Cryptocurrencies – a new monetary relationship or a global scam

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Contents

What is Cryptocurrency? [Everything You Need To Know!]

What Is Cryptocurrency: 21st-Century Unicorn – Or The Money Of The Future?

  1. Cryptocurrency is an internet-based medium of exchange which uses cryptographical functions to conduct financial transactions. Cryptocurrencies leverage blockchain technology to gain decentralization, transparency, and immutability.
  2. The most important feature of a cryptocurrency is that it is not controlled by any central authority: the decentralized nature of the blockchain makes cryptocurrencies theoretically immune to the old ways of government control and interference.
  3. Cryptocurrencies can be sent directly between two parties via the use of private and public keys. These transfers can be done with minimal processing fees, allowing users to avoid the steep fees charged by traditional financial institutions.

Today cryptocurrencies (Buy Crypto) have become a global phenomenon known to most people. In this guide, we are going to tell you all that you need to know about cryptocurrencies and the sheer that they can bring into the global economic system.

Nowadays, you‘ll have a hard time finding a major bank, a big accounting firm, a prominent software company or a government that did not research cryptocurrencies, publish a paper about it or start a so-called blockchain-project. (Take our blockchain courses to learn more about the blockchain)

“Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us .” – Thomas Carper, US-Senator

But beyond the noise and the press releases the overwhelming majority of people – even bankers, consultants, scientists, and developers – have very limited knowledge about cryptocurrencies. They often fail to even understand the basic concepts.

So let‘s walk through the whole story. What are cryptocurrencies?

Understanding Cryptocurrency Basics 101

  • Where did cryptocurrency originate?
  • Why should you learn about cryptocurrency?
  • And what do you need to know about cryptocurrency?

How cryptocurrency works?

Few people know, but cryptocurrencies emerged as a side product of another invention. Satoshi Nakamoto, the unknown inventor of Bitcoin , the first and still most important cryptocurrency, never intended to invent a currency.

In his announcement of Bitcoin in late 2008, Satoshi said he developed “A Peer-to-Peer Electronic Cash System.“

His goal was to invent something; many people failed to create before digital cash.

Announcing the first release of Bitcoin, a new electronic cash system that uses a peer-to-peer network to prevent double-spending. It’s completely decentralized with no server or central authority. – Satoshi Nakamoto, 09 January 2009, announcing Bitcoin on SourceForge.

The single most important part of Satoshi‘s invention was that he found a way to build a decentralized digital cash system. In the nineties, there have been many attempts to create digital money, but they all failed.

… after more than a decade of failed Trusted Third Party based systems (Digicash, etc) , they see it as a lost cause. I hope they can make the distinction, that this is the first time I know of that we’re trying a non-trust based system. – Satoshi Nakamoto in an E-Mail to Dustin Trammell

After seeing all the centralized attempts fail, Satoshi tried to build a digital cash system without a central entity. Like a Peer-to-Peer network for file sharing.

This decision became the birth of cryptocurrency. They are the missing piece Satoshi found to realize digital cash. The reason why is a bit technical and complex, but if you get it, you‘ll know more about cryptocurrencies than most people do. So, let‘s try to make it as easy as possible:

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To realize digital cash you need a payment network with accounts, balances, and transaction. That‘s easy to understand. One major problem every payment network has to solve is to prevent the so-called double spending : to prevent that one entity spends the same amount twice. Usually, this is done by a central server who keeps record about the balances.

In a decentralized network , you don‘t have this server. So you need every single entity of the network to do this job. Every peer in the network needs to have a list with all transactions to check if future transactions are valid or an attempt to double spend.

But how can these entities keep a consensus about these records?

If the peers of the network disagree about only one single, minor balance, everything is broken. They need an absolute consensus. Usually, you take, again, a central authority to declare the correct state of balances. But how can you achieve consensus without a central authority?

Nobody did know until Satoshi emerged out of nowhere. In fact, nobody believed it was even possible.

Satoshi proved it was. His major innovation was to achieve consensus without a central authority. Cryptocurrencies are a part of this solution – the part that made the solution thrilling, fascinating and helped it to roll over the world.

What is cryptocurrency?

If you take away all the noise around cryptocurrencies and reduce it to a simple definition, you find it to be just limited entries in a database no one can change without fulfilling specific conditions . This may seem ordinary, but, believe it or not: this is exactly how you can define a currency.

Take the money on your bank account: What is it more than entries in a database that can only be changed under specific conditions? You can even take physical coins and notes: What are they else than limited entries in a public physical database that can only be changed if you match the condition than you physically own the coins and notes? Money is all about a verified entry in some kind of database of accounts, balances, and transactions.

So, to give a proper definition – Cryptocurrency is an internet-based medium of exchange which uses cryptographical functions to conduct financial transactions. Cryptocurrencies leverage blockchain technology to gain decentralization, transparency, and immutability.

How miners create coins and confirm transactions

Let‘s have a look at the mechanism ruling the databases of cryptocurrencies. A cryptocurrency like Bitcoin consists of a network of peers. Every peer has a record of the complete history of all transactions and thus of the balance of every account.

