Altcoins Explained: What You Need To Know
All coins apart from Bitcoin are called Altcoins. Information from Coinmarketcap shows that there are over 5,000 cryptocurrencies and Altcoins make up nearly 60% of them. Since they are derived from Bitcoin, Altcoin prices tend to mimic Bitcoin’s trajectory. However, each altcoin runs following its own rules.
Altcoin combines words ‘alternative’ and ‘coin.’ These altcoins are alternatives to Bitcoins hence the name. Just like Bitcoin, they use blockchain technology which allows secured peer-to-peer transactions. In addition, altcoins aspire to become the next Bitcoin by serving as a cheap method for digital transactions which require lower energy consumption.
Crypto analysts predict that altcoins may soon be independent of Bitcoin’s trading signals due to the maturity of the cryptocurrency ecosystem and the development of new markets for coins.
How Altcoins Work
In general, Altcoins work like Bitcoins. You can make payments between two users’ wallets using your private keys. Transactions are permanently recorded using a recording ledger (Blockchain) and made available to the general public to avoid denial or alteration of exchanges.
Bitcoin is different from altcoins. Its ideology and design set a benchmark for developing other coins. Unlike Bitcoin, which uses the Proof work (POW) concept– a consensus mechanism for creating blocks. Some Altcoins such as Ethereum (the world’s second-biggest cryptocurrency by market cap) use the Proof of stake method (POS) to verify transactions, making it safer, easier and less energy-intensive.
Altcoin VS Bitcoin
Most altcoins do not follow Bitcoin’s rules. For instance, in mining, an altcoin known as Litecoin is mined to produce new Litecoins every 2.5 minutes, while Bitcoin is produced every 10 minutes while mining.
Litecoin mining follows a different set of rules compared to Bitcoin’s mining. In this sense, you can mine Litecoin’s using common computer hardware, while Bitcoin can only be mined using costly hardware like Application-Specific Integrated Circuit (ASIC).
There are over five thousand altcoins on the market; Litecoin is just one of them. Some altcoins are superior alternatives to Bitcoin, yet, no altcoin has come to reach Bitcoin’s $1,200,000,000,000 market cap. Some other examples of Altcoins include:
- Ethereum (ETH)
- Dogecoin (DOGE)
- Tron (TRX)
- Litecoin (LTC)
- Cardano (ADA)
- Stellar (XLM)
- Solana (SOL)
- Ripple (XRP)
- Monero (XMR)
- Bitcoin Cash (BCH)
- Shiba Inu (SHIB)
- USD Coin (USDC)
- Tether (USDT)
Types of Altcoins
Sometimes altcoins form the basis of a new business. They may also come from project enthusiasts while some may develop into a new framework from a messaging app to an online marketplace.
Altcoins often are more efficient by changing Bitcoin’s rules, and in some cases, may have a specific application depending on their functions and mode of operation.
Below is a summary of some important altcoins:
Since its launch, cryptocurrency trading and usage have been subjected to high volatility. Hence, the introduction of stablecoins. They are designed to tackle the overall volatility of cryptocurrency by linking their values to an underlying commodity, index, or security such as precious metal, fiat currencies, or other cryptocurrencies. This commodity serves as a reserve to compensate holders in case the cryptocurrency faces any problems. Stablecoins have a narrow range for price fluctuations.
Examples of prominent stablecoins include the USD Coin (USDC), Tether’s USDT, and makerDAO’s DAI. Payment processing giant Visa Inc. (V) announced in March 2021 that it would settle some transactions on its network in USDC over the Ethereum Blockchain. There are also plans to initiate further stable coin capacity later in 2021.
Some altcoins function as digital tokens and are sustained by an underlying blockchain platform. For instance, Tether (USDT) can be assumed as a digital token designed on Ethereum and other blockchains.
Investors often strive to earn returns by transacting altcoins with each other which sometimes might be risky. Also, trading cryptos on unregulated exchanges might expose traders to fraud, price manipulation, and some other risks.
