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The rise of cryptocurrencies

It's not just Bitcoin anymore: Thousands are flocking online to 'mine' and trade dozens of alternative currencies.

Last updated: 02 Feb 2014 08:21
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One US dollar is currently worth about 714 Dogecoins [Wired]

Shiva Keshavan, an Olympic luger from India, wasn't sure whether he could afford to attend the 2014 Winter Olympics in Sochi, Russia. He had to raise $5,000 in a matter of days.

But in only three hours, a small but active section on the popular website Reddit raised the necessary funds through the use of Dogecoin, a new digital "cryptocurrency". Just weeks earlier, Reddit users helped the Jamaican Olympic bobsled team get to Sochi by donating $30,000 worth of Dogecoins over a 24-hour period.

Bitcoin is the most famous type of cryptocurrency, but it's far from the only one. Unlike government-backed currencies, which are usually regulated and created by a central bank, cryptocurrencies are generated by computers that solve a complex series of algorithms and rely on decentralised, peer-to-peer networks.

Aside from Dogecoin - which was named after an Internet meme displaying a dog speaking in grammatically incorrect English - other cryptocurrencies include Litecoin, Fedoracoin, Coinye, and Ethereum. Many of these are slightly different variants of Bitcoin with their own unique coding.

How they work

Cryptocurrencies are becoming increasingly popular, and their combined market value can now be measured in the billions of US dollars. New cryptocurrencies are being created every day, and at the time of publication there were at least 83 different cryptocurrencies on the market, with hundreds or perhaps thousands more used among private circles.

Money is created when users with powerful computers solve puzzle-like algorithms. Much like mining gold, "mining" digital cryptocurrencies requires "work" on the computers' part. Only a finite amount of each digital currency exists, in hopes that it will appreciate in value over time. The puzzles become increasingly difficult to solve as more people attempt to mine the currency.

Many of these currencies are currently worth fractions of a cent, and the vast majority of them cannot be exchanged directly into US dollars. Yet many of them can be exchanged into Bitcoins, which can then be converted to dollars.

There are only a very small number of cryptocurrencies right now that attempt to move Bitcoin forward in a technical way.

- Matt Corallo, veteran Bitcoin developer

Interestingly, many of these cryptocurrencies, including "joke" virtual currencies, are worth more than the official currencies of several countries. Dogecoin, for example, was worth more than the Zimbabwean dollar and the currencies of 25 other countries at the time of publication.

However, whether these cryptocurrencies are worthwhile creations is open to debate. "There are only a very small number of cryptocurrencies right now that attempt to move Bitcoin forward in a technical way. Ethereum is one of the only ones that has an argument as to why that might be true," veteran Bitcoin developer Matt Corallo told Al Jazeera.

Indeed, in many cases developers create cryptocurrencies in order to make a profit.

"The cryptocurrencies which are attempting to create new technical alternatives to Bitcoin... want to raise money both to hire developers to create their systems, and to enrich their team should their project succeed," said Corallo.

Everyday uses 

Shortly after Bitcoin's creation, one user spent 10,000 Bitcoin for two pizzas. Today, that would be worth about $8m.

Nevertheless, Bitcoin's rise was gradual - whereas other cryptocurrencies today are gaining popularity at exponential rates. 

Cryptocurrencies are based on trust. While most of them cannot be formally traded for products and services, the big ones are increasingly gaining legitimacy. Dogecoin, for example, can be spent on vacationing in a Jamaican villa, and Bitcoin is accepted by overstock.com, the NBA basketball team Sacramento Kings, social gaming company Zynga, and even Virgin Galactic airlines.

Websites specifically geared to accepting Dogecoins have begun to crop up, and some users on websites like Reddit have paid tips to insightful commenters in Dogecoins. "Dogecoin is a very important achievement: It has made cryptocurrencies 'friendly' to the public. In general, Bitcoin and other cryptocurrencies before Dogecoin appealed more to the tech savvy/geeky/nerdy crowd," said Reddit user DogeFreedom, an investor in the currency, who declined to give his or her real name.

Economic bubble?

People rushing to invest, mine, and transact in cryptocurrencies might be fuelling an economic bubble, say some economists and tech writers.

Bitcoin drive gains currency in Germany

Bitcoins, Litecoins, and Dogecoins must be mined with specialised equipment, and people are spending "thousands of dollars on chips whose only function is to mine", collect and hoard a cryptocurrency, wrote Washington Post technology columnist Timothy Lee.

He added that people who mine cryptocurrencies might "organise themselves into 'pools'", thereby cornering the market and creating a bubble-like effect.

Another concern among economists is the highly volatile values of alternative currencies. Nobel Prize-winning economist Paul Krugman wrote: "Gold, after all, has at least some real uses, eg, to fill cavities; but now we're burning up resources to create 'virtual gold' that consists of nothing but strings of digits."

At the time of publication, Bitcoin remains the most prevalent cryptocurrency in terms of market capitalisation, but others, such as Dogecoin, are increasingly being seen as viable alternatives.

"Dogecoin has removed that aura of seriousness of cryptocurrencies and has been a huge success," claimed DogeFreedom. "A look at the Reddit user data shows that Dogecoin, in less than seven weeks of life, is the 2nd largest cryptocurrency community and is growing much faster than what Bitcoin or Litecoin had ever grown in the past."

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Source:
Al Jazeera
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