A transaction is a file that says, “Bob gives X Bitcoin to Alice“ and is signed by Bob‘s private key. It‘s basic public key cryptography, nothing special at all. After signed, a transaction is broadcasted in the network, sent from one peer to every other peer. This is basic p2p-technology.

Blockchain and Cryptocurrency

The transaction is known almost immediately by the whole network. But only after a specific amount of time it gets confirmed.

Confirmation is a critical concept in cryptocurrencies. You could say that cryptocurrencies are all about confirmation.

As long as a transaction is unconfirmed, it is pending and can be forged. When a transaction is confirmed, it is set in stone. It is no longer forgeable, it can‘t be reversed, it is part of an immutable record of historical transactions: of the so-called blockchain.

Only miners can confirm transactions. This is their job in a cryptocurrency-network. They take transactions, stamp them as legit and spread them in the network. After a transaction is confirmed by a miner, every node has to add it to its database. It has become part of the blockchain.

For this job, the miners get rewarded with a token of the cryptocurrency, for example with Bitcoins. Since the miner‘s activity is the single most important part of the cryptocurrency-system we should stay for a moment and take a deeper look at it.

What is cryptocurrency mining?

Principally everybody can be a miner. Since a decentralized network has no authority to delegate this task, a cryptocurrency needs some kind of mechanism to prevent one ruling party from abusing it. Imagine someone creates thousands of peers and spreads forged transactions. The system would break immediately.

So, Satoshi set the rule that the miners need to invest some work of their computers to qualify for this task. In fact, they have to find a hash – a product of a cryptographic function – that connects the new block with its predecessor. This is called the Proof-of-Work. In Bitcoin, it is based on the SHA 256 Hash algorithm.

Image Credit: https://privacycanada.net

You don‘t need to understand the details about SHA 256. It‘s only important you know that it can be the basis of a cryptologic puzzle the miners compete to solve. After finding a solution, a miner can build a block and add it to the blockchain. As an incentive, he has the right to add a so-called coinbase transaction that gives him a specific number of Bitcoins. This is the only way to create valid Bitcoins.

Train to Become A Blockchain Developer

Bitcoins can only be created if miners solve a cryptographic puzzle. Since the difficulty of this puzzle increases the amount of computer power the whole miner’s invest, there is only a specific amount of cryptocurrency token that can be created in a given amount of time. This is part of the consensus no peer in the network can break.

Revolutionary Properties

If you really think about it, Bitcoin, as a decentralized network of peers that keep a consensus about accounts and balances, is more a currency than the numbers you see in your bank account. What are these numbers more than entries in a database – a database which can be changed by people you don‘t see and by rules you don‘t know?

Basically, cryptocurrencies are entries about token in decentralized consensus-databases. They are called CRYPTOcurrencies because the consensus-keeping process is secured by strong cryptography. Cryptocurrencies are built on cryptography . They are not secured by people or by trust, but by math. It is more probable that an asteroid falls on your house than that a bitcoin address is compromised.

Describing the properties of cryptocurrencies we need to separate between transactional and monetary properties. While most cryptocurrencies share a common set of properties, they are not carved in stone.

Understanding cryptocurrency properties

1) Irreversible: After confirmation, a transaction can‘t be reversed. By nobody. And nobody means nobody. Not you, not your bank, not the president of the United States, not Satoshi, not your miner. Nobody. If you send money, you send it. Period. No one can help you, if you sent your funds to a scammer or if a hacker stole them from your computer. There is no safety net.

2) Pseudonymous: Neither transactions nor accounts are connected to real-world identities. You receive Bitcoins on so-called addresses, which are randomly seeming chains of around 30 characters. While it is usually possible to analyze the transaction flow, it is not necessarily possible to connect the real-world identity of users with those addresses.

3) Fast and global: Transactions are propagated nearly instantly in the network and are confirmed in a couple of minutes. Since they happen in a global network of computers they are completely indifferent of your physical location. It doesn‘t matter if I send Bitcoin to my neighbor or to someone on the other side of the world.

4) Secure: Cryptocurrency funds are locked in a public key cryptography system. Only the owner of the private key can send cryptocurrency. Strong cryptography and the magic of big numbers make it impossible to break this scheme. A Bitcoin address is more secure than Fort Knox.

5) Permissionless : You don‘t have to ask anybody to use cryptocurrency. It‘s just a software that everybody can download for free. After you installed it, you can receive and send Bitcoins or other cryptocurrencies. No one can prevent you. There is no gatekeeper.

What is Cryptocurrency: Monetary properties

1) Controlled supply : Most cryptocurrencies limit the supply of the tokens. In Bitcoin, the supply decreases in time and will reach its final number sometime around the year 2140. All cryptocurrencies control the supply of the token by a schedule written in the code. This means the monetary supply of a cryptocurrency in every given moment in the future can roughly be calculated today. There is no surprise.

2) No debt but bearer : The Fiat-money on your bank account is created by debt , and the numbers, you see on your ledger represent nothing but debts. It‘s a system of IOU. Cryptocurrencies don‘t represent debts, they just represent themselves.

To understand the revolutionary impact of cryptocurrencies you need to consider both properties. Bitcoin as a permissionless, irreversible, and pseudonymous means of payment is an attack on the control of banks and governments over the monetary transactions of their citizens. You can‘t hinder someone to use Bitcoin, you can‘t prohibit someone to accept a payment, you can‘t undo a transaction.

