Bitcoin Vs. Litecoin Vs. Dogecoin: Comparing Virtual Currencies

Cryptographically secure virtual currency exploded onto the scene in 2009 with the introduction of Bitcoin by Satoshi Nakamoto, the mysterious, and likely pseudonymous, developer of the currency. In the years since, Bitcoin has become the best-known, most widely circulated digital money in history. Bitcoin, with its technological design, has also inspired the development of many hundreds of other virtual currencies. In February 2016, more than 500 virtual currencies are traded in digital markets around the world every day. Few, however, come close to Bitcoin in influence, supply, trading volume or market capitalization.

Among the hundreds of virtual currencies available as of 2016, Litecoin and Dogecoin are two of the most influential alternatives to Bitcoin. Like Bitcoin, Litecoin and Dogecoin are decentralized, cryptographically secure digital currencies enabling peer-to-peer payments between any two people in the world without relying on government or regulatory oversight. Bitcoin supremacy seems certain to continue, even as the currency faces substantial growing pains; however, both Litecoin and Dogecoin also appear likely to continue as viable alternative digital currencies going forward.

Decentralized digital currencies, such as Bitcoin, Litecoin and Dogecoin, utilize cryptography and a public transaction ledger, known generically as a block chain, to ensure the security of peer-to-peer transactions. The Bitcoin block chain, for example, contains a record of every Bitcoin transaction since the currency's initiation in 2009. Sharing of this block chain occurs across the network so that every user with Bitcoin software can verify the past and current balance of every other Bitcoin user account on the network. Secure cryptographic methods protect the validity and the order of transactions in time within the block chain, ensuring that all Bitcoin accounts are accurate and current.

The transfer of bitcoins or another cryptocurrency from one user to another is also cryptographically protected. When a user sends bitcoins, a secret piece of data called a private key, which is known only to the user, adds a cryptographic signature to the transaction, proving to the rest of the network that the user authorized the transaction. The cryptographic signature also protects transactions from future alteration. Once a user initiates a transaction, the details begin broadcasting across the network. Before the transaction can be finalized in the block chain, however, other users on the network must complete a confirmation process known as mining.

Mining is a computer hardware-intensive, number-crunching process that cryptographically confirms transactions and inserts them into the block chain in proper chronological order. Once the mining process confirms a transaction, it is added to the distributed block chain and the transaction is complete. The process of mining is an optional activity on the Bitcoin network. Mining is in fact a competitive business. When a user successfully completes confirmation of a transaction block and that block is added to the block chain, the successful user receives a predetermined amount of newly created cryptocurrency as a reward for her efforts, in addition to an optional transaction fee paid by the user who initiated the transaction. The reward incentivizes the mining and ensures the continuing security of the cryptocurrency system.

Since its launch in 2009, Bitcoin has reigned as the world's most popular and widely accepted cryptocurrency. In 2015, the number of private merchants accepting payment in Bitcoin surpassed 100,000 for the first time. Retail purchases remained a small part of the payment network's overall transaction volume, which peer-to-peer payments dominate. According to an analysis by the U.S. Federal Reserve, worldwide retail payment volume averaged fewer than 5,000 bitcoins per day in February 2015, roughly 2.5% of the total transaction volume during the period. At the time, 5,000 bitcoins were worth about $1.2 million.

As of Feb. 2, 2016, 1 bitcoin is worth $374 on the open market. Prices adjust continually according to supply and demand, just like any market-determined exchange rate between two fiat currencies. Bitcoin payment volumes fluctuated between 180,000 and 240,000 transactions per day in the two weeks prior to Feb. 2. More than 15 million bitcoins are in circulation, giving the currency a dollar-denominated market capitalization approaching $5.7 billion. The Bitcoin system is designed to continually reduce the reward associated with Bitcoin mining until the supply of bitcoins grows to 21 million, which is a limit programmed into the system. Thereafter, miners must rely solely on transaction fees to pay for their efforts.

Charles Lee, an MIT graduate and former software developer at Google, launched Litecoin in 2011. The Litecoin cryptocurrency system is based substantially on the Bitcoin peer-to-peer protocol, with several technical differences designed as improvements over the Bitcoin system. The main technical difference noticeable to casual users is a reduction in the time it takes to process transactions. A Bitcoin transaction takes around 10 minutes to confirm, while Litecoin transactions take 2.5 minutes. Like bitcoins, litecoins are created through the mining process; however, Litecoin creation is capped at 84 million units, four times as large as the Bitcoin cap.

As of Feb. 2, 2016, 1 litecoin is worth just more than $3 on the open market. Payment volumes fluctuated between about 4,000 and 9,000 transactions per day in January, a fraction of the daily volume occurring on the Bitcoin network. The total number of litecoins in circulation exceeds 44 million. In dollar terms, the Litecoin market capitalization is nearly $136.5 million. Although hard figures are unavailable, it is safe to say that Litecoin is much less prevalent in retail environments than is Bitcoin. Thus, Litecoin continues primarily as a peer-to-peer payment system at the time of this writing, and it is likely to continue as such unless it gains in popularity in the coming months and years.

Launched in December 2013, Dogecoin began as something of a joke but progressed into a full-fledged cryptocurrency based on the Bitcoin system. It is named after Doge, an Internet meme combining pictures of a Shiba Inu dog with fragments of broken English. Dogecoin differs from Bitcoin and Litecoin in several respects. Most significantly for end users, Dogecoin miners require only about 1 minute to confirm a transaction, substantially less time than both its competitors. Additionally, the Dogecoin system has no cap on the number of dogecoins that users can mine. As long as miners continue operating, the Dogecoin supply continues to expand.

As of Feb. 2, 2016, 3,817 dogecoins are worth $1. Given the much higher mining reward, the total number of dogecoins in circulation already exceeds 102 billion. The supply is set to increase by an expected 5.2 billion dogecoins per year in perpetuity. The dollar-denominated market capitalization of the currency is just under $27 million. Payment volumes fluctuated between 14,000 and 22,000 in recent weeks. Dogecoin acceptance is not widespread in retail environments. People widely use the currency to give small tips to online content creators, forum participants and other worthy netizens.