Altcoins that are mined into existence are called Mining-based altcoins. Most of them use the proof of work consensus mechanism — a method also used by Bitcoin.
In this method, new coins are generated by solving complicated problems to create a new block. Some examples of mining-based altcoins include; Monero, Litecoin, and ZCash. Almost all the altcoins released in early 2020 are mining-based.
Another alternative to mining-based altcoins are the pre-mined altcoins, which are frequently part of initial coin offerings (ICO). Pre-mined altcoins are not developed through an alternative. They are often allotted before they are listed in the cryptocurrency markets. A good example is Ripple (XRP).
Altcoins that are created as a joke are called Meme coins. They naturally win favor within a short time, steadily promoted online by well-known crypto influencers as well as retail investors in their attempt to exploit short-term profits.
Some popular examples are Dogecoin (DOGE) and Shiba Inu (SHIB), which are regularly posted on Twitter by Tesla, Inc. (TSLA) CEO and cryptocurrency enthusiast Elon Musk. This promotion substantially moved the prices of these meme coins.
In October 2021, Shiba rose 91% in a day after this tweet from Musk:
Earlier, on May 9, 2021, Musk also tweeted to promote Dogecoin. However, many refer to April and May 2021 as “Meme coin season” due to the sharp surge in these Meme coins.
As the name implies, Security tokens are related to securities exchanged in the stock markets except for their digital origin. They are similar to traditional stocks and frequently guarantee a dividend payout or equity in ownership to holders. The price appreciation for security tokens usually draws investors to invest in them.
Utility tokens are used for the provision of services within the network. Sometimes, they are used to pay service fees or to gain rewards. But they do not pay out dividends like the security token. An example of a utility token is Filecoin, which is often used to buy space on a storage network.
Are Altcoins Good Investments?
The altcoin market is developing due to the surge in the number of altcoins listed every year. It has attracted a mob of retail investors, who invest in the hopes of making some short-term profit. However, generating a large profit requires very high capital. A lack of regulation stimulates price volatility in the values of the altcoin.
For instance, using the case of Ether (ETH) price in the past five years. As of Jan 12, 2018, Ether’s price rose to a peak of $1,299.95. In less than a month, it was down to $597.36 and later crashed to $89.52 by the end of the year.
However, three years later, the ETH price has surged above $4,500. This means timed transactions can contribute to a trader’s fortune and earning.
However, cryptocurrency markets are still facing problems since they are still developing. There are no definite investment metrics to analyze cryptocurrencies. There is still a lot of speculation in the altcoin market like the various cases of failed cryptocurrencies due to their failure to earn enough traction.
The altcoin market is an unregulated market that is exposed to price volatility. Therefore, as an investor, you need to do a lot of research just like you would do to invest in any business.
Pros and Cons of Altcoins
Improvement on Bitcoin. The altcoin is an improvement on Bitcoin since they strive to improve the cryptocurrency’s imperfections.
Variability. Several varieties of altcoins perform various functions. The investor can choose to invest in any one of them.
Improved transactions. Altcoins improve daily transactions by fulfilling the initial promise of bitcoin.
They provide competition. Since altcoins are developed by improving the laws under which Bitcoin was created. Its innovation establishes competition for the Bitcoin System.
High price volatility. Unlike the bitcoin Market, which has large investors, Altcoin has few investors and thin liquidity — resulting in higher price volatility.
Prone to fraudulent actions. Altcoins, as well as bitcoins, are prone to fraudulent activities since they run on the decentralized protocol.
How to Get Started Investing in Altcoins
Investing in altcoins is easy. You can visit prominent exchange platforms such as Binance, Gemini, eToro, Coinbase, and Kraken.
After deep research on your options, create an account on any of the exchange platforms. You will be required to fill in your data and submit a payment method from your account.
Once you have completed the steps, you can start trading in different altco