As money with a limited, controlled supply that is not changeable by a government, a bank or any other central institution, cryptocurrencies attack the scope of the monetary policy. They take away the control central banks take on inflation or deflation by manipulating the monetary supply.

“While it’s still fairly new and unstable relative to the gold standard, cryptocurrency is definitely gaining traction and will most certainly have more normalized uses in the next few years. Right now, in particular, it’s increasing in popularity with the post-election market uncertainty. The key will be in making it easy for large-scale adoption (as with anything involving crypto) including developing safeguards and protections for buyers/investors. I expect that within two years , we’ll be in a place where people can shove their money under the virtual mattress through cryptocurrency, and they’ll know that wherever they go, that money will be there.” – Sarah Granger, Author, and Speaker.

Understanding cryptocurrency: Dawn of a new economy

Mostly due to its revolutionary properties cryptocurrencies have become a success their inventor, Satoshi Nakamoto, didn‘t dare to dream of it. While every other attempt to create a digital cash system didn‘t attract a critical mass of users, Bitcoin had something that provoked enthusiasm and fascination. Sometimes it feels more like religion than technology.

Cryptocurrencies are digital gold. Sound money that is secure from political influence. Money promises to preserve and increase its value over time. Cryptocurrencies are also a fast and comfortable means of payment with a worldwide scope, and they are private and anonymous enough to serve as a means of payment for black markets and any other outlawed economic activity.

But while cryptocurrencies are more used for payment, its use as a means of speculation and a store of value dwarfs the payment aspects. Cryptocurrencies gave birth to an incredibly dynamic, fast-growing market for investors and speculators. Exchanges like Okcoin, Poloniex or shapeshift enable the trade of hundreds of cryptocurrencies. Their daily trade volume exceeds that of major European stock exchanges.

At the same time, the praxis of Initial Coin Distribution (ICO), mostly facilitated by Ethereum‘s smart contracts, gave life to incredibly successful crowdfunding projects, in which often an idea is enough to collect millions of dollars. In the case of “The DAO,” it has been more than 150 million dollars.

In this rich ecosystem of coins and token, you experience extreme volatility. It‘s common that a coin gains 10 percent a day – sometimes 100 percent – just to lose the same the next day. If you are lucky, your coin‘s value grows up to 1000 percent in one or two weeks.

Cryptocurrency list

While Bitcoin remains by far the most famous cryptocurrency and most other cryptocurrencies have zero non-speculative impact, investors and users should keep an eye on several cryptocurrencies. Here we present the most popular cryptocurrencies of today.

The one and only, the first and most famous cryptocurrency. Bitcoin serves as a digital gold standard in the whole cryptocurrency-industry, is used as a global means of payment and is the de-facto currency of cyber-crime like darknet markets or ransomware. After seven years in existence, Bitcoin‘s price has increased from zero to more than 650 Dollar, and its transaction volume reached more than 200.000 daily transactions.

There is not much more to say – Bitcoin is here to stay.

The brainchild of young crypto-genius Vitalik Buterin has ascended to the second place in the hierarchy of cryptocurrencies. Other than Bitcoin its blockchain does not only validate a set of accounts and balances but of so-called states. This means that Ethereum can not only process transactions but complex contracts and programs.

This flexibility makes Ethereum the perfect instrument for blockchain -application. But it comes at a cost. After the Hack of the DAO – an Ethereum based smart contract – the developers decided to do a hard fork without consensus, which resulted in the emerge of Ethereum Classic. Besides this, there are several clones of Ethereum, and Ethereum itself is a host of several Tokens like DigixDAO and Augur. This makes Ethereum more a family of cryptocurrencies than a single currency.

While Ripple has a native cryptocurrency – XRP – it is more about a network to process IOUs than the cryptocurrency itself. XRP, the currency, doesn‘t serve as a medium to store and exchange value, but more as a token to protect the network against spam.

Ripple, unlike Bitcoin and Ethereum, has no mining since all the coins are already pre-mined. Ripple has found immense value in the financial space as a lot of banks have joined the Ripple network.

Litecoin was one of the first cryptocurrencies after Bitcoin and tagged as the silver to the digital gold bitcoin. Faster than bitcoin, with a larger amount of token and a new mining algorithm, Litecoin was a real innovation, perfectly tailored to be the smaller brother of bitcoin. “It facilitated the emerge of several other cryptocurrencies which used its codebase but made it, even more, lighter“. Examples are Dogecoin or Feathercoin.

While Litecoin failed to find a real use case and lost its second place after bitcoin, it is still actively developed and traded and is hoarded as a backup if Bitcoin fails.

Monero is the most prominent example of the CryptoNight algorithm. This algorithm was invented to add the privacy features Bitcoin is missing. If you use Bitcoin, every transaction is documented in the blockchain and the trail of transactions can be followed. With the introduction of a concept called ring-signatures, the CryptoNight algorithm was able to cut through that trail.

The first implementation of CryptoNight, Bytecoin, was heavily premined and thus rejected by the community. Monero was the first non-premined clone of bytecoin and raised a lot of awareness. There are several other incarnations of cryptonote with their own little improvements, but none of it did ever achieve the same popularity as Monero.

