Over the past five years, cryptocurrencies have moved from a fringe interest – something only known to dedicated technophiles – to an international phenomenon, drawing investments from ordinary people all over the world.
Depending on who you ask, the meteoric rise of Bitcoin into the public consciousness is just a fad – a bubble that’s about to burst; then, there are those who think we’re primed for a technological revolution, with cryptocurrencies set to replace traditional currencies and bring the world’s oldest financial institutions into disarray. There is a diverse range of opinion on Bitcoin, as proved by this recent Lottoland poll.
The truth probably lies somewhere in-between these two extremes. The real question of cryptocurrency’s success or failure lies in the details, which is to say it lies in the variance of the currencies themselves. Here we look at two major cryptocurrencies – Bitcoin and Litecoin– and ask which is the most likely to replace conventional money.
Bitcoin is currently the largest form of cryptocurrency. It has a market capitalisation of 170 billion US dollars. This is a staggering increase from its market capitalisation of 42,000 US dollars in 2010. This is, of course, a far higher market capitalisation than Litecoin.
However, because Bitcoins are “mined” algorithmically, which is to say, are mathematically discovered as unique numbers from a set of possible unique numbers, (a bit like prime numbers) there is a limit to the number of Bitcoins that can ever be discovered. That’s 21 million coins, to be precise.
Litecoin, on the other hand, could be mined to a limit of 84 million coins. This may, at first, lead one to believe that the lead in market capitalisation already gained by Bitcoin is only temporary and that Litecoin may outstrip Bitcoin as Bitcoin reaches its limit of production, but this is not actually the case. The reason for this is that Bitcoins are almost endlessly divisible. The smallest division that can be transferred is one-hundred-millionth of a Bitcoin. This means that as long as Bitcoin retains its superior value, it won’t hit a practical limit any time soon.
The one area where this difference in maximum capacity might play out to Bitcoin’s disadvantage, is, oddly enough, the psychology of spending. Richard Brown, of IBM, has raised the point that users typically prefer spending whole units to fractions. Here, again, though, Bitcoin has an answer: Bitcoin wallets, such as Multibit and Electrum, allow users to display their Bitcoins in existing currencies, such as US dollars, overcoming the psychological aversion to decimals.
On the most fundamental level, the difference between Bitcoin and Litecoin is the algorithms that produce them: SHA-256 and Scrypt, respectively. SHA-256 is more complicated, which has lead to the development of specialist hardware for the mining of Bitcoin. Scrypt, on the other hand, can be run reasonably effectively by most computers. This makes Litecoin the clear choice for those whose interest in cryptocurrencies stems from a more libertarian, do-it-yourself attitude – although it’s not clear at this point that the technological barrier to Litecoin mining won’t go up in the years to come.
For this reason, and for the reason that Litecoin is currently less valuable than Bitcoin, and that Litecoin’s advantage in productive potential is completely offset by Bitcoin’s divisibility and use of wallets, it seems reasonable to conclude that Bitcoin will continue to be the major denomination of cryptocurrency.