Historically, the stock market has been the greatest creator of long-term wealth, with an average annual gain, inclusive of dividend investment and adjusted for inflation, of 7%. This would imply the opportunity for invested funds to double in value about once every decade.
However, cryptocurrency investors have laughed their way to the bank over the past year, with virtual currency valuations going through the roof. When 2017 began, the aggregate value of all cryptocurrencies combined was just $17.7 billion. By Jan. 4, 2018 (369 days later), the combined market cap of all 1,384 investable cryptocurrencies had soared to $774 billion. That's an increase in value of close to 4,300%, and it's a return the broad-based stock indexes would take decades to deliver.
Objects in the rearview mirror are getting closer
Bitcoin, the world's most valuable cryptocurrency by market cap, and the digital coin accepted by more merchants than any other virtual currency, is often credited with being the impetus for this rally. After all, bitcoin was the first to bring blockchain technology -- the digital, distributed, and decentralized ledger that underlies cryptocurrencies -- into the mainstream, and was the first actively traded digital currency on decentralized exchanges.
But, truth be told, the rally in recent months has been about far more than just bitcoin. In fact, bitcoin's dominance in relation to the aggregate cryptocurrency market cap is about as low as it's ever been at 34%, suggesting that the valuations of other virtual coins are growing at a much quicker pace than bitcoin's. In fact, the aggregate value of all cryptocurrencies, excluding bitcoin, has jumped from $2.24 billion on Dec. 31, 2016 to $522 billion as of Jan. 4, 2018, according to CoinMarketCap.com. That's a better than 23,200% increase in just over a year's time.
The search for the next bitcoin has investors and speculators pushing a number of digital currencies higher. However, only four, in my opinion, currently have the "tools" needed to surpass bitcoin's market cap in the intermediate term.
The two likeliest candidates to surpass bitcoin
Two of the likeliest cryptocurrencies to surpass bitcoin's market cap are Ethereum and/or Ripple, which just so happen to be third and second, respectively, in cryptocurrency market cap at the moment.
What makes Ethereum so special is its blockchain, and the number of organizations currently testing out that blockchain technology in some capacity. Ethereum's digital ledger incorporates protocols known as "smart contracts," which help to verify, facilitate, or enforce the negotiation of a contract. Smart contracts are particularly attractive from an efficacy and legal standpoint for businesses, which is why the Ethereum Foundation has had little issue finding takers to test out its technology. Ethereum's blockchain also moves beyond bitcoin's currency-only applications, which is why so many different industries are interested in what Ethereum has to offer.
In February, the Enterprise Ethereum Alliance was formed, and by Oct. 18, 2017, exactly 200 organizations from a variety of industries were testing a version of Ethereum's blockchain in small-scale and pilot projects. This includes a number of brand-name companies, as well as governments. If we begin to see wider acceptance of the Ethereum blockchain in real-world applications (i.e., beyond pilot projects), there's a real chance it could surpass bitcoin's market cap.
Ripple might even be a bigger threat to bitcoin, with the second-largest cryptocurrency behind bitcoin needing only to double once more in order to surpass it.
Like Ethereum, all eyes are on Ripple's blockchain technology, which is being specifically targeted at big banks and financial institutions. Ripple's exceptionally low transactions fees and quick settlement times are designed to be a major upgrade over the long-winded verification process payments go through with the traditional banking system.
Though Ripple announced in June 2016 that seven large banks would be testing out its blockchain technology in a limited capacity, it really gained notoriety in November 2017 when American Express (AXP -1.10%) and Banco Santander (SAN -0.84%) announced their intention to use Ripple's blockchain in a real-world test. The partnership will allow U.S.-based American Express users who send non-card payments to U.K. Santander accounts to have those payments processed through Ripple's blockchain. It's believed that these transactions will settle instantly, which is far quicker than what happens with current cross-border transactions, where the verification process can take days.
Ripple has also benefited from rumors surrounding its presumably inevitable listing on Coinbase, the world's most popular cryptocurrency exchange. Assuming it does get listed soon and manages to snag new banking partners, it could give bitcoin a real run for its money.
Two dark-horse candidates that could really surprise and surpass bitcoin
There are also two dark-horse candidates that could do exactly what Ripple has done and emerge from the shadows to make a run at bitcoin.
As with Ripple and Ethereum, Stellar's blockchain technology is the star. Stellar's blockchain offers quick processing times on its network of between two and five seconds for most transactions, which again would be a major improvement over the extended verification times often seen in cross-border payments.
Stellar's blockchain also incorporates its own version of smart contracts. Again, Stellar is making it clear that its blockchain is designed for enterprise customers and targeted at cross-border scalable applications.
But unlike Ripple and its laser focus on big banks, Stellar is approaching its search for scalability by seeking out multinational businesses. In October, IBM (IBM -1.99%) and KlickEx partnered with Stellar to facilitate cheaper and quicker cross-border transactions in the South Pacific region. This partnership involves a dozen international banks, representing multiple different currencies, developing and deploying Stellar's blockchain. The idea here being that IBM, which generates tens of billions of dollars each year outside the U.S., can receive payments from customers and have those payment process almost instantly, instead of waiting days for them to settle.
Assuming this project proves fruitful for IBM, "Big Blue" could choose to expand its application to other parts of the world. This is Stellar's chance to shine, and if it does, it may have a shot at garnering new partnerships and toppling bitcoin in the process.
Though it's the smallest of the four at the moment, with a market cap that's almost $250 billion behind that of bitcoin, Monero has the potential to really turn heads and supplant bitcoin as the largest cryptocurrency.
Why Monero, you ask? Look no further than the tremendous surge in interest for privacy coins of late. A privacy coin is nothing more than a virtual currency that's placed an increased emphasis on the privacy and anonymity of the sender and receivers of virtual funds.
Many cryptocurrency users falsely believe that because their logged data is stored in an encrypted fashion on a digital ledger that it can't be traced back to them -- but this just isn't true. In fact, the Internal Revenue Service recently won a legal battle against Coinbase that required the cryptocurrency exchange to turn over information on 14,355 users who'd exchanged more than $20,000 worth of bitcoin between 2013 and 2015. Though the IRS's legal win was for the purpose of catching capital-gain tax evaders, the broader theme here is that blockchain transactions often aren't as anonymous as you'd think.
Monero employs an open-sourced protocol known as CryptoNote that uses ring signatures to obscure the sender of a payment. Ring signatures are akin to having multiple signers on a joint bank account, but without knowing who the official signer is. Each transaction on Monero's blockchain generates a one-time spend key known as a stealth address that allows only the recipient to detect and spend those funds.
If privacy coins remain popular among cryptocurrency investors, and Monero lands a major partner, it could come out of nowhere to leapfrog bitcoin.