Monero‘s popularity peaked in summer 2020 when some darknet markets decided to accept it as a currency. This resulted in a steady increase in the price, while the actual usage of Monero seems to remain disappointingly small.

Besides those, there are hundreds of cryptocurrencies of several families. Most of them are nothing more than attempts to reach investors and quickly make money, but a lot of them promise playgrounds to test innovations in cryptocurrency-technology.

What is Cryptocurrency: Conclusion

The market of cryptocurrencies is fast and wild. Nearly every day new cryptocurrencies emerge, old die, early adopters get wealthy and investors lose money. Every cryptocurrency comes with a promise, mostly a big story to turn the world around. Few survive the first months, and most are pumped and dumped by speculators and live on as zombie coins until the last bagholder loses hope ever to see a return on his investment.

“In 2 years from now, I believe cryptocurrencies will be gaining legitimacy as a protocol for business transactions, micropayments, and overtaking Western Union as the preferred remittance tool. Regarding business transactions – you’ll see two paths: There will be financial businesses that use it for it’s no fee, nearly-instant ability to move any amount of money around, and there will be those that utilize it for its blockchain technology. Blockchain technology provides the largest benefit with trustless auditing, single source of truth, smart contracts, and color coins.”
Cody Littlewood, and I’m the founder and CEO of Codelitt

Markets are dirty. But this doesn‘t change the fact that cryptocurrencies are here to stay – and here to change the world. This is already happening. People all over the world buy Bitcoin to protect themselves against the devaluation of their national currency. Mostly in Asia, a vivid market for Bitcoin remittance has emerged, and the Bitcoin using darknets of cybercrime are flourishing. More and more companies discover the power of Smart Contracts or token on Ethereum, the first real-world application of blockchain technologies emerge.

The revolution is already happening. Institutional investors start to buy cryptocurrencies. Banks and governments realize that this invention has the potential to draw their control away. Cryptocurrencies change the world. Step by step. You can either stand beside and observe – or you can become part of history in the making.

How to Know if a Cryptocurrency is Real, a Scam, or Worthless

Secrets of cryptocurrencies

How to differentiate between quality cryptocurrencies and scams

There is so much information and mis-information out there concerning bitcoin and other cryptocurrencies, that it’s difficult for even those that have an understanding of the asset class to always recognize the fake from the real.

The truth is there are a lot of cryptocurrencies that have been developed that are nothing more than scams. Not only that, but those built in an attempt to meet a market demand, most of the time fail to differentiate enough from existing cryptocurrencies, to support a reason for them being adopted by the market.

To help to more accurately identify cryptos with a chance of lasting for the long term, I’ve put together a list of four things that all real cryptocurrencies will have associated with them.

It doesn’t guarantee they’ll survive, but it does mean they’ll have a much better chance of surviving, or in the case of scams, being ignored altogether.

#1 Meeting market demand by solving a problem

One thing that is no different about cryptocurrencies than any other asset class, product or service, is it needs to meet a market demand. If people or businesses don’t have a use for what is being created or developed, it is basically useless.

Since there is already a history of cryptocurrencies, we have a foundation to work from that the rest of the coins can be judged by. If a new coin isn’t solving a different problem that bitcoin, ethereum, or a few other cryptocurrencies are already solving, they aren’t going to have any lasting value.

If they become popular and you want to take a position in one, that’s fine, as long as you understand you shouldn’t be in it for a long time. When you make some money, sell the crypocurrency and run; it’s not going to last.

Another factor is if there is some difference between an existing coin and a new coin, it has to have enough difference in order to make it attractive to a significant number of people that see it as adding value to their lives.

One example of one I see failing, and which a lot of people aren’t aware of, is with bitcoin against bitcoin cash. In the case of bitcoin cash, which forked off of bitcoin, it doesn’t offer enough of anything new to justify it having any staying power. Eventually I think it’s going to not only crash, but probably cease to exist. There has been money to be made there, and those that held bitcoin when it went through the fork, aren’t going to lose any of their own money, although they will lose the temporary value bitcoin cash now has.

Just be sure you can accurately and clearly identify why a new coin’s development will be accepted by the market. If if doesn’t meet a specific need, it won’t survive, even if it enjoys a temporary boost in value from speculators, or those that don’t understand why they’re even buying it. Don’e be one of those, you could easily lose everything you put into it.

#2 – Strong network or community

Another extremely valuable aspect to consider when analyzing the validity of cryptocurrencies is the network or community built around it. It should be growing, active, and vocal about the coin the community supports.

The importance is if there is a strong and significant community built around the coin, it means most should have a stake in the cryptocurrency, meaning they own some, and that suggests it has a good chance of surviving, assuming the first point above is in place.

These first two points are vital to the success of a cryptocurrency, but it doesn’t guarantee they’ll survive. It does mean there is at least a perception of value by those supporting it, and it is worth checking out further.

Another factor in the size of the community behind a coin is it increases the size of the blockchain behind the coin, which increases the safety of the coin and ledger against being hacked.

What needs to be known after these two main elements is the safety factor.

#3 Is the code behind the cryptocurrency safe from hackers?

