Alternative Cryptocurrencies Thrive in Bitcoin's Shadow

The alternative cryptocurrency, created in October 2011 with a few tweaks to the Bitcoin protocol, has seen its value rise and fall in lockstep with bitcoin's.

As bitcoin has risen in prominence and in price and become more difficult to mine, new miners have rushed into litecoin as the next best thing - and purchased just about every available AMD Radeon graphics card, the most efficient way to mine litecoin.

"You can take Bitcoin open source code and make a couple tweaks, and you have an altcoin," said Greg Schvey, head of research for The Genesis Block, a New York research firm specializing in bitcoin.

Many of the alternative coins were created as "Intellectual experiments," Schvey said, ways to test out ideas for optimizing bitcoin.

Although many of the other cryptocurrencies are based on the Bitcoin protocol, not all are; the protocol for nxt, the cryptocurrency with the fourth-largest market cap, was written from scratch in Java.

Then there are coin systems built to work on top of bitcoin, such as mastercoin, which would allow people to assign to a bitcoin the value of any asset, such as gold or a company stock, and colored coins, which would allow one bitcoin to be distinguishable from other bitcoins.

Some of the altcoins have attributes that might turn out to be improvements over bitcoin, like litecoin's faster transaction speed; but Schvey pointed out that nothing would stop Bitcoin developers from incorporating such improvements or similar ideas into the Bitcoin protocol.

"In theory, litecoin is more vulnerable to botnets. It uses CPU/GPU for mining. Botnets already have a large number of compromised CPUs - and potentially GPUs - at their disposal. In contrast, due to the rise of ASICs, the overall hash rate of Bitcoin is astronomical compared with the mining capabilities of compromised CPUs/GPUs," Huang said.

It goes without saying that if investing in bitcoin is treading on untested financial territory, investing in a cryptocurrency that has hit the scene after bitcoin is even more uncertain.

In a 2011 post on Bitcoin Forum, Bitcoin Foundation Chief Scientist Gavin Andresen warned cryptocoin enthusiasts to thoroughly check out any new coin, just as he did when he first heard of bitcoin.