Over 2,000 unique pieces of encrypted software have called themselves coins and are now traded on exchanges. Nine years ago, there was one digital coin and that one was only a theory described on paper by an unknown author.
Since then, many coins have been created for specific purposes or to solve certain problems: here’s how you can buy these altcoins.
First, understand the top altcoins
Litecoin and Bitcoin Cash were transferred value between individuals, as bitcoin does, but faster. Ripple and Stellar work to speed international bank transfers. Ethereum and EOS are intended as platforms upon which to build entirely new blockchain businesses.
Dogecoin (DOGE) was created as a joke to imitate Doge, an internet meme about a Shiba Inu dog. Investors took it seriously and ran the total market capitalization of the coin to $1.9 billion in January.
In terms of market capitalization, what the underlying software of a cryptocurrency does is less important than when the release of that software was announced. Whether digital coins fulfill a useful purpose as currency has less bearing on its market value than their longevity. Of the top ten cryptocurrencies ranked by market capitalization, six have been in existence for more than four of the nine years since Bitcoin’s launch. Longevity matters.
Of the over $216 billion of cryptocurrency followed by coinmarketcap.com, over $180 billion resides in the top ten market capitalizations. A few years of existence and experience in a market so young can take the place of decades in traditional businesses.
How to buy altcoins in 3 steps
Here’s how you can buy altcoins in a few easy steps:
1. Create a Coinbase account
First, you’ll have to create a Coinbase account. Once you set up your account, you can deposit cash from your bank account. Then you’ll have to buy bitcoin, Litecoin, or Ethereum on Coinbase.
2. Transfer your bitcoin, Litecoin or Ethereum to another exchange
Once you buy your bitcoin, Litecoin, or Ethereum on Coinbase, you’ll have to determine which exchange your altcoins trade on. A quick Google search will usually suffice, but make sure the exchange is accredited and secure before choosing which exchange to go through with.
3. Open an exchange account and trade your bitcoin, Litecoin, or Ethereum for altcoins
Open an account on an exchange like Binance, Voyager or another reputable exchange and trade your bitcoin, Litecoin, or Ethereum for the altcoin of your choice. Once you’re done, make sure to store it in a cryptocurrency wallet.
How altcoins work
Almost all cryptocurrencies are based on blockchain distributed ledger technology, just like bitcoin. Bitcoin secures blocks of information with encrypted codes called hashes.
Once that hash has been decoded or computationally resolved by one of many electricity-devouring mines around the world, that block is secure, permanently and immutably fixed in time and place on the chain. The winning miner of each block is rewarded 12.5 bitcoins ($80,000 +/-) for the work. Bitcoin and multiple other highly capitalized cryptocurrencies use this verification method called Proof of Work. Bitcoin, Ethereum, Bitcoin Cash, Litecoin, and Monero are supported by networks of miners who compete to solve the encrypted key or hash in a winner-take-all grab for the reward.
Other cryptocurrencies, like EOS.IO and Cardano, have chosen to limit the number of “forgers” or nodes that participate in verification of each block produced. Proof-of-Stake protocol allows for faster verification and block production times and therefore faster overall transaction times. Nodes verify blocks on a consensus basis and rewards are distributed in proportion to the share of currency the forger holds and for how long that share has been held.
Ripple and Stellar have similar proprietary processes for block production, probably because the two companies share a founder. Both XRP and XLM use a validating servers network, a process of block verification that could be called Proof-of-Correctness. Consensus is achieved and block verification completed when a supermajority (80%) of servers agree.
One major cryptocurrency pegs its value to the dollar and claims full collateralization of its digital token with U.S. dollars. Tether calls its configuration of the block verification process Proof-of-Reserve—each USDT in circulation represents one U.S. dollar held in reserve. Tether claims it can prove it has a dollar to back every Tether.
Before there were digital coins and cryptocurrencies, there were physical tokens that represented a right to entry or use of service. As a key has value because it allows access, so a token has value because it enables a transaction: car wash tokens, theatre tickets, video game arcade coins. As a concept, video arcade coins transferred to online video games. By certain accomplishments, players could win digital weapons or “gold” that could be sold to other players for fiat currency. Tokens had gained real-world value.
Brock Pierce, one of the founders Block.one, creator of EOS.IO, once ran Internet Gaming Entertainment (IGE) and made a market in the digital winnings of hired “farms” of Chinese gamers.
The Altcoin Survivors
The EOS initial coin offering (ICO) that ended in June was by far the largest ever at $4 billion. Even though it is only months old and few people even try to explain what it does, EOS is ranked number five by capitalization. EOS is built on the Ethereum blockchain and could be purchased only with ETH during its ICO. EOS uses a Proof-of-Stake block verification process and has limited the number of nodes involved to 21. It may have value simply because so much value has been invested in it. Four billion invested dollars make many believers.
XRP, issued by Ripple, was intended to act as a secure, low-cost, time-efficient method of interbank money transfers and international remittances. Its new service called “xRapid” will use XRP as an independent digital asset to speed money transfers into emerging markets. Ripple has working agreements with over 100 banks, including Santander, CIBC, Credit Agricole and American Express.
In September, XRP reached the number two spot, ahead of ETH, in total market capitalization and a high of $0.57 per coin. Then a whale started selling. Jed McCaleb co-founded Ripple and then left in 2014 to start Stellar. He owned or controlled 7.3 billion of the 100 billion XRP outstanding. He had been selling less than 40,000 coins per day until August, when he began selling over a 500,000 coins per day. Even with that selling pressure, XRP has since been holding around the half-dollar price range and has recently regained the number two rank in market capitalization.
A dollar bill has value because the people who use it have entrusted to it the standards of a currency.
- It is a unit of account: everything under its economic influence is valued in dollars.
- It is a medium of exchange: almost anything that can be purchased can be purchased for dollars.
- It is a store of value: bank accounts, stocks, bonds and real estate values are measured in dollars.
The dollar exists as a dominant currency because the people who use it have come to trust its value more than any other. Which cryptocurrency will gain the trust necessary to replicate the dollar? It may be the one that first gains the trust of the banks, and now may be the best time to buy it.