As just mentioned, the size of the community is an additional layer of safety of the blockchain against being hacked. But that’s a secondary layer of safety. The primary layer of safety is the code that created the cryptocurrency in the first place.

If you’re new to cryptocurrencies, they are nothing more or less than software code. They are basically code made to meet a market demand, just like any other code is. The key to cryptocurrencies is their built-in resistance to being hacked.

If you ever read about some of the large hedge funds taking an interest in and investing in blockchain and cryptocurrencies, one of the things you’ll read about or listen to is they’re either hiring on some quality IT teams, or they’re spending money on a company that specializes in that area.

Why? The major reason is they want to have experts analyze the code to ensure its safety from being hacked.

I have a colleague that is an expert in coding, and he has found some coins that are very susceptible to being hacked, and they’re not safe to invest in. This is what the hedge funds are looking for before they take a position in any coin; especially those that are new to the market.

After all, there’s a reason they’re called cryptocurrencies. They’re supposed to be designed to be extremely difficult, if not close to impossible to being hacked.

Don’t panic at this because you may lack the skills to determine the quality of the code in regard to resisting hackers. It’s not hard to find expert commentary on how the design of the code of a coin aligns with safety from hacking. Just be sure to read carefully through the conclusion that was drawn by those that know what to look for.

The key is to not ignore that part of the cryptocurrency market and blindly invest.

#4 Development team

Lastly, knowing the team behind the design of the coin, or at minimum, the reputation they have in the market, is a key to determining the validity of the coin concerning whether or not it’s a scam, or if it is built to last.

The point isn’t that we have to have heard of who the individual members of the team are, as in most cases they could be from anywhere in the world. It’s like Google, Facebook or Amazon. Most of us are clueless as to the individual names of the IT department of these tech giants, but we definitely know they have put together a team of high-quality and qualified individuals that can get the job done.

That’s the same way to consider the team behind designing a specific cryptocurrency, and what type of team remains in place to maintain the code.

On top of the expertise in code and other elements of the design, I also am looking to see who the entrepreneurial person is behind the cryptocurrency. It’s one thing to have expertise in code and other tech skills, it’s another to identify the demand of a market and build something that has a strong chance of supplying that demand over the long haul.

Conclusion

I know of some investors or businesses that look at this list of qualities to look for in a cryptocurrency in a different order than I do. But having owned, operated, or acquired a number of businesses over the years, the first thing I want to know is whether or not something is meeting a market demand. If it’s not, the rest doesn’t matter.

If there is a cryptocurrency that is very safe and has an excellent development team behind it, yet it serves no real purpose, it would be nothing more than a well-developed piece of code that does nothing to solve a problem. Why bother researching the rest if you can’t find a purpose for the existence of the coin?

After that, looking to see if it is attracting a network of fans that own the cryptocurrency and are interested in what it can do. That is vital to making a decision. If no one knows about it, how will it increase in value? It’ll just be an interesting coin that has a tiny group of followers.

If that’s in place, then I find it worth the time to further check out the development team and the underlying code.

Assuming all of that is in place, it provides an excellent chance that the specific cryptocurrency isn’t a scam, and it has a decent chance of surviving and thriving. That in turn means it’ll generate strong returns for those investing in it.

When researching cryptocurrencies that attract your interest, filter them through these four things to help make a decision on whether or not you want to take the plunge.

As of now, there are few of these cryptocurrencies I would consider as one to buy and hold. Bitcoin is one, and probably ethereum. These should be considered short-term holdings unless some significant breakthrough appears that improves the outlook for each cryptocurrency.

Just remember, always ask this question first and foremost: Does it meet a specific market demand different and better than an existing cryptocurrency, and if yes, go ahead with further research.

With so much emotion attached to the various cryptocurrencies out there, just be sure to objectively step back when you ask that question. Keep in mind that the difference needs to be meaningful, not some something cosmetic or a tweak. That isn’t enough to differentiate and boost its chance at success.

If all these things align for you, take a little money and give it a shot. If you can identify a quality and legitimate cryptocurrency before it soars, you don’t need a lot of money to generate some amazing returns. But even if you are a little late to the game, taking a position in an existing crypto like bitcoin will pay off for a long time. Just wait for the market to correct and buy in at that time, i.e. buy on the dips.

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Comments

Tommy Limpitlaw

A good read! Which bigger cryptos do you think are scams?

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A sunny place for a shady currency
Venezuela’s crypto-currency: salvation or scam?

The Petro is probably a scam, but a better-designed crypto-currency could work

IT “WILL be an instrument for Venezuela’s economic stability and financial independence”, promises a white paper published by the country’s government last month. Venezuela, the issuer of the world’s least stable currency, proposes to issue its most trustworthy in the form of the petro, a “sovereign crypto asset backed by oil”. A private sale of this promising new asset started in February. The government plans to offer it to the public on March 20th.

In one sense, the idea is as ludicrous as it sounds. Only the most credulous investors will trust a currency issued by Venezuela’s socialist regime, which has debased the bolívar, expropriated private enterprises, ridden roughshod over the country’s constitution and faces sanctions from the United States and the European Union.

