Kate's Comment

Thoughts on British ICT, energy & environment, cloud computing and security from Memset's MD

Alt-coins: Bitcoin’s competitors. Which cryptocoins will survive?

I’ve not written much about my new hobby; cryptocoin (Bitcoin and its ilk) mining. A few months ago I created a virtual company, CipherMine, to mine cryptocoins like Bitcoin.

I won’t go into mining in detail here, but it is effectively printing virtual money. CipherMine is currently making over $3,000 per day of virtual currencies. Our real interest is in the “alt-coins”; crytocoins created by forking the open source Bitcoin system and adjusting it.

The first big one of these was Litecoin. The developers did not simply replicate it, but improved on Bitcoin. Not only is Litecoin more secure than Bitcoin, it has other advantages like faster confirmations; 2.5 minutes rather than Bitcoin’s 10 minutes.

Although the recipient gets notified immediately about a payment, they cannot be certain that they really have been sent the money until they have at least a few confirmations from the network.

In recent months though a huge number of cryptocoins have sprung up, especially clones of Litecoin which are called scrypt coins. The other main type are Bitcoin-based ones which are SHA256 coins – the name refers to the algorithm processed when mining them. To get a feeling for how many there are, check out Cryptsy, one of the exchanges I use regularly. There are over 100 now, and there is no way all of them can survive. So which will it be?

The cream of the crop: Bitcoin, Litecoin, Primecoin and Anoncoin

I believe that, like types of credit card (Visa, Mastercard etc) there is room in the market for a handful of cryptocoins. I think that two things matter in determining which those will be:

1) Useful, functional differences to Bitcoin.
2) First-mover advantage.
3) A community of users and developers supporting it.

Based on this, my top 4 cryptocoins which I think most likely to have a future are:

1) Bitcoin (BTC). It has numerous flaws and is technically inferior to Litecoin and others, but history tells us that the most popular standard wins out – not necessarily the best. As a SHA256 coin, mining is now restricted to people with specialist hardware so it is becoming less of a hobbyist activity.

2) Litecoin (LTC). As above, Litecoin is the leading competitor to Bitcoin. As well as being technically superior it also has a devoted community, loosely based around the Litecoin forum. It also has a strong developer community and even its own association. Litecoin can also be cost-effectively mined with GPUs since scrypt is more memory-intensive than SHA256.

3) Anoncoin (ANC). Although cryptocoins are designed to be decentralised and thus somewhat anarchic, they can quite easily be traced. Since many of the users of cryptocoins want anonymity, a group of very clever guys created Anoncoin. Its main feature is that it can be routed through I2P, the Invisible Internet. Anoncoin is a scrypt-based coin like Litecoin.

4) Primecoin (XPM). Primecoin differs mainly in the way it is mined. Mining Primecoins consists of finding ever-larger prime number chains. In theory this work could be useful. SHA256 and scrypt coin mining is a complete waste of power and computation by comparison. Also, Primecoin can be effectively mined with CPU only. I’m actually running an experiment at present to use spare CPU resources on our Miniserver VM hosts to mine Primecoins. The plan is to use it for batch-type high-performance computing tasks.

Unlike Bitcoin the three alt-coins above don’t yet have very major fiat (real money) exchanges. There is Litecoin Local though and there is a constantly evolving infrastructure around many of these coins. Personally, I tend to use BitStamp.net to get real money in and out of Bitcoins, then exchange Bitcoins for the above either on BTC-E or Cryptsy.

Speculation

I tried my hand at cryptocoin trading, but despite teaching myself about things like exponential moving average cross-over techniques I’ve repeatedly demonstrated that I’m a rubbish day trader!

Instead, I have a small portfolio of the above four cryptocoins. As with making an investment in shares, I’ve concluded that the best approach is to choose something whose fundamentals you think are sound and forget about it for a while. That’s actually how I originally got into this space; about 18 months ago I bought 30 Bitcoins at about $3 each. A year later they were well over $100/coin (ie. $3k in total). I’ve decided that approach is much better when it comes to coin speculation!

Ironically, had I merely held the Litecoin and Bitcoin I raised for investment in CipherMine, we’d actually all be a lot better off now too!

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