At the time of writing, there are 2,380 cryptocurrencies listed on coinmarketcap.com. That is more than all the different types of fiat currencies in the world. The question many people ask is, why are there so many of them? Just 10 years ago, there was only Bitcoin. Now we have a cryptocurrency in virtually every sector of the economy.
All these cryptocurrencies aim for, is to leverage blockchain technology to revolutionize areas as diverse as finance, health, energy, data storage, privacy and security, machine learning, payments, social networks, supply and logistics, and content ownership.
So, with so many cryptocurrencies already existing, what are some of the possible reasons for this scenario?
Many cryptocurrencies, different functionalities
The main reason for the recent surge in cryptocurrencies is because each represents a specific blockchain project. Given this, there are several kinds of cryptocurrencies:
A coin is a cryptographic currency that stores value. Bitcoin is the most well-known, however, there are other similar cryptocurrencies that serve as digital money such as Litecoin (LTC) or Zcash (ZEC).
A token is a digital asset – issued by a specific project – that can only be used as a payment method within its ecosystem. Tokens are similar to coins, however, the main difference is that it enables the holder to participate in the project’s network. There are two types of tokens:
- Utilities: Utility tokens have a specific use case inside the project. The most famous one is Ethereum (ETH) because it allows other smart contract developments to be built on its network.
- Securities: In a nutshell, securities profit exclusively from the work of the promoter or third parties. They tend to be heavily regulated, which diminishes the potential for fraud or scams. Some of the most well-known tokens are Blockchain Capital (BCap), 22X Fund and Slice.
That explains why there are so many cryptocurrencies. Again, no one really controls blockchain technology. Anyone who has the knowledge about how the technology works can use it to develop their own virtual currency.
Looking back at the development, Satoshi Nakamoto was the first to use blockchain technology to create Bitcoin. But soon after, other developers realized they too could exploit the same technology to develop a better “version” of the original. And so experts like former Google engineer, Charlie Lee, helped to create Litecoin, one of the very first altcoins. It didn’t stop with him. Soon, a litany of others followed, all trying to build something similar or better than Bitcoin.
The massive returns
Another explanation as to why there are so many cryptocurrencies relates to the huge success enjoyed by Bitcoin and a few of the altcoins. When Bitcoin was first created, not many people paid attention. It had no value, and many disregarded it or didn’t bother to find out what it was.
However, its value continued to appreciate over the years. Even Ethereum was almost worthless up until early 2017. This is despite the massive returns those who invested in the Ether token received.
Yet, come 2017, Bitcoin and almost every other altcoin boomed. People became overnight millionaires, as Bitcoin rose to about $20,000 per BTC at its all-time high. Suddenly everybody knew what was happening. There is now a wealth of information online about cryptocurrencies, and ways to easily purchase different coins.
In simple terms, a fork is a process in which a cryptocurrency is branched into another blockchain. While forking may not be the core reason for the wealth of different cryptocurrencies, it is still a factor. Bitcoin, for example accounts for at least four known cryptocurrencies that “branched off” it. These include Litecoin, Bitcoin Cash, and Bitcoin Gold. Litecoin has Litecoin Cash; Ethereum Classic (ETC) and Ethereum (ETH). Even newer coins are being forced to create new cryptocurrencies. A very good example is Zcash that now has resulted in Zclassic (ZCL) and then a twin fork between ZCL and Bitcoin resulting into Bitcoin Private.
Innovation continues to open space for more cryptocurrencies
Cryptocurrencies keep on increasing due to the nature of innovation and our desire for constant improvement. One way of thinking of this, is to look at the example of the millions of apps that providers like Apple or Google have. Many of them do essentially the same thing, but we still end up having many of them. Imagine an app that streams music, for instance. There isn’t just one, but hundreds of them. We love some and dislike others. Still, many others keep on being developed, time and time again.
This is what cryptocurrency is like. For example, although we have cryptocurrencies with smart contracts that essentially work in the same way, more and more continue to emerge. What they do is tweak elements in the protocol, and promise the next revolutionary smart contracts platform. Think of Ethereum as the best platform for Smart contracts. Now there are numerous platforms with tokens that run the same type of network. NEO – the Chinese Ethereum, Cardano – the Japanese Ethereum, Stellar, EOS to name just a few, are all competing to catch up with Ethereum. If you are still wondering why there are so many cryptocurrencies, think along these lines.
The ICO boom
The ICO boom is also one possible reason as to why there are so many cryptocurrencies. The success of some of these token sales has only served to spur on more token sales. This has made even easier due to the lack of regulatory checks on the ICO ecosystem. In the end, these coin offerings get listed on trading exchanges as crypto tokens. The first coin offering is recorded as Mastercoin, which was held in 2013. Soon, others followed, spurred on by the success of crowd sales like those of Ethereum, NXT, IOTA, and Stratis, to name but a few.
An ICO in the financial industry is followed by another in the supply and logistics sector, gaming industry, insurance and so on. Without a doubt, the end product is a proliferation of cryptocurrencies.
While some ICOs are built on host platforms like that of Ethereum, many others are launching their own blockchain platforms. Each has a native currency upon which network transactions are based. So, if we have a thousand successful ICOs, we definitely will have a thousand cryptocurrencies. Never mind that so many others fail to make it out of the planning chamber.
Having several thousand cryptocurrencies isn’t a bad thing. However, the role each plays in the advancement of society is what matters. There are those whose main objective is to be used as speculative tools. If that is the driving force behind all or most of them, then I am sure many will fade along the way, mostly when the bubble finally bursts. In the end, we may have none or just a handful that will achieve mainstream adoption.