The sheer amount of cryptocurrencies available to invest in can be daunting for newcomers. How – and why – are there so many? Are there any differences between them? Most importantly, should investors take all of them seriously?
Nearly a decade has passed since the first Bitcoin was mined, and in that span of time, it has been joined by over 1,600 other cryptocurrencies. Dubbed “altcoins” as a portmanteau of “alternative” and “coin”, these other cryptocurrencies were largely created in an attempt to emulate Bitcoin’s success. Nevertheless, the venerable cryptocurrency has yet to be displaced from its first-mover advantage and continues to be a staple purchase for newcomers to the scene.
Bitcoin still forms much of the volume traded on cryptocurrency markets worldwide. In response, some altcoins have been created – and touted – at some point as “Bitcoin killers”. Chief among these altcoins is Ethereum, which has traditionally been recognised as the second most important cryptocurrency after Bitcoin. That is no small achievement in and of itself, considering that it was only launched just three years ago. Originally mooted as a programming language that would utilize Bitcoin’s blockchain for software development, Ethereum has several integral features that differentiate it from Bitcoin.
Faster and more efficient mining rates aside, Ethereum’s “Bitcoin killer” feature is its support for “smart contracts”. Smart contracts are legally binding agreements that automatically enforce the obligations set out in them. Some use cases for smart contracts include, for example, the execution of insurance policies and the receipt of music royalties. In either case, the conditions for payment are to be triggered by the corresponding input – and the blockchain technology underpinning the contract will record all events and changes made to it.
No real purpose
With that said, not all altcoins have defining features that set them apart from Bitcoin – let alone each other. Some were created only to serve fairly niche purposes and would never be embraced by a wider audience. For example, Dentacoin was aimed at “improving dental care worldwide and making it affordable”. Initially described as “one of the top ‘blockchain’ currencies in the world, performing far better than famous alternatives such as Bitcoin”, its price has since fallen by 90% in the last six months.
The vast majority have simply been low-effort wholesale copies of more established altcoins. With no redeeming features that justify investing in them, they eventually die off or fade away. Lists of “dead coins” are scrupulously maintained online: as of September last year, over 600 have already fizzled out. That makes for an approximate failure rate of 1 in every 4 cryptocurrencies launched to date. Nonetheless, that is not to say that these “dead coins” have been complete failures. 46% of all Initial Coin Offerings (ICOs) in 2016 ended up going nowhere – but not before allowing their creators to run away with over $104 million from starry-eyed backers!
Unsurprisingly, a study reported that the vast majority of altcoins and their ICOs have been nothing more than scams. Researchers discovered that more often than not, the only proof of the cryptocurrency’s existence – if at all – was found in the project pitch and promise. If the authorities are diligent, they may be able to freeze the money and catch the perpetrators: PlexCoin developer Dominic Lacroix was jailed for two months after defrauding investors of $15 million through an ICO. That, however, is a big “if” as a Vietnamese company scammed over 32,000 people out of $660 million through ICOs for Pincoin and iFan.
Scams have also taken the form of Ponzi schemes, where the developer pays returns to early investors with the money raised from subsequent participants. The most infamous Ponzi scheme was OneCoin, which relied on new users to bring in even more new users – and money. The developers were fined in Italy, had their offices raided in Bulgaria as well as their assets seized in China.
Ease of creation
One key reason for the proliferation of ICO scams is the sheer ease with which anyone can make an altcoin. How-to guides outlining simple steps to copy source code freely shared online were readily available by the time Ethereum was launched. Some bloggers even observed that the most time-consuming step was simply editing the source code to ensure that the final product did not resemble the original too closely.
Another reason would be that people are attracted by the get-rich-quick hype that surrounds cryptocurrencies. Bitcoin certainly did its part in perpetuating that when it reached an all-time high of $19,783.21 last year: all of a sudden, people who had never before heard of cryptocurrencies or disdained them were frantically trying to get involved. For many, it was a new concept that came with a vocabulary of its own. That would take some time to learn, if at all, and many have not: hence the scams.
It is well worth remembering that there are just 174 fiat currencies currently in circulation in the world today. Except for their country of origin, each one is much the same as any other in serving the same function and purpose of payment for goods and services. In contrast, most of the approximately 2,000 cryptocurrencies created so far – with or without their unique features – have been no more than scams that prey on the uninformed and the greedy. They are scarcely worth taking the time and effort to investigate.
As for the likes of Dentacoin and other especially niche altcoins: they will either find their place under the sun or quietly fade away. Many of them were not designed for investment or regular transactions in the first place, and should not be expected to have the same returns or uses that more established cryptocurrencies enjoy. Investors should always take the time to conduct research and act out of an abundance of caution – lest they find themselves on the wrong side of yet another get-rich-quick scheme.