What are Altcoins? Why do they matter, and should we pay attention? Should I invest in them? Are they damaging the credibility of digital currency? According to Coinmarketcap there are 454 alternative digital currencies with non-negligible market capitalization. It is probably safe to say that there are thousands in total, some abandoned, some fledgling, and 95% or more of them are completely and utterly useless. All together they have a combined value of over 329 Million USD. A lot of money to be sure, but to put that in perspective the Bitcoin market cap is 20 times the size of all of the others combined. Why is that?
Altcoins are largely copies of the Bitcoin code where the initial parameters have been modified to create another Blockchain. In other words a Bitcoin duplicate or doppelganger, a fresh coat of marketing paint, and a fancy name, but fundamentally identical in function. However, just because something functions the same, doesn’t mean that they are equal. The real value in Bitcoin and largely what accounts for the massive discrepancy in capitalization is in the security of the network. Hundreds of millions of dollars has poured into creating a large, distributed, and fortified network that at its heart it capable of transferring data securely between untrusted parties pseudo-anonymously. This fundamental utility is unmatched by most of the alternative coins. It is this security that dramatically amplifies the total value of the network. Any alternative coin that claims to be as secure as Bitcoin would need to have massive buy-in from the miners and individuals that make up the Bitcoin network.
If the network can’t be matched, what is the point? The real value of Altcoins is in trying out new innovative ideas, exploring the boundaries of what is possible with digital currency, and validating different approaches. Digital currency and trust networks are an entirely new way of facilitating payments online, and like any new technology there is a lot of work to be done to build robust next generation networks. Being able to quickly copy the Bitcoin code and try new ideas is fundamental to advancing the state of the art. Unfortunately most Alt coins are created solely to profit off of unsophisticated investors, who lack the technical competence or independent third party resources to validate the claims being made. Many who sat on the side lines as Bitcoin made a meteoric ascent are wondering if they missed the boat, and whether investing in some of these alternative currencies might make sense.
The Altcoin has become a penny stock on steroids, except without any of the safety nets meant to shield consumers from outright fraud. A subject I’ve written about in the past with respect to zetacoin Completely unregulated digital assets, backed by very questionable assertions, and a lot of marketing spin. Very few of them have any intrinsic value, or have made substantial contributions to digital currency research. This shouldn’t be construed as investment advice, but investors should realize that Altcoins are extremely speculative assets, are easily manipulated by the creators or third parties, and the vast majority have absolutely no value whatsoever. One shouldn’t invest monies that they can’t afford to lose in technologies they don’t understand.
One of the questionable claims that many Altcoins make is about confirmation times. This has got to be the most misleading metric that keeps on being thrown around. Bitcoin is infamous for their choice of 10 minute confirmation times. That means on average it takes 10 minutes for a transaction to be validated by the network, and up to an hour for a transaction to be indelibly inked in the global ledger. These are simple parameters of the network, that can be changed in just a few lines of code. For arguments sake lets say I do that, and release my new coin SuperFastBest coin. SuperFastBest coin has confirmation times of 1 second, by my calculations it is 600 times faster than Bitcoin and thus must be worth at least 600 times more. If it was this simple to increase the speed of Bitcoin why didn’t Satoshi make confirmation times 1 second? For a project of such immense complexity it seems rather short sighted to make transactions so slow.
The answer is that decreasing confirmation times increases the number of orphaned blocks. In other words the network does not have time to reach uniform consensus and so alternate chains begin forming in different parts of the world. The end result is substantially decreased integrity and security. SuperFastBest coin might be validated in only a second, but it will take hundreds of seconds for the network to converge to the point where I can trust that the transaction actually happened. Dogecoin, and others with shorter confirmation times require more processing power and memory utilization and ultimately are not much faster or better than Bitcoin is already. Coins that market themselves based on transaction times should be distrusted, either the developers are incompetent, or are purposely misleading you.
In short, when people make extraorindary statements about their new crypto currency, be ready to ask for proof. Get feedback from people in the community who have the technical expertise to validate those claims, and be extraordinarily wary of any altcoin that can’t back up its claims with reasoned argument. Bubbles in the market are largely based on hype without fact, and that only serves to detract from the legitimate work going on in the Bitcoin space. I’m going to devote some more time on this blog talking specifically about leaders in market capitalization, and what makes them interesting or scammy. If you have a particular favorite you would like me to look into send me a tweet!