KNOW THE BIG COINS

Bitcoin Market cap: $US139 billion

Supply: Currently 16.8 million (max 21 million) High: $US19,511 (December 18, 2017)

Bitcoin was born after the GFC in 2009 when there was widespread disillusionment with financial intermediaries. Some central banks had responded to the crisis by printing more and more money, which devalued currencies. People felt let down by banks. Some smart computer scientists specialising in encryption, who had been mulling over how to set up an alternative to money, came up with Bitcoin, a peer-to-peer cryptocurrency that is kept in a digital wallet on a computer or smartphone rather than a bank account. Each Bitcoin has a computer code that is a bit like an email address. To pay for something in Bitcoin or to transfer money to another person, you send a code. There are merchants that allow you to pay in Bitcoin.

The underlying technology that was built to support Bitcoin is called blockchain, which is powered by a public ledger that records and validates all transactions chronologically.

Originally, Bitcoin was a payment system without a central bank but it has morphed into the poster child of the 1300 new cryptocurrencies and "altcoins" that have been created using similar blockchain technology. Recently people have held Bitcoin because it is attractive for its momentum, trend and volatility.

At first Bitcoin was worth little but it hit a high of $19,511 in December 2017. Enthusiasts like the fact that Bitcoin is limited and supposed to never exceed 21 million coins. Bitcoin controls the number through computer servers called Bitcoin miners. The servers communicate over an internet-based network and confirm transactions by adding them to a ledger that is updated and archived. Each new ledger update creates some new Bitcoins. The number of Bitcoins created in each update is halved every four years until the year 2140, when it will round down to zero. At that time there will be no more than 21 million Bitcoins.

Each Bitcoin is divided to eight decimal places, into 100 million smaller units called “satoshis”. One satoshi equals 0.00000001 of a Bitcoin.

How does Bitcoin make money?

When a credit card is used, the processor charges a transaction fee, which the merchant has to pay. But Bitcoin currently has no fees on most transactions. Because transactions are processed by the peer-to-peer network, which is rewarded by the system with the creation of new Bitcoins, a reward for the processors (miners) is built in.

There are dozens of exchanges that sell and trade Bitcoin and it is important to compare the costs and features before you sign up.

There have been a number of hard “forks” off the original Bitcoin, such as Bitcoin cash and Bitcoin gold.

Ripple Market cap: $US40 billion Supply: 38,739 billion High: $US3.65 (January 4)

While Bitcoin soared more than 1469% in 2017, Ripple surged by an astonishing 35,664%. Since those highs, however, Ripple’s price has been plunging with the other cryptocurrencies, exacerbated by fears that some banks won’t be using it as previously rumoured. Ripple has long been loved by the cryptocurrency world but suddenly people have got the jitters about its future.

While Ripple started out in 2004 as a system for exchanging digital IOUs between trusted parties, it was further developed by Jed McCaleb, a programmer, in 2012. Ripple claims to be a real-time, fast settlement system for financial institutions to move money between digital wallets as well as a currency exchange and remittance network. The Ripple token is one of the currencies that can be transferred with the software.

Ripple is different from Bitcoin in a number of ways. While Bitcoin was created to be a digital currency, Ripple was created to digitise transactions between banks. Largely it has been designed to be a faster and more efficient version of Bitcoin.

Bitcoin and Ripple have different governance and ownership structures. While Bitcoin is highly decentralised and an open source network, owned by a community, Ripple is owned by a private company. Ripple’s internal ledger is closed and this enables it to make quick upgrades.

Bitcoin’s decentralised approach means anyone can use it for whatever they like; Ripple is much more targeted as an asset transfer solution for major calculations. The Ripple company approaches customers such as large financial institutions, selling its technology. Ripple is known as “the Bitcoin that banks like” and a number of big names have signed up to use it for part of their banking services.

Ripple doesn’t use the “mining” process that Bitcoin uses to distribute new coins and secure the network. Instead it issues tokens itself, transforming the company’s role into something more akin to a central bank. Nor does it use Bitcoin’s centralised exchanges.

Ethereum Market cap: $US80 billion Supply: 97 million so far High: $US1389 (January 15)

The second most popular cryptocurrency, Ethereum, is a global computer network with its own virtual currency called Ether. While Bitcoin is a currency, Ethereum offers both a currency as well as a new type of distributed computer that is spread across thousands of individual computers at once, all kept in sync with blockchain technology.

The founder of Ethereum, 24-year-old Vitalik Buterin, announced it in 2013 and launched it in 2015.

He describes his worldwide decentralised computing network as a global smartphone. He designed Ethereum to do complex financial transactions and it can be programmed (using blockchain) to operate according to the apps (called DApps) built on top of it.

The currency, Ether, pays for the computers on the world network to complete tasks. People buy and hold Ether, betting that it will become more valuable as more people want to use the network and need Ether to pay for its computing power.

The shared records of the Ethereum network – of every transaction and computation it has ever performed – are a blockchain, just as the shared records of all Bitcoin transactions are a blockchain. But Ethereum's blockchain database is totally independent of Bitcoin's blockchain. By keeping the blockchain decentralised, it can protect itself from outside meddling.

Ethereum itself and all the code that runs on it are public and open source. Wired magazine explains that if Ethereum users have the technical knowhow, they can verify how much they will be charged and see how secure the code is. “On traditional apps, users must blindly trust developers to charge them appropriately and protect their credit card information. On Ethereum, the need for security is shifted onto the users of the platform, which can be good if you understand it.”

Just as you do with Bitcoin, you can buy Ether from people who already own them on virtual currency exchanges.

It has not yet been decided how many Ether will ultimately be distributed but the number is likely to be around 100 million. So far, 97 million have been distributed.

Litecoin Market cap: $US8388 billion Supply: 55 million (max 84 million) High: $US366 (December 19)

Litecoin had a meteoric rise in 2017, beating Bitcoin and going up more than 5260%. Much of the rise, say the market experts, was based on the surge in interest around cryptocurrencies that saw people who thought the Bitcoin price was overdone spill into other currencies such as Litecoin.

Charlie Lee, a former Google engineer, founded Litecoin in 2011. It runs on blockchain, which is a public ledger of transactions that can't be tampered with. Litecoin “forked” off the Bitcoin ledger in late 2011 and was designed to complement the original cryptocurrency by being a faster and more lightweight version of Bitcoin. Litecoin claims a transaction takes a quarter of the time of Bitcoin.

This faster “mining” makes transfers quick and cheap, to anyone in the world. Litecoin uses script in its proof-of-work algorithm, a sequential memory-hard function requiring asymptotically more memory than an algorithm, which is not memory-hard.

“The vision is always I wanted Litecoin to complement Bitcoin – not compete,” Lee has said. “Bitcoin can be used for like moving millions of dollars between

banks, buying houses, buying cars. It’s really secure. Litecoin can be used for cheaper things”

Litecoin has a new system called LitePay, which is expected to take the cyber currency into the business world with financial institutions and businesses accepting payments in Litecoin instantly from anywhere. Litecoin says the blockchain is secure.

Litecoin’s supply cap is 84 million coins, four times that of Bitcoin.