Who needs bitcoin? Check out these virtual currency alternatives

Who needs bitcoin? Virtual currency alternatives

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"Most people agree that virtual currencies are here to stay," the Winklevoss twins told CNBC recently.

Virtual currencies enable people to make payments in virtual online environments, such as when playing a game or on a social networking site. They are an emerging tradeable commodity and bitcoin—first created in 2008—has so far been synonymous with this movement.

Bitcoin is used to exchange online credits for goods and services and there is no central bank that issues them. Bitcoins can be created online by using a computer to complete difficult tasks, a process known as mining.

(Read more: Winklevosses: Bitcoin worth at least 100 times more)

The virtual currency has garnered widespread interest from policymakers, regulators and the media this year. Reaching fever pitch in April, its price fluctuated wildly above the $200 mark. On Tuesday it hit a new all-time high of over $900, according to major exchange Mt. Gox.

Bitcoin may be the runaway winner at the moment, according to Cameron and Tyler Winklevoss—who famously battled Mark Zuckerberg over the origins of Facebook—but they believe it is "very possible" that there could be more than one.

What are the alternatives to bitcoin?

(Read more: Bitcoin is tulip mania 2.0—not gold 2.0: Schiff)

CNBC highlights some the greatest hits in cryptocurrency, including defunct and dubious alternatives. These options are not for the fainthearted and are in are no way endorsed by CNBC.

By CNBC's Matt Clinch
Posted 19 Nov. 2013

e-gold

e-gold

Deemed to be the forerunner of all of today's digital currencies. Founded in 1996, co-founder Douglas Jackson said on the currency's still active website that it was created to "advance the material welfare of mankind" and as a "fulcrum for a better future."

It allowed users to open an online account denominated in grams of gold (or other precious metals) which gave people the ability to make instant transfers of value to other e-gold accounts.

The United States Secret Service put an end to the service in 2007. Three individuals pleaded guilty to operating as an unlicensed money transmitting business in violation of federal criminal law in 2008.

Approximately $90 million was seized or restrained from former accounts at e-gold, but former customers can still make a formal claim to gain access to funds. At a U.S. Senate Homeland Security and Governmental Affairs Committee hearing on virtual currencies on Monday, Mythili Raman, an acting assistant attorney general at the Department of Justice, said that at its peak e-gold reportedly moved over $6 million each day for more than 2.5 million accounts.

She added that it became a popular payment method for sellers of child pornography, operators of investment scams and perpetrators of credit card and identity fraud.

"E-gold is proof that online payment systems must grow up or be shut down," Axel Merk, the president and CIO of Merk Investments told CNBC.

"There's the obvious that a system must be secure. Then there's the world of regulation: For online payment systems to thrive in the long run, they must find ways to comply with anti-money laundering rules. E-gold failed on both accounts."

Liberty Reserve

The libertyreserve.com homepage which was recently shut down.
Source: libertyreserve.com

In May an indictment was filed by U.S. prosecutors against currency service Liberty Reserve that accused the Costa Rica-based company of helping criminals around the world to launder illicit funds.

One million users across the world—one-fifth of them Americans—made 55 million transactions over seven years to the tune of $6 billion, with few questions asked while Liberty collected 1 percent, investigators said.

At Monday's U.S. Senate committee hearing, Jennifer Shasky Calvery, director of the Treasury's Financial Crimes Enforcement Network said that Liberty Reserve used its centralized virtual currency to allegedly engage in credit card fraud, identity theft, investment fraud, computer hacking, narcotics trafficking and child pornography. She added that one Liberty Reserve co-founder had already pleaded guilty to money laundering in the scheme a few weeks ago, with seven in total being charged.

Raj Samani, the chief technology officer of EMEA at McAfee, said in research paper in October that the alleged use of Liberty Reserve by criminals would have been aided by its failure to verify new accounts, an accusation that was levied at predecessors such as e-gold.

"Regardless of the level of scrutiny by regulators and law enforcement, criminals will continue to migrate activities to alternate platforms," he said. "Simply shutting down the leading platform will not solve the problem," he said.

Litecoin

Litecoin

Based on the processes used with bitcoin, litecoin differs in that it can be efficiently mined—using computers to compete difficult tasks—with consumer-grade hardware and also enables faster transactions.

