These Digital Coins Soar (or Fall) With Bitcoin: QuickTake Q&A

(Bloomberg) -- It was astounding enough when Bitcoin soared more than 14-fold over the course of 2017 to reach a peak of more than $19,000 on Dec. 16, giving it a total market value of $329 billion -- greater than the gross domestic product of South Africa or Ireland. Equally astounding, perhaps, is that Bitcoin’s value has now been eclipsed by the combined market caps of the next biggest four cryptocurrencies, which have largely moved in lockstep with Bitcoin’s (many) ups and (occasional jarring) downs. To believers in digital money, the emergence of competing coins, many with specialized uses, is a sign of the field’s maturation. To skeptics, it’s another sign that Bitcoin is in a bubble.

1. What are Bitcoin’s biggest competitors?

The four biggest, by market capitalization, are Ether (or Ethereum, as it’s often called), Ripple (aka XRP), Bitcoin Cash and Cardano. One of these, or another from the long list of up-and-comers, could potentially grab leadership away from Bitcoin and become the de facto digital coin of the future. Collectively, non-Bitcoin coins are known as altcoins. There are more than 7,500 such coins, or tokens, and about one in five of those are counted as full-fledged digital currencies, according to CoinMarketCap.com.

2. How are altcoins different from Bitcoin?

Just like Bitcoin, some of these coins trade on online exchanges and can be used to buy goods and services. But many have special features that original Bitcoin lacks. Bitcoin Cash, a spinoff from the original, allows for a greater number of transactions to be processed in a single batch, so it can be speedier and cheaper to use. Ethereum supports so-called smart contracts, which is computer code that governs transfer of digital assets between parties. (An escrow smart contract, for instance, could be used by a home buyer to transfer money to the seller once the house inspection is completed.) XRP was designed for use by banks and other institutions to make international money transfers faster and cheaper. Cardano’s creators seek to build a next-generation blockchain that’s more secure than existing networks for money transfers.

3. What is their appeal to investors?

Nifty features aside, their main appeal lies in their low price relative to Bitcoin. Many people who can’t afford the price of Bitcoin see altcoins as a more reasonable way to get in on the crypto craze. Because they are much more volatile than Bitcoin, altcoins also offer potential for much more price appreciation -- or much deeper losses. In the last two months of 2017, while Bitcoin’s price more than doubled, Cardano’s shot up roughly 30-fold.

4. How do new altcoins get created?

Many are issued by startups or development teams through so-called Initial Coin Offerings, designed to raise funds. Last year, investors poured about $4 billion into ICOs.

5. How often do Bitcoin and altcoin prices move in tandem?

Most of the time, according to a Bloomberg survey, which is no surprise, since they share many of the same investors. Many invest in Bitcoin, then branch out into other coins. What’s more, people often need Bitcoin or Ether to participate in ICOs. This correlation is expected to weaken with time, however, as the new networks behind the altcoins rev up. Then the specialized tokens will be of use not just to investors seeking to make a quick buck, but also to users of those particular networks.

6. How can I buy or invest in altcoins?

Investors can buy coins in ICOs and later trade them on exchanges. Some people agree to buy coins months in advance of when they are actually issued, for projects that don’t even have a working product yet -- clearly a risky maneuver. Some of the largest altcoins are available on large mainstream exchanges like Coinbase. Smaller coins are often sold by smaller, more obscure websites.

The Reference Shelf

• QuickTake Q&As on Bitcoin’s wild ride, ICOs, the battle over "true" Bitcoin and China’s attempts to stifle cryptocurrencies.
• A primer on Bitcoin and blockchain.
• Altcoins had a strong close to 2017.
• Some household names are joining the crypto mania.
• In Bloomberg Prophets, Aaron Brown offers a tool to understand cryptocurrency price movements.

To contact the reporter on this story: Olga Kharif in Portland at okharif@bloomberg.net.

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net, Laurence Arnold

©2018 Bloomberg L.P.