What is Bitcoin and how does it work?
Bitcoin is the very first cryptocurrency to be created, having first come to light in 2009 after being created by an anonymous person/group using the moniker Satoshi Nakamoto. The main goal of Bitcoin is to disrupt the way money is currently transferred across the globe. It wants to become the leading medium of exchange in the world. They have promised ultra-low transaction fees, as well as much faster processing times than are seen with traditional online payment services. Bitcoin also operates on a decentralised basis, which means that no one authority can decide what is to be done with the network and control the supply of the currency compared to centralised governments which control fiat currencies.
All Bitcoin tokens are digital and the balances are stored on a public ledger, in addition to all Bitcoin transactions being stored there. Bitcoins are not backed by any asset or commodity. The Bitcoin network operates efficiently due to miners who are parties that use their computing power in order to verify transactions. This verification process involves solving complicated equations to ensure that these transactions are legitimate. Every time a miner successfully solves this block equation, they will receive a reward for doing so in the form of Bitcoin, in addition to transaction fees. The total supply of Bitcoin is fixed at 21 million tokens. The price of Bitcoin had fluctuated widely since it was first created in 2009, with it reaching nearly $20,000 in December.
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Pros of Bitcoin
- What Bitcoin does well is providing a medium of exchange in a peer-to-peer way that allows people to send and receive funds across the world for minimal cost and very quickly.
- This is compared to the slow times seen with the traditional payments systems which can take a lot longer and charge higher fees.
- While the Bitcoin network is transparent in the way that anyone can see what transactions are being made between wallets, it also allows for a lot of privacy.
- It is very hard to know who is involved in these transactions as all of the information provided is simply how much the transaction was worth and what the two parties involved wallet addresses were. This is why a lot of governments have been concerned about cryptocurrencies being used by criminals for money laundering and engaging in other criminal activity, because it is so hard to trace these payments and link them to anyone. There are also anti-fraud measures implemented as part of the network as payments are irreversible. There is no way for someone to chargeback or cancel payments that they have made. Another advantage is that you can send funds across borders and not have to worry about currency exchange risk. This saves you money in the long term and you aren’t restricted by having to send payments on working days. You can send or receive Bitcoin at any time of the week, no matter what time or day it may be.
Cons of Bitcoin
While there are a lot of positives, in recent times there have been some major flaws pointed out regarding Bitcoin. The number one issue is that of scalability. Due to the block size being limited to 1MB, there is a lot of network congestion which has led to transactions taking a lot longer to process and as a result the fees have also increased. This of course goes against the principles laid out in Satoshi’s whitepaper of having a medium of exchange that was faster and cheaper than traditional payments services. This is why Bitcoin Cash spawned after a hard fork in the Bitcoin network during August 2017. There are ongoing solutions being proposed in order to try and resolve this scalability issue.
There is also somewhat of a barrier to entry of using Bitcoin because a lot of merchants still don’t accept it as a form of payment and it also is a lot easier when making everyday purchases to use cash or card, rather than sending Bitcoin. There are a number of products however on the market now which are effectively debit cards for Bitcoin, so they can be used the same way as normal debit cards. Another drawback is something which is inherent to all cryptocurrencies, which is the price volatility. Merchants and vendors often don’t want to deal with not knowing what direction Bitcoin will go as they cannot accurately forecast their financials for the year due to this ever fluctuating price.
What is Ripple?
Ripple is both a digital payment network specialising in financial transactions and a cryptocurrency. It was first released back in 2012. The cryptocurrency of Ripple is named XRP. Ripple is mostly known for its digital payment system. This caters for smooth transfers of money no matter if it is cryptocurrency or fiat currency throughout the world. Ripple has a medium which called the Gateway and it acts as the key link in a chain of trust for two parties involved in a transaction. The Gateway receives and will send the given currency using public addresses through their Ripple network. Anyone can become a member of the network and have their own gateway opened. XRP is utilised to bridge different types of currency together, no matter if it is crypto or fiat. This means the system of transferring one currency to another is seamless.
