Why are there so many cryptocurrencies? (with studies)

how many cryptocurrencies are enough

Cryptocurrencies are the next generation of currencies.

But why are there so many cryptocurrencies? Is it really necessary to have so many and why can’t there be only one?

There are so many cryptocurrencies because people have a different vision of how the perfect cryptocurrency should look like. Furthermore, the code of Bitcoin and the most crypto project is open-source, meaning people can download and modify it for free.

I know, I get it. It’s hard to decide to tell which cryptocurrency is the best. However, having more crypto projects to choose from is a good thing.

Open-source – Bad or good?

The reason why there are so many cryptocurrencies is that crypto projects are most of the time open source, meaning everybody can look into the code and copy it.

This has multiple advantages and disadvantages. Bugs can be found easier and fixed faster. People can implement new features based on the existing code and increase development speed. Most of the coins are just copies from others and they implemented their features based on that.

However, if other projects are copying an existing project, they are also copying the bugs and vulnerabilities. Even if the main project updates the bug or vulnerability, the other projects would have to update their project too, or the bug or vulnerability would still exist in their project.

Why can’t there be only one cryptocurrency?

Think of this problem like Google and other search engines like Bing, Yahoo or DuckDuckGo.

Google controls the entire market, but small projects try to beat the big player and want something from the pie.

It’s the same with cryptocurrencies. Bitcoin is a big player. Everybody is talking about Bitcoin, but other projects want to prove to the people, that they are capable of doing the job at least as same as good as Bitcoin or even better.

Having more cryptocurrencies is essentially not even a bad thing. It could be beneficial. All projects are competing against each other and want to prove to investors/crypto enthusiasts that their project is the best.

Let’s take Ethereum as an example. Ethereum recently announced to change its algorithm from Proof of Work to Proof of Stake. However, other cryptocurrencies have the Proof of Stake algorithm for years. Ethereum saw that the algorithm that other coins used was better and took the idea and made a different version of the Proof of Stake protocol.

Video about Vitalik Buterin (Founder of Ethereum) talking about Ethereum 2.0 (Proof of Stake implementation)

This proofs that competition in the market can be a good thing.

Can’t there be only one cryptocurrency like Bitcoin?

In my opinion, it would be a bad thing if only Bitcoin or Ethereum would exist. If there would be no competition, there is no need for improvement.

Let’s take Google for example. They still make updates to their ranking algorithm and improve it every year to hold the first place on being the best search engine on the market. If they wouldn’t update the algorithm, other search engines would probably beat Google in the long term and people would start using the other search engine.

The bad side of having so many cryptocurrencies

Having more coins to choose from makes it harder to tell which is a winner and which don’t. More coins mean that investors or crypto enthusiasts have to perform more research to identify which coin is better.

Sometimes, it makes it near impossible to tell which project is better.

Let’s take Ethereum vs. Bitcoin. People state that Bitcoin is better because it has a better reputation and a higher trading volume. However, Ethereum has soon the eco-friendly Proof of Stake algorithm and smart contracts, which makes the coin at least as good as Bitcoin.

As you can see, researching crypto projects is time-consuming and it can lead to frustration.

However, as I already mentioned, this makes the market competitive and forces coins to get better and improve their protocols or implement new technologies. On the other side, customers benefit from it because the quality of a project improves.

Innovation and different visions of other crypto projects

There are two main reasons why people/developers are publishing new cryptocurrencies:

  • Different vision of Bitcoin
  • Quick profits

Different vision of Bitcoin

This is the most essential thing to understand when it comes to why so many cryptocurrencies exist.

For instance, Ethereum thought that Bitcoin needed an update or improvement in his protocol. So, they developed smart contracts, which allows users to create tokens. Tokens are based on an existing blockchain and can be used for many different things.

Reddit announced recently that they would build a token on the Ethereum blockchain which is similar to their karma system. People can use Reddit tokens to buy premium memberships or other things on the Reddit platform.

Having the ability to create tokens is a great feature, but Bitcoin doesn’t have it. People and developers have different visions about how the crypto space should look like and which coins should be used for certain situations.

Quick profits

There are creators of cryptocurrencies that just have the intention to make quick profits and leave the coin to die out.

