Digital Currencies: Which One Will Be “The Next Big Thing”?
2016 was the year for unexpected results and surprise winners in the world of digital currencies. Bitcoin was one of them. Bitcoin, the digital cryptocurrency created in 2008 saw an unexpected resurgence, ending the year with more gains than every major currency, stock index and commodity.
Bitcoin spent 2016 quietly regaining strength, surging 79% to $778 in December, only to climb to around $1000 before the end of the year. It is currently trading at around $900. It has come a long way since 2014 when regulatory pressures and security failings saw the cryptocurrency lose 58% of its value.
Why Is Bitcoin Popular Again?
In the early days, Bitcoin and similar concepts were seen as a potential currency replacement. A revolution in payment models: more democratic, without central oversight and controls. None of that materialised in the way digital currency supporters and investors hoped. Instead, increased Bitcoin use is a sign of troubled economic times.
Investors and hedge funds always put more money into alternative investment vehicles, such as gold, oil and now, Bitcoin, when markets face uncertainty. At the same time, China, Mexico, India and Venezuela are restricting foreign currency exchange, or anticipating a reduction in remittances, which is forcing people to seek alternative ways to move money discreetly, which now includes Bitcoin.
There are also supply-side problems, with fewer coins getting mined and lower payments to those who verify the coins on the public Blockchain – the public ledger – pushing up the currency value.
As many payment industry and tech insiders know, Bitcoin is not the only cryptocurrency on the market. Most aren’t as well known, but they do exist.
The three most popular alternative digital currencies include Ethereum, Litecoin, and Ripple. Could any of these gain the same kind of acceptance and popularity as Bitcoin? Let’s consider the options:
Ethereum is a technical evolution of Bitcoin, first proposed in 2013. Developed in Switzerland, the live Blockchain was launched in 2015, gaining enough interest from cryptocurrency insiders to give the currency (known as the Ether) a valuation of over $1 billion in 2016. Far less than the total value of Bitcoin, but still impressive.
Ethereum makes it easier to implement binding contracts, since “once a program starts running, no one has the power to modify or stop it.” This is known as a “smart contract”, and could give both parties an advantage in certain circumstances. Microsoft, IBM and Deloitte are investigating ways this could strengthen currency trading and cross-border payments. It is one to watch in 2017.
Similar to Bitcoin in many ways, Litecoin is the most popular and secure alt-currency in the digital space. Transactions occur faster, with a new coin mined every 2.5 minutes (compared to every 10 minutes for Bitcoin); although Litecoin does not trade at the same volume. There are fewer security issues since it was created by a former Google employee, Charles Lee, now the Director of Engineering at Coinbase.
Litecoin was designed to handle overflow demand if Bitcoin became too popular, which is something we could see in 2017.
As far as cryptocurrency investors are concerned, Ripple is not the best option. Since the initial release, the native currency supported on the open source ledger, known as Ripples, have lost 90% of their value. However, as a secure blockchain model, banks are strongly in favour of Ripple.
Unlike Bitcoin, Ripple is run centrally and considers itself a ‘”real-time gross settlement system”, and functions as a currency exchange and remittance network.’ The financial sector Magazine, American Banker noted that ‘from [a] banks’ perspective, distributed ledgers like the Ripple system have a number of advantages over cryptocurrencies like bitcoin.’
Since 2014, Ripple protocols and systems have been used by dozens of banks across the word. In Germany, America, Australia, and then worldwide, though payment provider, Earthport, integrating an international transfer option that is cheaper and quicker than traditional methods for clients that include Bank of America and HSBC.
In 2016, an interbank network was established, known as the Global Payments Steering Group (GPSG), to ‘oversee the creation and maintenance of Ripple payment transaction rules, formalised standards for activity using Ripple, and other actions to support the implementation of Ripple payment capabilities.’ The GPSG includes numerous well-known banks, including Santander, CIBC, Royal Bank of Canada and others with experience using Ripple.
Does this mean Ripple is the “next big thing” in cryptocurrency?
Not exactly. Bitcoin looks likely to grow in popularity in 2017. Ripple, on the other hand, will most likely consolidate its position as a more secure version that banks will use as part of their Blockchain revolution. We can potentially expect the cost of international payments to drop, thereby challenging new remittance providers to stay relevant in 2017.
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