Last year, investors saw history in the making. Not only did cryptocurrencies announce their coming out party in a big way by increasing their aggregate market cap by nearly $600 billion, but the better than 3,300% rise in market cap also just might be the single most impressive year for any asset class in history.
Even though bitcoin, the largest cryptocurrency by market, didn't lead the way in percentage gains last year, it's been the driving force behind the market as a whole. Let's not forget that bitcoin has rallied from less than $0.01 to over $11,000 per token in roughly eight years, is accepted by more merchants worldwide than any other digital currency, and is the virtual currency responsible for pushing blockchain technology into the spotlight. Blockchain is the digital, distributed, and decentralized ledger that underpins most cryptocurrencies and records all transactions without the need for a bank.
These four cryptos could unseat bitcoin
Today, bitcoin's market cap makes up just north of 40% of the cumulative digital currency market cap -- it had consistently comprised 75% to 95% until last year -- and it remains the most influential cryptocurrency. But that doesn't mean bitcoin's dominance will last forever. There are a number of cryptocurrencies waiting in the wings that could unseat bitcoin as the go-to medium of exchange and/or most influential digital currency. Here are four that may very well be the biggest threats to bitcoin.
Even though most folks view bitcoin and Litecoin to be in cooperation with each other, I believe that Litecoin is actually bitcoin's greatest competition. Not only have the number of Litecoin transactions per day been steadily rising as bitcoin's have remained range bound for two and a half years, but the Litecoin blockchain also has a number of advantages over bitcoin that could make it far more useful as a medium of exchange.
To begin with, Litecoin has implemented the Segregated Wireless (SegWit) upgrade to its blockchain. SegWit helped to improve capacity, lower transaction fees, and speed up processing times over its network, which may I add is already operating quicker and for less cost than bitcoin's. Litecoin can also process seven times as many transactions per second as bitcoin, and has a block rate of two and a hald minutes, compared with an average of 10 minutes for bitcoin. In short, Litecoin has much better capacity to expand its network than bitcoin.
It also shouldn't be overlooked that founder Charlie Lee is actively involved in Litecoin's development and merchant partnerships. Having an active participants like Lee is an intangible asset that bitcoin simply doesn't have.
In addition, while most cryptocurrencies are focused on their blockchain technology, Litecoin is predominantly focused on growing as a medium of exchange, like bitcoin. That makes it the most likely competitor, in my opinion, to unseat bitcoin.
Another potential competitor is Nano (formerly RaiBlocks), which could turn heads because of the sheer speed of its blockchain network. According to Nano, its blockchain is capable of processing about 7,000 transactions per second, which is currently the quickest of all cryptocurrencies, and close to a third of the transaction-per-second capacity of payment processing giant Visa.
The secret to Nano's success is the design of its blockchain: the block-lattice. Instead of utilizing a central blockchain that requires consensus and can slow down decision-making, each user on the network has a personal blockchain that he or she controls. With users being able to make changes on their own blockchain without the need for consensus, the network should, in theory, be exceptionally scalable and shouldn't bog down performance as new users are added.
The downsides for Nano, if there are any with these processing speeds, is that the process of completing a transaction is repetitive -- it actually requires two transactions, one where a sender deducts money from their account, and one where the receiver adds funds to their account -- and it's yet to land any major partners. Further, Nano is geared more as an enterprise network than a medium of exchange. Still, as the fastest cryptocurrency network around, it may gain interest from merchants and businesses alike.
Another impressive cryptocurrency that has a genuine opportunity to supplant bitcoin at some point in the future as a medium of exchange is Stellar and its Lumens coin. Stellar brings three attractive qualities to the table that consumers and businesses would appreciate.
First, Stellar offers a relatively quick processing time, with the claim that it settles most transactions within two to five seconds. The true value of these quick validation and settlement times is in cross-border payment instances, which can often be held up for days with the current banking system.
Second, Stellar incorporates smart contracts into its blockchain, just like Ethereum. A smart contract involves protocols that help validate, facilitate, or enforce the negotiation of a contract. In other words, it's a digital, more legally binding contract that businesses often use to determine when an action should occur, such as when money should be spent, or when new product should be ordered. Without paper, smart contracts make things a lot more efficient.
Finally, Stellar has demonstrated that it can partner with the big boys. In October, Stellar announced that it had partnered with IBM (NYSE:IBM) in the South Pacific region in a cross-border remittance project run on IBM's blockchain. The test involves a dozen major South Pacific banks and Stellar's Lumens coin, which is being used as the intermediary currency between countries on the network. If it's good enough for IBM, it might just be good enough for merchants and consumers as well.
Perhaps the long shot of the bunch, but nevertheless a real contender to supplant bitcoin as a medium of exchange, is Ripple.
While not as fast as the Nano network, Ripple has suggested that its blockchain can process up to 1,500 transaction per second, which is considerably faster than bitcoin. More importantly, Ripple has thus far demonstrated that it can maintain these processing speeds with more and more financial institutions being added to RippleNet. With nearly instantaneous transaction validation and settlement, along with transaction fees that are just a fraction of a cent, Ripple has all of the tangible qualities that would make it a contender.
Like Stellar, Ripple has plenty of high-profile partners. It's working on a cross-border project with American Express and Banco Santander for real-time remittances, is testing cross-border transfers with MoneyGram International, and is having its XRP coin used by SBI Holdings' newly launched digital asset exchange.
The biggest knock against Ripple is that it's primarily geared toward being a solution for the financial services industry and not necessarily a means of buying goods and services. Still, with the XRP among the daily transaction leaders in terms of transactions conducted per day, its adoption as a medium of exchange wouldn't exactly be a stretch.
Sean Williams has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool owns shares of and recommends Visa. The Motley Fool is short shares of IBM. The Motley Fool recommends American Express, but has no position in any cryptocurrencies mentioned. The Motley Fool has a disclosure policy.