But there is a germ of sense in what Venezuela is proposing. The country is suffering from hyperinflation, with prices doubling every month. By the end of 2020 economic output will be 40% lower than it was in 2020, according to the IMF. Venezuela needs the “economic stability” promised by the white paper. In theory, adoption of a crypto-currency, impervious to political whims, could provide that.

Venezuela is not the only country seeking a cryptonic. Officials of Iran and Russia have said their governments might be interested in issuing crypto-currencies. On February 28th the Marshall Islands announced that it would issue one, called the sovereign, that it will accept as legal tender.

What would-be cryptocracies have in common is an uncomfortable relationship with the dollar. The Marshall Islands is a dollarised economy; a second currency would give it at least the illusion of greater control over its money. Iran and Russia are subject to American sanctions.

For Venezuela, whose crypto plans are more advanced, the petro might simply be a way to evade American sanctions and raise cash it desperately needs. The United States has frozen the dollar assets of the country’s president, Nicolás Maduro, and 48 other Venezuelans. It has also barred companies with American operations from lending to some Venezuelan entities. Production of oil, almost the country’s sole source of foreign exchange, is declining because of lack of investment by PDVSA, the state-owned oil company. Venezuela’s foreign-exchange reserves are dwindling.

With the petro, Venezuela has something new to sell. It has “pre-mined” 100m petros, all that will ever be created, promises the white paper. State television showed outdated personal computers supposedly poised to mine the new currency. The “pre-sale” brought $5bn, Mr Maduro claimed, without providing evidence. At the government’s reference price for oil of $60 a barrel, the total value of the new currency is $6bn (so, if Mr Maduro is telling the truth, almost all the petros have been pre-sold). That is a useful sum, but less than half the amount the country must pay to service its foreign debt this year. The United States Treasury has warned that investors who buy petros with dollars may be violating its sanctions. That makes the currency less useful as a sanctions-buster.

A more intriguing possibility is that the government views the petro as a substitute for the value-leaking bolívar. Other countries with high inflation, like Zimbabwe and Ecuador, have escaped by adopting the dollar, which would be anathema to Mr Maduro’s regime. In 1923 Germany defeated hyperinflation by issuing the Rentenmark, a currency backed by land. Brazil slew inflation in the early 1990s by replacing the cruzeiro with a new currency, the real, managed by a central bank that came to be seen as trustworthy. In theory, the petro could be Venezuela’s real.

The government has announced that Venezuelans will be able to buy petros at authorised exchange houses and pay taxes with them, which could be the first step towards making the petro an everyday currency. Zimbabwe dollarised when citizens refused to accept payments in the local money. In Venezuela, which deprives people of access to dollars more effectively than did Zimbabwe, people could switch from the bolívar to the petro. That would increase demand for the new currency, and thus its price (and the government’s eventual profits).

But the government has already undermined the trust that is supposedly built into the notion of an oil-backed crypto-currency. During the pre-sale it switched from the widely used Ethereum platform, which validates and keeps records of transactions in multiple crypto-currencies, to the New Economy Movement (NEM), a newcomer. The main crypto-currency on the NEM platform has a market capitalisation of just $4bn, compared with $61bn for Ethereum’s main currency. Because the platform is smaller, the network of computers used to validate transactions and enforce the rules on which a crypto-currency is based is more centralised. That makes it easier for one user, say, Venezuela’s government, to dominate the platform and undermine a crypto-currency.

The link to oil is no more convincing. The petro is not exchangeable for oil. It is merely backed by the government’s promise that it is backed by oil. That promise may not be honoured by the country’s repressed opposition, which may some day take power. Without decentralisation or a credible link to oil, the petro is just an unbacked currency issued by Venezuela’s discredited government. That’s what the bolívar is, too.

This article appeared in the The Americas section of the print edition under the headline “A sunny place for a shady currency”

The 10 Most Important Cryptocurrencies Other Than Bitcoin

Bitcoin has not just been a trendsetter, ushering in a wave of cryptocurrencies built on a decentralized peer-to-peer network, it’s become the de facto standard for cryptocurrencies, inspiring an ever-growing legion of followers and spinoffs.

Key Takeaways

  • A cryptocurrency, broadly defined, is virtual or digital money which takes the form of tokens or “coins.”
  • Beyond that, the field of cryptocurrencies has expanded dramatically since bitcoin was launched over a decade ago, and the next great digital token may be released tomorrow, for all anyone in the crypto community knows.
  • Bitcoin continues to lead the pack of cryptocurrencies, in terms of market capitalization, user base, and popularity.
  • Virtual currencies such as Ethereum and XRP, which are being used more for enterprise solutions, have also become popular.
  • Some altcoins are being endorsed for superior or advanced features vis-à-vis bitcoins.

What Are Cryptocurrencies?

Before we take a closer look at some of these alternatives to Bitcoin, let’s step back and briefly examine what we mean by terms like cryptocurrency and altcoin. A cryptocurrency, broadly defined, is virtual or digital money which takes the form of tokens or “coins.” While some cryptocurrencies have ventured into the physical world with credit cards or other projects, the large majority remain entirely intangible.

The “crypto” in cryptocurrencies refers to complicated cryptography which allows for the creation and processing of digital currencies and their transactions across decentralized systems. Alongside this important “crypto” feature of these currencies is a common commitment to decentralization; cryptocurrencies are typically developed as code by teams who build in mechanisms for issuance (often, although not always, through a process called “mining”) and other controls.