There is no proof of work or proof of stake system in place with the Ripple network. A consensus protocol is used to validate the balances of accounts, as well as verifying the transactions that are made. Ripple already has a relationship with over 100 banks and financial institutions globally, including giants such as Standard Chartered Bank and BBVA. There are many improvements to traditional payment systems, as transactions can be processed in seconds and it can handle millions of transactions without any issues. Fees are ultra-low, especially when compared to the significant fees banks charge when payments are made across borders.
Pros of Ripple
Ripple is in the unique position that it bridges the gap between the traditional financial payments system used by the likes of banks and financial institutions with the world of cryptocurrency and blockchain. There is a huge market for Ripple to get involved with, having already got partnerships in place with more than 100 banks and other financial institutions. The Ripple network is adequately anonymous and secure that it offers a lot more security than the traditional banking payments systems. There are also a lot less costs associated with using this network. Processing times are much faster too and it can easily deal with cross border and cross currency payments.
It can even deal with high volumes of transfers without any slowdown or other issues cropping up. Ripple clearly has a lot of things going for it and has a lot of potential going forward. It is mainly focused at companies and institutions rather than the everyday consumer. Ripple is unique when compared to most cryptocurrency and blockchain projects in the fact that it has been making a profit for more than a year to date. This showcases that they have a great idea and have executed to a high-quality. This is shown by the major partnerships they have attracted to date, with further notable partnerships coming in the future too.
Cons of Ripple
Ripple is not really relevant to everyday consumers who are looking to exchange funds for everyday purchases and payments. It is mostly preferred by those dealing with more significant sums in these transfers, such as business institutions and governments. One of the big drawbacks of Ripple for a lot of people in the community is the fact that it is a lot more centralised than the likes of Ethereum and Bitcoin. It is also private as the Ripple Labs team owns about 70% of the token. This means that decision can be made to change the network and manipulate the cryptocurrency to aid in their own goals, rather than being decentralised and not able to be controlled in this manner such as with Bitcoin. It is also not able to be minded.
There is a massive amount of tokens currently in existence, as many as 100 billion tokens. About 38 billion of these tokens are currently in circulation in an investment sense. There are fears in some circles that the Ripple team who own about 70% of the coins will try to cash out on their position at certain times, which will flood out the market for XRP. This would lead to short term levels of oversupply that are massive. This means that normal investors holding these tokens could be burnt in a significant way.
Bitcoin vs Ripple
Bitcoin and Ripple clearly are very different to one another. Bitcoin is completely decentralised and focusing on being a medium of exchange for the everyday consumer, whereas Ripple is a lot more centralised and focuses on catering for large groups such as governments and financial institutions. Bitcoin has experienced issues with transaction fees and speeds in recent times, an area in which Ripple completely dominates with their ultra-low metrics in this area. Bitcoin has a mining system in place called proof of work whereas Ripple instead uses a consensus protocol in order to verify transactions, eliminating the need for any miners. Bitcoin is not owned by any entity and is fully decentralised whereas about 70% of Ripple tokens are owned by the company Ripple Labs.
This means that Ripple can make changes as they see fit, whereas with Bitcoin the community as a whole needs to make these decisions. The Bitcoin network has a lot of issues with scalability and can only handle about 10 transactions per second, compared to the 1,500 transactions per second that the Ripple network can handle. During 2017, the average cost per transaction with Bitcoin was around the $35 mark, with the same metric being only $0.004 for Ripple. There is no need for miners, the Ripple network requires little to no energy consumption per transaction, compared to the on average 250kWh needed for each Bitcoin transaction, which leads to serious energy demands.
Bitcoin vs. Ripple
It is very hard trying to decide if Ripple is better than Bitcoin or vice versa as they are a lot different in their structure and their aims. Bitcoin is focused on being a medium of exchange for the average person, while Ripple focusing more on financial institutions and large organisations. It is certainly a fascinating process comparing these two giants of the crypto world, both of which have come so far in the past twelve months or so.
They both clearly have their pros and cons, but overall they are both solid digital currencies which may suit your specific needs depending on your situation. If you are looking to use either of these cryptocurrencies or make an investment, make sure that you are using the best crypto brokers and crypto trading strategies as outlined in the crypto broker comparison guide. Therefore, you are giving yourself the best chance as possible to benefit from your investment.