If you’ve decided crypto is right for your portfolio, choosing which cryptocurrency to buy can involve juggling a lot of details. To make the comparison process simpler, here’s a brief summary of the important attributes of some of the largest cryptocurrencies. For each, we’ll discuss key characteristics, as well as potential pro and con arguments.
Bitcoin
Bitcoin’s key attributes:
- The first and currently largest cryptocurrency by market cap.
- Launched in 2009 by pseudonymous founder Satoshi Nakamoto.
- Total supply is capped at 21 million bitcoins.
- Runs on a proof of work consensus mechanism.
- Undergoes a halving approximately every 4 years.
- Aims to be a functioning currency and store of value (an asset investors believe will maintain its value over the long term).
Bitcoin’s potential pros
- Supporters argue that it is the cryptocurrency that’s most likely to survive in the long run. They believe it’s the most decentralized cryptocurrency (meaning it’s owned and controlled by a network of independent individuals or organizations, instead of a single entity), given its lack of a central developer team, as well as the energy requirements of its proof of work mining system, which make it difficult for any one entity to control the blockchain.
- They also believe it has insurmountable brand recognition, as it has achieved a level of institutional adoption no other cryptocurrency currently has (for example, several corporations and a world government now hold bitcoin as a reserve asset).
- Supporters believe that these elements, combined with its hard cap of 21 million units, make bitcoin the best hedge against inflation. If international inflation continues to rise, they predict people everywhere will turn to bitcoin as a store of value.
Bitcoin’s potential cons
- Critics argue that the Bitcoin network’s proof of work system makes it impractical to be used as a functional currency. For example, the Bitcoin network takes about 10 minutes on average to create a new block on its blockchain, whereas the Ethereum network (which runs on proof of stake) currently takes about 12 seconds.
- They also argue using bitcoin (and cryptocurrencies in general) requires people to understand complexities (e.g., crypto cybersecurity, how to transfer coins without losing them forever, tax considerations). These hurdles may make it difficult for bitcoin to truly achieve mainstream adoption, compared to more traditional inflation hedges.
- Proof of work systems require a lot of energy to maintain. Critics contend that the impact on the environment isn’t worth the value to society that bitcoin provides, though advocates believe an increasing amount of renewable energy is used to run the network.
Ethereum
Ethereum’s key attributes:
- Founded in 2013 by Vitalik Buterin.
- Currently the second-largest cryptocurrency by market cap.
- Unlimited total supply.
- A portion of the supply is burned (i.e., destroyed; removed from circulation) following each transaction, with the goal of preventing inflation.
- Runs on a proof of stake consensus mechanism.
- Periodically undergoes upgrades initiated by its development team.
- Allows third-party applications to be programmed with its infrastructure.
Ethereum’s potential pros
- Supporters believe the Ethereum network can become the go-to platform for developers and entrepreneurs to launch new crypto projects. They see its proof of stake consensus mechanism as nimble compared to proof of work (as it requires less energy and processes transactions faster), making it more practical for innovation to occur.
- Supporters also believe the network’s proof of stake model and burning mechanism (after each transaction, the network removes a variable number of coins from circulation) could make its currency deflationary (in contrast to critics, who believe its uncapped supply will result in inflation).
- The Ethereum network is led by founder Vitalik Buterin and the Ethereum Foundation. Advocates hold this team in high regard and are optimistic they will be able to build the ETH ecosystem into an indispensable part of crypto’s future.
Ethereum’s potential cons
- Critics argue that the Ethereum network may be too centralized (i.e., vulnerable to being controlled by a single or small number of entities), which goes against what many see as a core tenet of cryptocurrencies. In addition to its centralized development team, Ethereum’s proof of stake model may pose additional risks of centralization.
- They also argue that its uncapped supply is a slippery slope toward inflation. They believe its burning mechanism won’t be enough to overcome what they see as poor tokenomics. Critics who hold this view are likely to champion cryptocurrencies with a fixed supply that can’t be changed over those with no supply cap.
- While supporters champion the Ethereum network for its relative efficiency compared to proof of stake models, critics contend that there are other crypto networks that are even more efficient. They believe that Ethereum could eventually be abandoned in favor of faster networks.
Litecoin
Litecoin’s key attributes:
- Launched in 2011 by computer scientist Charlie Lee as a fork from the Bitcoin blockchain.
- Total supply is capped at 84 million litecoins.
- Runs on a proof of work consensus mechanism.
- Undergoes a halving approximately every 4 years.
- Aims to be a functioning currency and store of value (an asset investors believe will maintain its value over the long term).
- Features a unique privacy function that protects wallet information.
Litecoin’s potential pros
- Litecoin supporters agree with bitcoin’s vision, but argue that it needs to be more efficient. They believe litecoin can be a leaner, faster version of bitcoin thanks to its unique algorithm, which allows it to process transactions in roughly 2.5 minutes (versus bitcoin’s 10-minute average).
- They also praise its MWEB feature, which makes it so that only the sender and receiver can see this information. For many cryptocurrencies, sending someone a payment means anyone can see the amount of crypto in both the sender and receiver’s crypto address, which some argue raises questions regarding privacy.
- Apart from these differences, litecoin shares many similar attributes with bitcoin. This includes a proof of work consensus mechanism and a halving that takes place every 4 years.
Litecoin’s potential cons
- Critics argue that the Litecoin network’s relative speed compared with networks like Bitcoin is accomplished by sacrificing security. Proof of work blockchains typically achieve greater speed by making mining puzzles (what miners must solve to add data to a blockchain) less complex, which means they require less time and energy to solve. Critics argue this makes it potentially cheaper for a cybercriminal to control a majority of the mining power and take over the blockchain.
- Despite its similarities to bitcoin, litecoin lags far behind bitcoin in terms of adoption. Bitcoin is currently the largest cryptocurrency in market cap, whereas litecoin doesn’t crack the top 10. Moreover, many who use litecoin as a medium of exchange often convert their holdings to bitcoin as a store of value.
- While advocates champion litecoin’s relative speed compared to bitcoin, there are other cryptocurrencies that can process transactions even faster. Litecoin transactions take 2.5 minutes on average, but other networks can get the job done in just seconds.
What to consider when evaluating cryptocurrencies
For a more in-depth look at the arguments presented above, review the basics on tokenomics, consensus mechanisms, and crypto volatility.
Also remember that crypto can be volatile, and managing your holdings requires understanding crypto cybersecurity. In general, crypto may be more susceptible to market manipulation than securities, and direct investments in crypto do not benefit from the same regulatory protections applicable to registered securities. Also, the future regulatory environment for crypto is currently uncertain.
In light of this, if you've decided crypto is right for your portfolio, you should only buy crypto with an amount you can afford to lose.