Cryptocurrencies are almost always designed to be free from government manipulation and control, although as they have grown more popular this foundational aspect of the industry has come under fire. The currencies modeled after bitcoin are collectively called altcoins and have often tried to present themselves as modified or improved versions of bitcoin. While some of these currencies are easier to mine than bitcoin, there are tradeoffs, including greater risk brought on by lower levels of liquidity, acceptance and value retention.

Below, we’ll examine some of the most important digital currencies other than bitcoin. First, though, a caveat: it is impossible for a list like this to be entirely comprehensive. One reason for this is the fact that there are more than 2,000 cryptocurrencies in existence as of January 2020, and many of those tokens and coins enjoy immense popularity among a dedicated (if small, in some cases) community of backers and investors.

Beyond that, the field of cryptocurrencies is always expanding, and the next great digital token may be released tomorrow, for all anyone in the crypto community knows. While bitcoin is widely seen as a pioneer in the world of cryptocurrencies, analysts adopt many approaches for evaluating tokens other than BTC. It’s common, for instance, for analysts to attribute a great deal of importance to the ranking of coins relative to one another in terms of market cap. We’ve factored this into our consideration, but there are other reasons why a digital token may be included in the list as well.

1. Ethereum (ETH)

The first bitcoin alternative on our list, Ethereum is a decentralized software platform that enables Smart Contracts and Decentralized Applications (DApps) to be built and run without any downtime, fraud, control, or interference from a third party. The applications on Ethereum are run on its platform-specific cryptographic token, ether. Ether is like a vehicle for moving around on the Ethereum platform and is sought by mostly developers looking to develop and run applications inside Ethereum, or now by investors looking to make purchases of other digital currencies using ether.   Ether, launched in 2020, is currently the second-largest digital currency by market cap after bitcoin, although it lags behind the dominant cryptocurrency by a significant margin. As of January 2020, ether’s market cap is roughly 1/10 the size of bitcoin’s.

During 2020, Ethereum launched a pre-sale for ether which received an overwhelming response; this helped to usher in the age of the initial coin offering (ICO). According to Ethereum, it can be used to “codify, decentralize, secure and trade just about anything.”   Following the attack on the DAO in 2020, Ethereum was split into Ethereum (ETH) and Ethereum Classic (ETC).   As of Jan. 8, 2020, Ethereum (ETH) had a market cap of $15.6 billion and a per-token value of $142.54. 

2. Ripple (XRP)

Ripple is a real-time global settlement network that offers instant, certain and low-cost international payments. Launched in 2020, Ripple “enables banks to settle cross-border payments in real-time, with end-to-end transparency, and at lower costs.”   Ripple’s consensus ledger (its method of conformation) is unique in that it doesn’t require mining. Indeed, all of Ripple’s XRP tokens were “pre-mined” before launch, meaning that there is no “creation” of XRP over time, only the introduction and removal of XRP from the market supply according to the network’s guidelines. In this way, Ripple sets itself apart from bitcoin and many other altcoins. Since Ripple’s structure doesn’t require mining, it reduces the usage of computing power and minimizes network latency. 

So far, Ripple has seen success with its current business model; it remains one of the most enticing digital currencies among traditional financial institutions looking for ways to revolutionize cross-border payments. It is also currently the third-largest cryptocurrency in the world by overall market cap. As of Jan. 8, 2020, Ripple had a market cap of $9.2 billion and a per-token value of $0.21. 

3. Litecoin (LTC)

Litecoin, launched in 2020, was among the first cryptocurrencies to follow in the footsteps of bitcoin and has often been referred to as “silver to bitcoin’s gold.” It was created by Charlie Lee, an MIT graduate and former Google engineer. Litecoin is based on an open-source global payment network that is not controlled by any central authority and uses “scrypt” as a proof of work, which can be decoded with the help of CPUs of consumer-grade. Although Litecoin is like bitcoin in many ways, it has a faster block generation rate and hence offers a faster transaction confirmation time.   Other than developers, there are a growing number of merchants who accept Litecoin. As of Jan. 8, 2020, Litecoin had a market cap of $3.0 billion and a per-token value of $46.92, making it the sixth-largest cryptocurrency in the world. 

4. Tether (USDT)

Tether was one of the first and most popular of a group of so-called stablecoins, cryptocurrencies which aim to peg their market value to a currency or other external reference point so as to reduce volatility. Because most digital currencies, even major ones like bitcoin, have experienced frequent periods of dramatic volatility, Tether and other stablecoins attempt to smooth out price fluctuations in order to attract users who may otherwise be cautious.

Launched in 2020, Tether describes itself as “a blockchain-enabled platform designed to facilitate the use of fiat currencies in a digital manner.”   Effectively, this cryptocurrency allows individuals to utilize a blockchain network and related technologies to transact in traditional currencies while minimizing the volatility and complexity often associated with digital currencies. On Jan. 8, 2020, Tether was the fourth-largest cryptocurrency by market cap, with a total market cap of $4.6 billion and a per-token value of $1.00. 