"Litecoin is a peer-to-peer Internet currency that enables instant payments to anyone in the world," the company states on its website.

Jonathon Waller, a developer at start-up incubator BitcoinEAST in Japan, believes litecoin could become much more valuable in the future when used in conjunction with bitcoin.

Price differences between the two could be exploited, he said, similar to arbitrage trading in today's foreign exchange markets.

Another benefit could be coin mixing, he added. Bitcoin customers use software tools to shuffle coin identification codes in an attempt to keep their anonymity.

Peercoin

Peercoin

Peercoin, otherwise known as PPCoin and Peer-to-Peer Coin, has the third-biggest market capitalization after bitcoin and litecoin, according to coinmarketcap.com.

"Money the way it should be," says the sales pitch on its website. "It enables instant payments to anyone! No banks, no fraud, no hidden-fees," the company says.

Peercoin states that Bitcoin favors "proof-of-work," whereas Peercoin prefers "proof-of-stake." This means that people are given new coins if they already hold some, instead of giving new coins to people that have mined the currency. Thus, the fewer subsidies to miners, the less people would be inclined to try to complete the energy intensive tasks, making the currency more energy efficient.

Waller told CNBC that it's experimental, but it seems sound. It's a "very speculative investment. I have some because 'you never know,' " he said.

Ripple

Ripple

It's a "math-based currency plus," according to a spokesperson for Ripple.

Confused? Well you shouldn't be. It states that the overall system is faster than bitcoin (transactions in seconds versus minutes or more) and it can accommodate any currency like dollars, bitcoin, euros and its own currency, called XRP.

The company behind the currency, Ripple Labs, is a San Francisco-based start-up funded by Google Ventures—Google's investment arm—among others.

OpenCoin

OpenCoin

Started by a group of virtual currency enthusiasts from the U.K. and Germany, OpenCoin is founded on the ideas of David Chaum, who invented a system of untraceable electronic cash in the 1980s called e-cash.

The OpenCoin project is not to be confused with OpenCoin Inc. a new company that is developing the Ripple network.

"It is about minting tokens that can be transferred in a non-traceable way. It is fast, and the user has full flexibility on how to do the transfer," a statement on the OpenCoin project website says.

"So, if you want open source digital cash, opencoin.org is the place to be. If you want an account based system like the ripple network, it is not."

MintChip

Bloomberg/Contributor | Bloomberg | Bloomberg via Getty Images

Not an alternative currency but a research project created by the Royal Canadian Mint (RCM) that's still in a prototype stage.

MintChip is a secure value transfer technology with many of the attributes of cash, delivered digitally. Created after an open competition for software developers, it uses a secure chip to hold electronic value (which could be in a mobile device, the cloud or a USB stick) and a secure protocol to transfer electronic value from one chip to another.

It's backed by fiat currency, but is "currency agnostic," according to a RCM spokesperson, so can be used for any other national reserve.

"This is fascinating," Eric Garland, a future trends analyst and researcher, told CNBC. "The Canadian government backs this one. They know something new is coming and want a hand in it. Smart!"

Merk told CNBC that this government support could actually be its downfall. "It's embracing technology that may long be outdated before it becomes useful," he said.

Linden Dollars

Tina Stallard/Contributor | Getty Images News | Getty Images

The digital currency of choice for the virtual gaming world of "Second Life"—the free 3-D virtual world where users roam around using avatars to socialize, connect and create.

Linden Dollars can be exchanged for U.S. dollars or other currencies on market-based currency exchanges. Virtual goods include buildings, vehicles, clothing, skin, hair, jewelry, works of art and much more.

The Second Life economy totaled $567 million in U.S. dollars in 2009, according to a blogpost on the site's community page back in January 2010. This was a 65 percent climb from 2008 figures and meant gross resident earnings stood at $55 million in 2009—11 percent higher than in 2008.

"I put Linden Dollars in the same bucket as airline miles. They are an ingenious way to leverage on an established ecosystem, with the potential to break out to have commercial value elsewhere," Merk told CNBC.

Meanwhile, Waller isn't so sure. The virtual game received plenty of media traction in 2005 and 2006, but he says the currency could be liable to a slip in the number of users.

Garland agrees, adding that Linden Dollars could have a long life, provided that people keep playing "Second Life."

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