They want to scam people and want their money. Unfortunately, it happens frequently in the crypto space that somebody gets scammed.

Why?

Because it’s hard to tell which cryptocurrency is a scam coin and which doesn’t. Most crypto projects are build of promises that the coin will be good in the future and there are no regulations that the person who made the promise has to keep it. Therefore, he could take the money and if he is smart, he does it in a way that it’s not trackable.

Afterward, investors are frustrated because they got scammed.

The reason why small crypto projects are dropping so fast

As I already mentioned, some coins are just build to scam people. Therefore, these coins will die out quickly.

However, the crypto market is competitive. People are always arguing that there is ‘one’ coin which is the best and can do everything, but in reality, it’s just another cryptocurrency and they want to convince people to buy, so they make profits.

It becomes harder and harder for small crypto projects to succeed because people who got scammed by an altcoin project are not willing to invest in another small cryptocurrency. They would rather buy trusted and big coins like Bitcoin or Ethereum.

I should mention that there are great altcoin projects out there, however, they either have not the capital to invest in fast adoption or there is another bigger cryptocurrency that already has the same or a similar technology build in.

If you want to know why most cryptocurrency projects fail, click here to learn more.

Studies

I analyzed the top 1000 coins according to coinmarketcap. Here is what I found out.

Trading volume and why it matters

There are currently 233 coins that have a trading volume higher than 1 million of 24h. Trading volume is crucial for the crypto market because it makes it harder to manipulate the price.

The trading volume is the summary of buy and sell orders. In this scenario, the summary of buy and sell orders from the last day. Coins with small trading volume can be manipulated easier because attackers/traders only have to trade a smaller amount to increase the price of a coin.

However, this manipulation doesn’t hold long and the price will correct shortly after, but it could damage the reputation of a cryptocurrency project or even be the reason why people made huge losses.

Altcoin season vs. Bitcoin season

Altcoin season vs. Bitcoin season

(Source: coinmarketcap.com)

The graph shows that people made huge gains with altcoins in the bull run in 2017/2018. The Bitcoin dominance dropped from over 80% to 40% in only a few weeks and Ethereum nearly had the same market capitalization as Bitcoin at some point.

Altcoins and Bitcoin are a little bit seasonal. Why? Because if Bitcoin goes up, people are selling their altcoins and buy Bitcoin to not miss out on the opportunity. On the other side, if altcoins go up, people are selling Bitcoin to buy altcoins and make profits by holding altcoins for a short time.

The Bitcoin dominance never came back to 80% or above after the bull run. This indicates, that people are investing in other coins because they think other coins are better than Bitcoin.

Another reason why people are investing in other coins can be to diversify their crypto portfolio. It’s the same thing as in the stock market. People are investing in more than one project to diversify the risk of not losing all their money if one coin crashes. On the other side, they will not miss out on an opportunity because they invested at least a small amount in other projects that have potential.

Please note that I made the studies myself and it should not be used for investment purposes. It is just my opinion and I’m not a financial advisor.

Innovation has no end

There will always be a new crypto project that solves problems of Bitcoin or other big players like Ethereum. There is no limit to innovation and people will always find a way to make technology better.

In my opinion, developers will start using tokens more and more. They are easier to use because they are based on an existing blockchain. Therefore, the development time is less and there are fewer security problems.

In addition to that, tokens can even be used for even more things than just being a currency. Remember, cryptocurrencies want to be currencies or replace them. Tokens can be different and could have different use cases as the Reddit token does.

Conclusion

There are so many crypto projects because people have different visions of how the perfect cryptocurrency should look like. Bitcoin also has some disadvantages which developers try to solve with different solutions and their own coins.

In addition to that, most projects are open source and people can just copy the code. That makes it for scammers easier to scam people because they could create coin XY, make an ICO (Initial coin offering) and sell all their coins after the coin is listed on an exchange. However, being open source makes it easier for the projects to implement a tested and secure code in their projects.

Feel free to share this content. You can also tag FireStake at Twitter and I’m happy to respond.

Maximilian Groß

I'm a software engineer. I'm the owner of FireStake.com and know the crypto space since 2016. Furthermore, I share everything I learn about crypto on this blog.

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