Bitcoin was the first widely used cryptocurrency, but there many more of the same kind about five of them

The Bitcoin

Bitcoin comes from miners who process and add transactions to the Bitcoin public record and get rewarded with Bitcoins for their efforts. Changes to the mining process are negotiated and when 80 per cent of miners agree, the change becomes mandatory.

This process has worked well because the miners have an interest in keeping a stable reliable system that does not drop in price or go into a bubble then crash. The value of a Bitcoin is set by the market, which is the shared delusion of market players as there is no backing to the currency.

In terms of risk it sits somewhere between the share market, which can drop significantly but seldom to zero, and the derivatives market where you can lose more than you invested.

While Bitcoin transactions are public the true identities can be hidden so it’s an easy way to purchase illegal goods or shift money around the world from one Bitcoin wallet to another and then to a normal currency. The low transaction fees and inability to track and tax money also appeals to some.

Litecoin

Litecoin is built on Bitcoin ideals but aims to have a wider range of miners with algorithms that do not give a great advantage to hi-tech miners. Tugs such as faster transactions and a bigger currency limit also help but the same problems that plague Bitcoin will also affect Litecoin.

Bitcoin can be converted into other currencies quite easily but it’s difficult with Litecoin and the other cryptocurrencies, so one has to change it to Bitcoin then a normal currency.

Peercoin

This coin has a built-in interest rate of 1 percent annually, which is trivial compared to exchange rate movements. Each transaction costs 0.01 Litecoin which does not suit high volume or low value trading.

Namecoin

It is built on Bitcoin technology but adds a parallel internet which is uncensored and outside government control.

As a result Namecoin is a much riskier option than Bitcoin, which does diminish Namecoin’s attraction.

Quarkcoin

In concept, Quarkcoin (or Quark) is close to Litecoin. It has faster transaction times than Bitcoin. Its security algorithms are much more advanced than Bitcoin and this means that normal PCs can be competitive in mining coins. Miners who buy expensive high speed machines for Quarkcoin will have much less of an advantage than those doing the same for Bitcoin.

What’s the importance?

The new cryptocurrencies dicussed are based on Bitcoin but all have added tweaks which may make them better technologies in the longer term. Bitcoin is by far the biggest with about $12 billion value which is some 16 times bigger than its nearest rival Litecoin.

In the long-term, a concern is the weakness of the SHA-2 encryption algorithm which is the basis of all cryptocurrencies above, with the exception of Quarkcoin.

When should you use a cryptocurrency?

If you are an investor who enjoys playing the market then all cryptocurrencies have a lot of ups and downs and if you get it right there is money to be made.

There is a lot of good theory about boom and bust in speculative markets. Expect to lose if you are not a knowledgeable investor who is familiar with charting and market psychology. Margin trading is already happening, so you can profit (or lose) on rises and falls in cryptocurrencies.

Fraud and other problems are common so be very careful and read a lot before you do anything.

If cryptocurrencies are like other speculative activities, the early players and the big players benefit to the disadvantage of the late entrants and the small players. Given the recent spike in cryptocurrency values we are most likely past the early entry stage.

The majority of cryptocurrency activity still appears to be speculative rather than usage as a currency. If this state of affairs starts to reverse then cryptocurrencies may do well; if not then the whole concept may die like the great South Sea Bubble.

Probably the biggest practical use for cryptocurrencies is in international money transfers where the overheads of credit card fees and currency exchange margins are ridiculously high.

Moving your Bitcoins into normal cash still attracts money of around 5 percent including buying and selling, so real savings will only be made if your destination is happy to work with Bitcoin.