Why Virtual Currency Is Here to Stay - Bitcoin or No Bitcoin

You'd better start getting used to the idea of virtual currency.

While the much talked about Bitcoin is the most prominent and widely used virtual currency, it is not the only one.

Bitcoin is not even the first, as the earliest digital currencies emerged as far back as the early 1990s (most of them are long gone).

Today there are more than 80 kinds of virtual currency, with an array of odd names like feathercoin, bbqcoin, fireflycoin, and zeuscoin.

They're called virtual currency because they don't exist in the physical world as coins or paper bills. They only exist in cyberspace.

But the fact that there are so many types of virtual currency shows that this is a concept that is not going away.

And while critics like to point out that a virtual currency is backed by nothing, like gold or a national government, and has no intrinsic value, they can serve an important purpose.

A successful virtual currency enables the transfer of money between parties anywhere in the world without the need for intermediaries like banks or payment processors or the fees they like to charge.

And a decentralized digital currency like Bitcoin is also outside the control of any central bank or government.

Virtual Currency Still in its Infancy

Still, the era of virtual currency is just getting started and is littered with the bones of its pioneers. Many early efforts from the 1990s, such as Beenz and Flooz, fell victim to fatal flaws in their design.

More recently, in May of this year, the U.S. government shut down the virtual currency Liberty Reserve after an investigation showed it was used almost exclusively by criminals around the world to launder money.

And yet the digital currencies continue to grow in popularity, a testament to the power of the concept.

Bitcoin itself is a great example of the resiliency of the ideas driving virtual currency. Over its five-year history, it has endured several crashes in the Bitcoin prices, but has recovered in each instance to reach new highs.

And while Bitcoin has the advantage of being the dominant virtual currency right now, that by no means guarantees it will win out as the digital money of the future.

A lot of very smart, innovative programmers continue to work to improve upon the virtual currency concept, building on existing currencies and seeking to correct what they see as flaws.

In fact, quite a few of the new digital currencies that have emerged in the past couple of years are based on Bitcoin, but with significant tweaks.

But the world does not need or want 80 digital currencies. Consolidation is inevitable, and nearly all of them will eventually fall away. Only a handful will survive.

So the only question is, which ones?

Here are the top candidates...

The Digital Currencies Most Likely to Succeed

  • Bitcoin: For now, the top candidate to emerge as the world's main virtual currency has to be Bitcoin. It's gotten a great deal of attention over the past year, and far exceeds the value of all other digital currencies. As of today (Friday), the total value of the Bitcoin market is $8.79 billion, while the combined value of the other major digital currencies was in the neighborhood of $310 million. More importantly, a number of startups, such as Coinbase and Bitpay, have structured their businesses around the Bitcoin economy. Such startups have attracted $12 million in venture capital in the second quarter of 2013 alone. With that kind of money behind it, a surge in interest from Chinese investors, and Wall Street rumored to be sniffing around as well, Bitcoin is the odds-on favorite.
  • Litecoin: The brainchild of former Google Inc. (Nasdaq: GOOG) programmer Charlie Lee, Litecoin is Bitcoin's little brother. Like many other nascent digital currencies, Litecoin is based on Bitcoin code, but differs in that it processes transactions four times faster. It is the second-most valuable virtual currency at $234 million. Litecoins are also created at a faster rate and have a maximum limit of coins four times that of Bitcoin. "The idea was to create silver to Bitcoin's gold," said Lee, now a software engineer at Coinbase. "I wanted to create something that was a bit cheaper in value and easier to transact."
  • Ripple: This virtual currency, which is more of a hybrid digital currency and online payment system, has the best chance to dethrone Bitcoin. Ripple was founded by former Bitcoin developers as a next-generation virtual currency. It not only allows payments through cyberspace, but in the process provides cheap and easy conversions between itself, other digital currencies, and even government-issued fiat currencies. Like Litecoin, Ripple is much faster at processing payments than Bitcoin. And there's some money behind Ripple, too - last week the company in charge of Ripple's development announced $3.5 million in financing from six investors.
  • ???coin: With the virtual currency universe so young and unsettled, don't count out the possibility that a yet-to-be invented digital currency will become the de facto standard. Remember, Microsoft Corp. (Nasdaq: MSFT) was not the first or only vendor of operating systems back in the early days of the PC, but only emerged the winner after its landmark deal with IBM Corp. (NYSE: IBM). With Litecoin and Ripple both proving that much more innovation is possible, a completely new entrant could become the iPhone of virtual currency and sweep away everything that came before it.

Editor's Note: Michael Robinson, Money Morning's Director of Technology Investing, is getting ready to release the most comprehensive Bitcoin guide ever created. This guide covers Bitcoin A to Z. Not only does it give you the full history of Bitcoin and the technologies driving it... it also serves as a step-by-step "how-to" manual for putting into action the best Bitcoin investing opportunities. If you would like to receive this guide for free as soon as it's available, just sign up below. You'll also get Michael Robinson's weekly updates from Strategic Tech Investor, where you'll learn about the best technology investing ideas on the planet right now.

More on Bitcoin: Federal Officials Give Bitcoin Market the Nod of Approval It Needed

Related Articles: