Rise of altcoins and other smaller rivals throws up fresh challenge to bitcoin

Bitcoin's weathered hacks, heists, booms and busts to reign as the king of cryptocurrencies through its first decade. But now there's a fresh challenge to its dominance of the fledgling market: some 2,000 smaller digital coins.

Collectively, "altcoins" are gaining ground on their bigger cousin. Individually, they are gaining traction among users, gathering communities of developers and users often deeply devoted to their goals.

Bitcoin has almost doubled in value this year, rallying nearly 30% in recent days to touch its highest level in ten months on Tuesday. But last year it lost three-quarters of its value.

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That volatility has put off mainstream investors from pension funds to asset managers who are seen as crucial to bitcoin's growth from speculative token to established asset.

Bitcoin has also struggled for traction as means of payment, its intended usage. Few but cryptocurrency diehards go shopping with the digital currency.

Enter the altcoins.

They also suffer from high volatility and few are used for mainstream payments. But playing out in their growth is a slow-burn tussle that analysts and academics describe as a race to find the answers to bitcoin's flaws. It's one that could shape the evolution of cryptocurrencies and related technologies like blockchain.

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MONEY OF THE INTERNET?

The two biggest altcoins, Ethereum and XRP, together account for about a fifth of the coin market, with respective circulations of $22 billion and $17 billion. Others, with names like AnarchistCoin and CryptoPing, are illiquid and seldom used.

"Their proliferation is driven by the need to spark new innovation - security innovations, or a new algorithm that allows faster transaction to a new blockchain," said Paolo Tasca, who runs University College London's Centre for Blockchain Technologies.

For an interactive version of the graphic below, click here https://tmsnrt.rs/2E20y39.

Without doubt, it's the most well-known of its kind. And to the extent they do look at cryptocurrencies, larger investors tend to gravitate towards bitcoin.

But its use in commerce is hamstrung by high transaction costs and low speed. And for all its proponents' claims that it is "digital gold," bitcoin's volatility means that it is highly impractical as a store of value.

"Bitcoin was designed to be the money of the internet, but that was a very early idea," said Hugo Volz Oliviera, an analyst at trading platform London Block Exchange. "Other projects have tried to fill the gap that exists."

Some, like ethereum, power blockchain-based applications. Others, known as "stablecoins," look to overcome the problems associated with wild price fluctuations by being pegged to fiat currency.

A bigger proportion still are essentially clones of bitcoin, offering little in the way of radically difficult uses. Some, such as Litecoin, are designed to tackle some of bitcoin's weaknesses, such as slow transactions.

Bitcoin proponents point to initiatives such as the Lightning network - code that can be added to the blockchain that's designed to make payments faster and cheaper - that could help it overcome its structural flaws.

And even as altcoins spread, high-profile supporters such as Twitter CEO Jack Dorsey see bitcoin maintaining its dominance. In an podcast released in February, Dorsey said bitcoin will become the internet's native currency, given that it was born, developed and tested online.

PURE SPECULATION, OR BETS ON THE FUTURE?

Altcoins outperformed bitcoin by four percent in the first quarter of this year, according to Cumberland, a major cryptocurrency trader based in Chicago.

And if the burgeoning number of altcoins is a product of the technological hunt for answers to bitcoin's weaknesses, investor interest can be seen as bets on which altcoin will gain ground for payments or transfers, or as a store of value.

"What you've had is a maturation of the altcoin market, and you've got investors and traders more comfortable understanding the fundamentals around what they're buying," said Bobby Cho, Cumberland's chief operating officer.

Others say altcoin trading is mostly speculative, with investors interested less in the technicalities and communities of various coins than simply their potential to make money.

"There is no doubt that as investors become further drawn into the space, they do like to diversify into other digital assets," said Michael Sonnenshein, its chief executive.