As at 10th April 2019, there were 2,238 cryptocurrencies listed on CoinMartketCap. To anyone that’s a lot. To explain we will attempt to draw parallels between the existing financial system and the one composed of cryptocurrencies.
For starters its relatively easy to explain why there are so many local currencies (fiat) in the world today. In the far past, you could say that each country had its own currency as a sign of the country’s sovereignty.
These days its more importantly about enabling countries to adopt a monetary policy (supply of money) which it feels would be suitable for it at any point in time. The monetary policy is important because it can change the exchange rate of a currency. Let’s say Kenya and South Africa had debts to pay, they can decide to adopt opposing monetary policies to pay it off but with a single currency, they can’t.
The easy answer to why we have so many cryptocurrencies is that each crypto supposedly has its own problem that it seeks to solve. While a number of them have the same objective, they are aimed at improving the existing cryptocurrencies. The fact is that cryptocurrencies have evolved from 10 years ago when Bitcoin first came to be.
Permissionless
The first pointer as to why there are so many is that anyone can create a cryptocurrency. Well not exactly everyone but any programmer who understands how blockchain works can build their own cryptocurrency. The blockchain is the backbone, foundation on which cryptocurrencies are built on. Since there are no barriers to creating a blockchain if you have the expertise. As there are no licences required like the current fin system where you need to get a licence from the central bank or authority.
Countries are sovereign authorities and except they have an agreement to have a single authority they can decide to break off from the existing one. Imagine passing that sovereignty to an individual. In the sense that he can build his own currency without getting a sign off from anyone. That’s almost how cryptocurrency works.
Forks
Think of these as road forks where two road divides into two paths. So say a group of people start on the same road together but they reach a point where the road divides into two different roads. The divide causes a rift regarding the best path to takes and so the group splits into two groups based on what they feel is the best road to take.
That’s the case for a couple of cryptos, they split up because of varying idea on how best to proceed. When a fork happens to a cryptocurrency an alternative version is created and two cryptocurrencies are created. Bitcoin for example has hard-forked into Bitcoin Cash (BCH), Bitcoin Gold (BTG) and Bitcoin SV (BSV).
ICO (Initial Coin Offerings)
In 2017 this seemed like a good option of funding for start-ups in the space. It is similar to an IPO (Initial Public Offer), although the difference here is that token holders don’t own a part of the company. Rather by buying the tokens at the ICO stage, they are given first mover advantage to sell the tokens for a higher price when the project performs well. ICO’s can be created by anyone, what is usually required is a whitepaper and a website, detailing what the project is about and its roadmap.
Innovation
Cryptocurrencies are driven by innovation, in the sense that people are looking for new ways to improve on existing cryptocurrencies or fix seeming flaws in a cryptocurrency.
Bitcoin which is the first cryptocurrency has been seen as energy consuming because of the amount of energy required to verify and confirm the transaction. The creator of Litecoin looked to solve the seeming flaw with Bitcoin by making it more energy efficient. As opposed to Bitcoin all time limit of 21 million, Litecoin has a limit of 84 million. Also, Litecoin aimed to reduce the amount of time it takes to verify and record a transaction from Bitcoin’s 10 minutes to 2.5 minutes.
Before you invest or buy any cryptocurrency we recommend that you read and understand what problem it seeks to solve as well as the team behind it. These tips could help you when investing in cryptocurrency.
