After Bitcoin launched in 2009, it took almost two years for rival cryptocurrencies to emerge. In December 2014, the number had grown to 500. Today, there are almost 2,000 altcoins in existence.
But why have we seen an explosion in the number of competing coins over the last few years? Why are there so many cryptocurrencies?
The Natural Progression of Bitcoin
If we take a moment to understand the history of Bitcoin, you can see there’s a natural progression which has led to the current situation.
When Satoshi Nakamoto published the Bitcoin whitepaper in 2009, he introduced it as a digital currency:
[The current system] suffers from the inherent weaknesses of the trust-based model.
Completely non-reversible transactions are not really possible, […] a certain percentage of fraud is accepted as unavoidable, […] and no mechanism exists to make payments over a communications channel without a trusted party.
What is needed is an electronic payment system based on cryptographic proof instead of trust. A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.
Different Interpretations of Cryptocurrency
As Bitcoin—and more specifically, blockchain technology—proved itself as a secure and reliable way of transferring assets, other developers started to add their own interpretations to how it could be used.
2011 saw the arrival of Litecoin and Namecoin. Technically, Litecoin is very similar to Bitcoin, but the developer Charlie Lee made some changes that he considered to be improvements: a shorter block generation time, a higher total number of coins, and a different hashing algorithm.
Namecoin is also similar to Bitcoin, with 21 million coins and the same proof-of-work algorithm. The currency’s main difference is that it allows data to be stored in its blockchain transactions. Today, Namecoin is used for the .bit top-level domain name. It operates outside of ICANN.
More Types and Categories of Cryptocurrency
As Namecoin showed, the use cases for cryptocurrencies were already starting to blossom. Soon, we had Peercoin using a proof-of-work/proof-of-stake hybrid, IOTA choosing to use the Tangle instead of a regular blockchain, and privacy-focused coins like Monero, Dash and Zcash come into existence.
Each new coin was trying to solve a new problem or remedy a perceived weakness in existing cryptocurrencies.
Therefore, to help understand the vast number of cryptocurrencies, it’s perhaps wise to split them into usage categories instead. The edges of these categories are somewhat blurry, but broadly speaking, most coins fit into one of seven groups:
- Payments and Currencies: Bitcoin, Litecoin, Nano, Dogecoin.
- Privacy: Monero, Verge, Komodo, Zcash.
- Computing and Data Management: Siacoin, Golem, Holo.
- Platforms: Ether, Cardano, NEO, NEM.
- Business and Protocols: Binance Coin, ICON, VeChain, Ardor.
- Fintech: Ripple, Stellar, OmiseGo, QASH.
- Entertainment: Steem, Tron, Loom, WAX.
The Forking of Cryptocurrencies
Developers have forked all the major blockchains, and some blockchains have even been forked dozens of times. In 2018 alone, the Bitcoin blockchain gave rise to Bitcoin Pizza, Bitcoin All, Bitcoin Private, Bitcoin Rhodium, Bitcoin Smart, BitVote, Bitcoin Interest, Bitcoin Atom, Bitcoin Lite, Classic Bitcoin, and Bitcoin Zero.
Forks can be either “hard” or “soft.” A soft fork, such as SegWit, happens when one blockchain remains valid after an update. A hard fork occurs when a new blockchain comes into existence while the older version of that blockchain also remains valid. Well-known examples include Bitcoin Cash, Bitcoin Gold, and Segwit2x.
It is the hard forks that are responsible for adding to the ballooning number of altcoins. Learn more about hard forks and soft forks in cryptocurrency.
Huge Returns and the ICO Boom
We saw a record number of new cryptocurrencies in 2017. Driven by massive financial returns, many developers contracted a collective case of FOMO and released just about anything in hopes of grabbing a slice of the pie.
The vast number of new coins led to an ICO boom. The unregulated nature of ICOs combined with the public’s feverous interest in anything related to the blockchain led to an unprecedented amount of cryptocurrency investment.
The boom is still ongoing. The Wall Street Journal claims ICOs raised $5.5 billion in the entirety of 2017. Between January and May 2018, the amount already stood at $11.8 billion.
But the ICO boom does have risks and downsides. Because it’s so easy to launch a coin, the marketplace has become flooded with coins that at best don’t offer material improvements over established tokens and at worst are outright scams. If you’re an investor, you need to exercise extreme caution.
Satis Group says just eight percent of coins offered via ICO go on to be listed on an exchange. It claims as high as 80 percent of ICOs with $50 million of investment go on to be scams (Bloomberg). Just five percent can be considered promising or successful.
Increased Adoption of Cryptocurrency
The world is increasingly using crypto tech in day-to-day life. Already, lots of businesses are running their own blockchains to solve a particular issue or streamline a workflow. Similarly, there are a growing number of ways to spend your Bitcoins and altcoins.
As real-world adoption grows, so too does the number of cryptocurrencies. Some of them might never have an ICO or be listed on an exchange, but they still exist and add to the total number of coins in circulation.
A better term for these types of cryptocurrencies is crypto assets or crypto tokens. They draw users thanks to their association with a particular business sector.
Looking forward, it seems inevitable that the number of cryptocurrencies will continue to grow over the coming years.
But it’s tough to accurately predict which coins will remain popular. Even Bitcoin, which has dominated the sector since its inception, is not necessarily safe in its position as market leader. Until January 2017 it had never dipped below 75 percent of crypto’s entire market cap. By June, it had dropped to 38 percent, just six percent more than Ethereum. In 2018, it’s bounced between 35 and 55 percent.
Realistically, you probably don’t need to worry about 90 percent of new coins. However, if you’d like to invest in crypto and play a small part in which currencies become successful in the long run, check out our list of the best cryptocurrency exchanges.