Cryptocurrencies

Even though it was introduced in 2009, the digital currency Bitcoin caught the interest of the mainstream media only in 2012. Due to its supposed anonymity, Bitcoin and other digital currencies are often compared to cash. However, unlike cash, these currencies are purely digital and used primarily online. Digital currencies have the potential to compete against other online payment methods such as credit/debit cards and PayPal.

Bitcoin and the other digital currencies considered here are decentralized systems; i.e., they have no central authority. They use cryptography to control transactions, increase the supply and prevent fraud. Hence, they often are referred to as cryptocurrencies. Once confirmed, all transactions are stored digitally and recorded in a ‘blockchain,’ which can be thought of as an accounting system. Payments are validated by network nodes. Sometimes, as in the case of Bitcoin, powerful, expensive computers are needed for the process. Bitcoin’s algorithm provides an effective safeguard against ‘counterfeiting’ of the currency.

However, the ecosystem is vulnerable to theft. Users keep keys to their Bitcoins and make transactions with the help of wallets. Exchanges facilitate trade between Bitcoins and fiat currencies, and also allow for storing Bitcoins. Bitcoins can be stolen through wallets or exchanges. Up until this point, exchanges have been targeted more frequently than wallets.

Many wallets are located on users’ computers, while exchanges by their nature are online. This makes exchanges an easier target. It was revealed in February 2014 that $350 million worth of Bitcoins were stolen from Mt. Gox, which led to the shutdown of the exchange.

The other cryptocurrencies in our analysis are very similar to Bitcoin and have been created by “forking” the main Bitcoin protocol. Hence, they are called altcoins. But they are not exactly the same. For example, Litecoin will generate 4 times as many coins (84 million), and the transactions are added to the blockchain 4 times faster than Bitcoin (2.5 minutes against Bitcoin’s 10 minutes).

ICO

(Initial Coin Offerings) is the process of issuing the company’s own tokens (an analogue of shares in the traditional financial market with a number of unique properties) and placing them on a crypto exchange.

In other words, this is a way to bring a new crypto currency to the market. The developers of any new project use ICO as a mechanism for raising funds under the terms of which future crypto currency is sold for existing virtual and highly liquid crypto-currencies.