not only by mining but also by staking – according to the Proof-of-stake algorithm (literally “proof of ownership”). This algorithm uses existing user funds to create new blockchain structures. The owner of more coins becomes a validator and gets the right to seal transaction blocks, receiving a reward in cryptocurrency for this. Proof-of-stake cryptocurrencies do not require the same computing power as mining, and it is considered more environmentally friendly and affordable.
A distinctive feature of the ether is the creation of smart contracts – algorithms for exchanging values or finances between counterparties. The scope of smart contracts is broad: it includes audit, management, management, and other business operations. Intelligent contracts are developing — this is how the Cardano cryptocurrency appeared, which allows you to conclude clever multi-level agreements, and is distinguished by reliability and high speed.
Summary
Bitcoin became the world’s first cryptocurrency – a decentralized financial system with its unit of account. Bitcoin has its advantages and disadvantages. Therefore, other tokens began to appear after it, having their characteristics and functional purpose.
Today there are several thousand cryptocurrencies. They differ according to several criteria:
Degree of centralization. Most cryptocurrencies are decentralized, but there are also those concentrated in the hands of one specific organization – for example, Ripple.
Degree of anonymity. In some networks, user data can be calculated, while in others, it is impossible even to know the amount of funds in a particular wallet.
Transaction processing speed. Bitcoin does not have the best performance here compared to Ripple, which processes 1,500 transactions per second.
Scope of application. Ethereum is aimed at creating smart contracts; for example, Tron is aimed at supporting online entertainment.
Fiat binding. The same bitcoin does not depend on the value of any of the traditional currencies; for example, Tether (USDT) is pegged to the dollar. Fiat-pegged tokens are called stablecoins.
Investors recommend diversifying your portfolio and investing in those tokens whose functional orientation is close and understandable to you. Investing in cryptocurrency is quite risky: traditional money is much less volatile than tokens; it differs from cryptocurrency and securities familiar to many. Before deciding to invest in a particular asset or trade it, it is worth watching the course changes for some time and studying all the factors that affect it.
