On the subject of altcoins

Recently I created a FAQ/Guide for /r/Bitcoin and I was asked to expand it by adding information on altcoins and their merits. Since such a discussion is a big subject onto itself, I decided to devote a whole blog post to this.

If you want the quick and easy version - if you are starting your adventure with Bitcoin and crypto-based currencies, stick with Bitcoin and don't look at other currencies. Most of them exist only to speculate on their value and don't offer anything in return. All the technical innovation is happening in the Bitcoin space, all the merchants are there, this is where you should focus your attention. Come back here once you feel confident in operating in Bitcoin securely if you want to learn more.

Getting dirty

Now, lets quickly talk about a few characteristics of Bitcoin:

Bitcoins are very divisible. Currently 1BTC can be divided up to 8 decimal places. This means that Bitcoin can handle very very small transactions (at the current price of about $1000/BTC, we are talking about the precision of 0.001 cent). If the need arises, this precision can be increased further. There will always be enough units of account to handle even the smallest payments in Bitcoin.
The way Bitcoin operates is very wasteful, but it is pretty much the only way such a system can operate. Bitcoin solves two very hard problems - decentralized money creation and decentralized money transmission. Both of those problems are easy to address for centralized currencies, but the decentralized nature of the system requires the process of block mining. As discussed previously, this means that bitcoins have an intrinsic value, since they cost money to create.
Because of the high cost of mining involved, any attack on the Bitcoin Network is very costly. Anyone trying to steal bitcoins through the means of double-spend or Finney attack will have to overcome the entire Network working against them.

There are many misconceptions being spread around that try to fool people into thinking that altcoins solve those problems. Let me address some of the more popular claims.

You need coin X to allow for small transactions

No, you don't. The Bitcoin Network is capable of handling transactions with 0.00000001BTC precision and the blocks are big enough to handle the traffic. You don't need an altcoin to handle small transactions or more transactions.

You should look into coin X - you can mine it and make a lot of money!

There is no easy money to be made. Mining bitcoins is a specialized industry where one needs to invest a lot of money to be competitive on the market. Mining altcoins is hoping that your small effort is in fact big and will make you rich. Again, mining is wasteful - unless you have the right equipment for the job, it will cost you more in electricity and computer parts than it will earn you. Unless you know what you are doing, there is no money to be made there.

Coin X has blocks generating Y times faster than Bitcoin, this means that your transactions are Y times faster!

No, not really. The amount of computing power behind Bitcoin dwarves any altcoin. At the current time getting 1 confirmation is enough to secure most commercial transactions. The hassle of someone trying to scam you while buying coffee from you is not worth it. In most cases seeing a transaction appear in your client with a proper fee will be enough to transact - altcoins don't offer any advantage here.

Buy coin X and diversify your portfolio!

Bitcoin is not a system set in stone. If there will be an important problem or security vulnerability Bitcoin needs to address, it can change itself to keep up with the world. This means that unless Bitcoin fails abruptly (for example someone suddenly discovers a major vulnerability in ECDSA algorithm and can steal everyone's coins), its failure will mean that other altcoins will fail as well. If government cracks down on Bitcoin, other coins will follow. If the Internet is shut down and Bitcoin Network dies, other coins will follow. Diversifying into altcoins will not save your portfolio.

And remember...

If someone claims their altcoin is really something, take a look at the list of all cryptocoins. There are hundreds of them. Almost all of them without merit.

The exceptions

There are a few altcoins that have a merit of their own. I would not recommend them to anyone starting with Bitcoin, but they deserve a mention as an exception to some of the rules.

TestNet Bitcoins

I think this quote of mine explains TBTCs well:

"TestNet coins are worthless, but useful. They are useful because they are worthless. If you will add value to them, they will be useless, therefore worthless."

TestNet Bitcoins are not used as a normal trading currency, but are created for software developers wanting to test their software in a Bitcoin-like environment without losing their money getting lost or them messing with the Bitcoin Network. If you are a software developer and need some TestNet Bitcoins, you can visit my faucet.

Ripple

Ripple is an entirely new beast onto itself. It is a combination of decentralized currency, payment network, exchange and peer to peer lending. The system is still in early development, but since it operates completely different from how Bitcoin works, it is worth looking into at some point. Do be warned, the currency that fuels how Ripple functions - ripples, was all created upfront and a vast majority of it is being held by one or two companies. Some people take issue with that, so be warned.

Namecoin

Namecoin is not only a Bitcoin-like currency, but also a distributed Domain Name Service. The project recently experienced some major bug in its system that made it pretty much useless. If the developers address the issue, it will continue to be a very interesting project to follow due to the extra utility of the created coins (although there is also an issue with Namecoin possibly not being future-proof).

Everything else

Coins other than the ones mentioned above don't offer anything beyond what Bitcoin does. Some people may claim that some altcoin has an innovative block generation algorithm that doesn't require much computational power, or contributes to some prime number research, but in the end that doesn't make them better than Bitcoin, only different. Unless you know what the differences mean and wish to support them, don't buy them.

And remember, some people just want your money

A big number of altcoins are promoted only for one reason - to get your money. Some people were too late to the Bitcoin party, so they decided to start their own and get rich with it. They hope that their coin will grow and become a system like Bitcoin, so they paster a lot of people to devote their time/work/money to make that happen. The most prominent offenders I have come across are the Litecoin supporters. I have seen them asking people working on Bitcoin projects to create projects for their coin, to beg exchange owners to allow their coin to be traded on the exchange, and trying to convince a lot of people new to Bitcoin that they can earn a lot more money by investing into Litecoin. Recently their coin's value has risen along with Bitcoin, but the darnest thing is - there has been no major innovation taking place in the Litecoin ecosystem. There are no new big merchants accepting it, no new services have been created to make Litecoin use easier or anything like that.

So far, Litecoin is a big speculation currency.

There are many other ones like it, but this is probably the first you will come across. Unless speculation is your thing, don't give them your money.

To sum all up

If you are new to Bitcoin, don't look further than Bitcoin - there is a lot of people that will confuse you.

If you are confident in using Bitcoin and want to see what else is out there, check out Ripple and Namecoin.

If you are a software developer and want to program something yourself, check out Bitcoin TestNet.

Every other altcoin - keep away unless you know what you are doing and are certain you are doing the right thing.