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Bitcoin taking a back seat to 'altcoins'

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Bitcoin taking a back seat to 'altcoins'

The market capitalization of bitcoin alternatives grew tremendously in 2017, but this growth comes with high risks, as evidenced by precipitous drops in cryptocurrency values during the first two months of 2018.

Bitcoin is losing market dominance as other cryptocurrencies gain traction. At the beginning of 2017, bitcoin comprised 87.61% of total cryptocurrency market cap, according to CoinMarketCap. On Feb. 5, that figure had dropped to 36.32%.

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"Newcomers to the market wanted to get rich fast," Aite Group analyst Gabriel Wang, who covers blockchain and cryptocurrencies, said in an interview. The best way to do that, according to Wang, was to trade bitcoin alternatives. Bitcoin was worth more than $1,000 on the first day of 2017, while so-called "altcoins" like Ethereum's ether token were trading at a fraction of that amount.

Wang anticipates that three to five major cryptocurrencies will dominate the space in the future, but the analyst said that bitcoin may not be one of them.

In an interview, David Mondrus, CEO of cryptocurrency startup Trive, attributed bitcoin's fading dominance to its "stalled" innovation. As bitcoin transaction volume increased with its growing adoption, the block size, which limits the number of transactions that can be processed, caused backups and high fees. The block size debate led bitcoin cash to spin off from bitcoin in August 2017.

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In some cases, betting on altcoins has paid off. A $1,000 investment in open software platform Ethereum on Jan. 1, 2017, would be worth more than $87,000 as of Feb. 5, 2018. The same investment in blockchain payment firm Ripple would be worth more than $106,000.

But these investments come with substantial risk. All but one of the top 25 cryptocurrencies by market cap have seen negative returns in the year to Feb. 5. Most of these lost more than half of their value in 2018, according to data compiled by S&P Global Market Intelligence. After reaching highs near $20,000 in December 2017, bitcoin's price was around $7,000 on Feb. 5.

"If you limit your stake in the market, you limit the amount you can lose," Wang said. "But the upside potential is almost unlimited."

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