5. Bitcoin Cash (BCH)

Bitcoin Cash (BCH) holds an important place in the history of altcoins because it is one of the earliest and most successful hard forks of the original bitcoin. In the cryptocurrency world, a fork takes place as the result of debates and arguments between developers and miners. Due to the decentralized nature of digital currencies, wholesale changes to the code underlying the token or coin at hand must be made due to general consensus; the mechanism for this process varies according to the particular cryptocurrency.

When different factions can’t come to an agreement, sometimes the digital currency is split, with the original remaining true to its original code and the other copy beginning life as a new version of the prior coin, complete with changes to its code. BCH began its life in August of 2020 as a result of one of these splits. The debate which led to the creation of BCH had to do with the issue of scalability; the Bitcoin network has a strict limit on the size of blocks: one megabyte (MB). BCH increases the block size from one MB to eight MB, with the idea being that larger blocks will allow for faster transaction times.   It also makes other changes, too, including the removal of the Segregated Witness protocol which impacts block space. As of Jan. 8, 2020, BCH had a market cap of $4.4 billion and a value per token of $240.80. 

6. Libra (LIBRA)

One of the most-hyped cryptocurrencies is one that, as of January 2020, has yet to even launch. By mid-2020, rumors circulated that social media giant Facebook, Inc. (FB) was developing its own cryptocurrency. Given Facebook’s incredible global reach and the potential for massive volumes of exchange across its platform, the cryptocurrency world had long speculated that the social media titan might launch its own digital token.

Rumors were formally confirmed on June 18, 2020, when Facebook released the white paper for Libra.   The tentative launch date for the token is later in 2020, as Facebook has committed to sorting through regulatory barriers before launch. Libra will be overseen in part by a new Facebook subsidiary, the financial services outfit Calibra.   When Libra does launch, it is sure to garner massive amounts of attention from those within (and outside of) the cryptocurrency sphere.

7. Monero (XMR)

Monero is a secure, private and untraceable currency. This open-source cryptocurrency was launched in April 2020 and soon spiked great interest among the cryptography community and enthusiasts. The development of this cryptocurrency is completely donation-based and community-driven.   Monero has been launched with a strong focus on decentralization and scalability, and it enables complete privacy by using a special technique called “ring signatures.” 

With this technique, there appears a group of cryptographic signatures including at least one real participant, but since they all appear valid, the real one cannot be isolated. Because of exceptional security mechanisms like this, Monero has developed something of an unsavory reputation: it has been linked to criminal operations around the world. Nonetheless, whether it is used for good or ill, there’s no denying that Monero has introduced important technological advances to the cryptocurrency space. As of Jan. 8, 2020, Monero had a market cap of $994.0 million and a per-token value of $57.16. 

8. EOS (EOS)

Aside from Libra, one of the newest digital currencies to make our list is EOS. Launched in June of 2020, EOS was created by cryptocurrency pioneer Dan Larimer. Before his work on EOS, Larimer founded the digital currency exchange Bitshares as well as the blockchain-based social media platform Steemit. Like other cryptocurrencies on this list, EOS is designed after ethereum, so it offers a platform on which developers can build decentralized applications. EOS is notable for many other reasons, though.

First, its initial coin offering was one of the longest and most profitable in history, raking in a record $4 billion or so in investor funds through crowdsourcing efforts lasting a year. EOS offers a delegated proof-of-stake mechanism which it hopes to be able to offer scalability beyond its competitors. EOS consists of EOS.IO, similar to the operating system of a computer and acting as the blockchain network for the digital currency, as well as EOS coins. EOS is also revolutionary because of its lack of a mining mechanism to produce coins. Instead, block producers generate blocks and are rewarded in EOS tokens based on their production rates. EOS includes a complex system of rules to govern this process, with the idea being that the network will ultimately be more democratic and decentralized than those of other cryptocurrencies. As of Jan. 8, 2020, EOS had a market cap of $2.7 billion and a per-token value of $2.85. 

9. Bitcoin SV (BSV)

Bitcoin SV (BSV), with “SV” in this case standing for “Satoshi Vision,” is a hard fork of Bitcoin Cash. In this sense, BSV is a fork of a fork of the original Bitcoin network. A planned network upgrade for November of 2020 resulted in a protracted debate between mining and developing factions in the BCH community, leading to a hard fork and the creation of BSV. Developers of Bitcoin SV suggest that this cryptocurrency restores Bitcoin developer Satoshi Nakamoto’s original protocol, while also allowing for new developments to increase stability and to allow for scalability. Bitcoin SV developers also prioritize security and fast transaction processing times. 

As of Jan. 8, 2020, BSV had a market cap of $2.1 billion and a per-token value of $114.43. 

10. Binance Coin (BNB)

Binance Coin (BNB) is the official token of the Binance cryptocurrency exchange platform. Founded in 2020, Binance has quickly risen to become the largest exchange of its kind globally in terms of overall trading volume. The Binance Coin token allows Binance users to trade in dozens of different cryptocurrencies efficiently on the Binance platform. BNB is used to facilitate transaction fees on the exchange and can also be used to pay for certain goods and services, including travel fees and more. 

As of Jan. 8, 2020, BNB had a market cap of $2.3 billion and a per-token value of $14.71. 

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