Just a decade ago cryptocurrencies were just a notion. Five years ago, they were hardly part of any serious financial conversations. But within the past 18 to 24 months, all that has changed. Cryptocurrencies top market news day in and day out. There are some avid fans of the currencies who vouch for its usefulness and consider it a mainstay in the global economy. Skeptics, on the other hand, call digital currencies a pyramid scheme, a bubble, and even an outright scam. No matter where you stand, it’s hard not to ignore what’s going on in the crypto world.
What is a Cryptocurrency?
Cryptocurrency is a type of currency that uses cryptography to do three major things: secure transactions, control creation of additional units of that currency, and to verify transactions. Cryptography is essentially a method of encoding information so that it can be securely transmitted. Cryptocurrencies primarily take advantage of cryptography’s ability to condense large amounts of information and use a short code to represent that block of information..
All cryptocurrencies are created to solve a specific problem or capitalize on an opportunity. These nuances are one of the ways that some currencies become more valuable. As of January 16, 2018, there are 1,450 cryptocurrencies, according to CoinMarketCap.com, the biggest source of cryptocurrency market data. These are the top 5 cryptocurrencies in terms of market capitalization.
1. Bitcoin (BTC)
If you haven’t heard of Bitcoin, where have you been? This king of all cryptocurrencies, the one that started it all, was created as a peer-to-peer cash system to make online payments between users. Bitcoin has the highest price, biggest market capitalization, and more volume than the rest of the top five cryptocurrencies combined.
Despite being the first of all digital currencies, Bitcoin has its limitations. For starters, its block size of 1MB can only process about 2,500 transactions every 10 minutes. By comparison, Visa is able to process 24,000 transactions per second. And because these numbers are finite, transaction times and fees increase as more people use the currency. A few other cryptocurrencies have worked to address these issues, namely Bitcoin Cash, which is #4 on the list. We’ll have to wait and see if any other currencies are able to topple the king.
2. Ethereum (ETH)
Bitcoin, and many other cryptocurrencies, are designed to run a specific number of functions, which limits the capabilities of that cryptocurrency. Ethereum, the second largest cryptocurrency, can run any program created by any programming language, making it a more flexible type of currency. It’s designed primarily to run smart contracts that automatically execute without any fraud or third-party interference whenever specific conditions are met.
Transactions create Ether, which is both a tradable currency and a payment method for transaction fees and other services run on the Ethereum network. Ethereum can be useful for bookkeeping, financial transactions, real estate, marketplaces, and supply chains.
3. Ripple (XRP)
Often when people need to send money to each other in different currencies, they would first need to convert it to a common currency like USD, then transfer the money. Of course, you can incur lots of fees with all of these conversions. Ripple’s goal is to allow users to send real time payments globally across networks, regardless of the currency type.
Ripple eliminates the need for conversions and the fees by using XRP (vs. USD) as the underlying currency with all money transfers. According to Ripple, more than 100 institutions are already using the cryptocurrency in some way, typically for cross-border payments. Western Union, which has traditionally been one of the fastest ways to send money, recently announced integration with Ripple, turning a competitor into a partner.
Unlike Bitcoin, Ethereum and several other cryptocurrencies, Ripple doesn’t require any mining. And because it doesn’t need mining, it reduces the amount of computer power and network latency in using the coin.
4. Bitcoin Cash (BCH)
Bitcoin Cash is a spinoff, aka hard fork, of Bitcoin. Investopedia defines a hard fork as “as situation when a blockchain splits into two separate chains in consequence of the use of two distinct sets of rules trying to govern the system.” You can picture it almost exactly like a fork in a road with Bitcoin continuing to function it always has and Bitcoin Cash splitting off from that main road with its own chain of with a different set of rules and its own set of transactions.
Remember that Bitcoin has a 1 MB block size, which was instituted only to prevent fraud on the network. Bitcoin Cash increases the block size limit to 8 MB, which allows miners to process more transactions per second. This adjustment makes transactions faster and less expensive for users.
5. Cardano (ADA)
Though Cardano only launched in late 2017, it has quickly become the fifth-most valuable cryptocurrency – as of the date of this post, of course. Interestingly enough, Cardano was founded by the co-founder of Ethereum. Other than running on blockchain and sharing a founder, the two currencies have little else in common.
According to its website, Cardono seeks to “deliver more advanced features than any other protocol previously developed.” It aims to solve many of the problems that exist with the previous generations of cryptocurrencies, particularly when it comes to transaction fees and processing times, the ability for currencies to work together, and a system’s ability to evolve as necessary and eliminate hard forks.
There you have it – an overview of the top five cryptocurrencies at the moment. You can currently purchase cryptocurrency on one of more than 40 cryptocurrency exchanges. Keep in mind the volatility and unpredictability of the currency movements from day to day, even from hour to hour. If you choose to play around in the crypto market, make sure you do your due diligence and don’t use money you can’t afford to lose.