What Is a Cryptocurrency and How Does It Work? Ethereum, Litecoin, Dash, and Other Bitcoin Alternatives Explained

By Gopal Sathe | Updated: 14 September 2017 11:57 IST

Highlights

Bitcoin is a type of cryptocurrency, using blockchain technology
Popular alternatives include Etherium, Litecoin, and Dash
Dogecoin, first made as a joke, was another early BTC alternative

What Is a Cryptocurrency and How Does It Work? Ethereum, Litecoin, Dash, and Other Bitcoin Alternatives Explained

We've talked about Bitcoin, how it's "mined", how you can buy Bitcoin, and whether or not that's a good idea. Bitcoin is based upon a technology called blockchain, a digital record with which all transactions made using Bitcoin are available for verification by the public. This decentralised ledger means that no one entity can control Bitcoin, and each block (or Bitcoin) has to be mined using a complicated algorithm on your computer.

Over the years, the computing power required to do this has gone up, and an individual can't really mine for Bitcoin on their PC anymore, but what you can do is buy and sell Bitcoins via exchanges.

Also seeWhat Is Bitcoin, Should You 'Invest' in Bitcoin, How to Buy, and All Other Questions Answered

It's just one type of cryptocurrency though, based on this technology. As the growing value of Bitcoin moved it from a curiosity to an investment, a number of other crytpocurrencies started to come up - some, such as Dogecoin, as jokes, and others like Litecoin as serious alternatives. We've put together a guide for beginners, so read on to know more.

What is cryptocurrency?

Cryptocurrencies are digital currencies that are based on blockchain technology. The "rules" of the chain - such as the number of blocks, the frequency at which new blocks are generated, and how blocks are verified - are also made public in the blockchain, and there are a number of alternatives.

"Cryptocurrency is a digital currency that uses rules of cryptography for regulation and generation of units of currency," says Hitesh Malviya, a Bitcoin investor who has also conducted corporate training sessions about blockchain. "Bitcoin is the most valuable cryptocurrency till now. However, there are some contenders in the market which may be considered as serious alternatives to the same."

"Bitcoin has been a trendsetter when it comes to cryptocurrency," says Sathvik Vishwanath, CEO and Co-founder, Unocoin, an Indian Bitcoin exchange. "Following the success of Bitcoin, other forms of cryptocurrency offer some modification or the other and yet have some limitations."

"For instance, while these currencies might be easier to mine, they are vulnerable to more risks and liquidity challenges owing to limited acceptance and value retention," he adds. "However, the onset of altcoins (other decentralised currencies) is a strong testament to the fact that the future belongs to cryptocurrencies."

Also seeHow to Buy and Sell Bitcoin in India

How do cryptocurrencies work?

As explained above, cryptocurrencies use blockchain technology to generate new blocks of coins, which can be distributed. This is tracked through the public blockchain ledger, and verified through fairly complex algorithms. As the number of coins and so the complexity has increased, the time taken to create new blocks has soared sky high, and even the time to verify a transaction is now fairly long.

As a result, a number of new cryptocurrencies (or altcoins) came up, and according to a Delhi-based Bitcoin investor who is also invested in a number of other altcoins, these are attractive because you can get the coins more easily and quickly, and verify the transactions faster too. "The value of one coin is also much lower, so it's a safer way to get started, and it's also a little less volatile," he adds.

These altcoins have different rules in their blockchain ledgers, so some for example don't have an upper limit on the number of coins that can be mined, such as Dogecoin. Litecoin, one of the oldest Bitcoin alternatives, is like the latter in many ways, but it can be decoded with much less processing power; this also means the transaction confirmations are faster.

The basics of public ledger, transactions verified against the ledger, and mining by confirming transactions and adding them to the ledger remain in common across the different cryptocurrencies. They're also typically open-source, and decentralised.

One thing to note is that not all altcoins make sense as an investment - for example, some are inflationary, that is to say, the value of each individual coin will go down with time. "The cryptocurrency market runs largely on speculations, hence it’s quite volatile in nature," adds Malviya.

Which cryptocurrency should I get?

"Bitcoin is the oldest cryptocurrency and it has grown exponentially," says Sandeep Goenka, COO and Co-founder, Indian Bitcoin exchange Zebpay. "Ethereum comes second to Bitcoin in terms of popularity and we are planning to support multiple cryptocurrencies in the future, we will be adding support for Ethereum very soon."

Litecoin, which has been around since 2011, is a popular option because it's relatively fast, the Delhi-based Bitcoin investor we spoke to told us. The other altcoin he has invested in is Ethereum, which he explained has grown in value remarkably fast, making it a strong investment as well.

Bitcoin investor Malviya's picks are Ethereum, Litecoin, and Dash. "Etherum, quite simply put is an open software platform based on blockchain technology that helps the developers to build and deploy decentralised applications," he says. "The exchange and transfer of Litecoins is based on an open source cryptographic protocol and isn’t managed by any central authority. ormerly known as Darkcoin or XCoin, Dash is yet another open source P2P cryptocurrency offering the same features as Bitcoin but with advanced capabilities including immediate transactions, private transactions, and decentralised governance."

That said, this guide is written as an introduction to the topic, and if you're reading this, then investing in altcoins might be a risky move. "Cryptocurrencies have become extremely popular in the past couple of years, people should gain enough knowledge about cryptocurrencies and we don’t suggest people to invest immediately in it," says Goenka. "Only if you are convinced about the technology, then go ahead and invest in it."

He's not alone in suggesting this. "There is a stronger support for Bitcoins, both in terms of the community and companies accepting Bitcoin payments," says Unocoin's Vishwanath. "Having the community support and acceptance that Bitcoin currently enjoys is going to relieve a host of novice users."

Also seeCryptocurrency Prices across Indian exchanges

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