Cryptocurrency has been on a tear recently, as government spending and liquidity from the Federal Reserve flood the financial system. That’s helped cause a run-up in popular digital currencies, including Bitcoin, Ethereum and (perhaps surprisingly) Dogecoin. But the move is also fueled by rising speculation that cryptocurrency is the “must catch” wave of the future.
What cryptocurrencies have in common
Cryptocurrencies are built using what’s called blockchain technology, which uses a distributed ledger to produce, track and manage a digital currency. Think of it like a running digital receipt of all the transactions in the currency, including a list of who owns which currency and how much.
This “receipt” is being constantly verified by a decentralized network of computers, helping to prevent fraud and ensuring the proper functioning and accounting of the currency.
Cryptocurrency is “mined” by powerful computers called miners that perform complex math calculations to create coins. They also earn coins by processing transactions of the currency.
Thousands of cryptocurrencies exist, and literally any number could be created using similar blockchain technology. Cryptocurrencies allow the user to move money semi-anonymously, though the FBI and IRS are getting better at tracking transactions and freezing accounts.
Key differences among three popular cryptocurrencies
Cryptocurrencies can be created for many different purposes, and each may occupy different parts of the crypto universe. The table below sums up some key differences among Bitcoin, Ethereum and Dogecoin, each of which has a distinct purpose and maximum number of coins.
Purpose of the cryptocurrency
Each of these three cryptocurrencies was created for a different purpose. Notably Dogecoin was a satire on the rising popularity of Bitcoin and the doge meme featuring a charismatic Shiba Inu. Meanwhile Bitcoin and Ethereum were created for more serious purposes, including actually facilitating transactions or acting as a store of value.
The market capitalization of each consists of the total extant coins multiplied by the current trading price, and there’s a wide divergence. Bitcoin is the largest, with Ethereum trailing a distant second and Dogecoin among the top 10, according to CoinMarketCap. Traders cluster around the most popular cryptocurrencies and volume drops significantly below the top 20.
While these currencies may be among the most popular for traders, Bitcoin is the one that’s emerged among the mainstream. It’s becoming easier to access Bitcoin, with multiple ways to purchase or store the currency that piggyback on existing apps such as PayPal or Robinhood.
It’s also useful to note how many coins can be issued in each cryptocurrency. Many traders have flocked to Bitcoin because of its hard limit on issuance, just 21 million. If money continues to flow into Bitcoin and demand rises, this fixed limit virtually ensures that the price will rise over time. While that may be good for traders, it makes Bitcoin harder to use as a currency.
In contrast, Ethereum’s issuance is unlimited, but it has a fixed issuance schedule, which may slow the production of new coins. Meanwhile, the production of Dogecoin is unlimited, which is part of the joke. That unlimited issuance hasn’t seemed to stifle the currency from skyrocketing in 2021, rising from about a half-penny a coin on Jan. 1 to around $0.32 by the end of April.
If you’re considering trading cryptocurrencies, it’s valuable to understand that they’re not all created equal. Some features such as Bitcoin’s limited issuance may make a currency more attractive than others, at least over a longer period of time. But in the short term cryptocurrency is driven by sentiment, so even something created as a joke and with unlimited issuance may rally hard if a swell of interest sweeps in. “Much wow,” as a famous doge meme might say.