- Altcoin is short for "alternative coin" and is an alternative cryptocurrency to Bitcoin.
- Altcoins improve on the flaws and limitations of Bitcoin, operating on different technology and use cases.
- Altcoins are highly speculative investments characterized by their volatility.
Altcoin is a cryptocurrency alternative to Bitcoin that uses the same decentralized peer-to-peer (P2P) payment network. Its name is a portmanteau of "alternative" and "coin." Since Bitcoin is widely regarded as the first of its kind, new cryptocurrencies are considered alternatives.
Like Bitcoin, altcoins are a form of decentralized digital currency created and traded on the blockchain and available through the best cryptocurrency exchanges. Many altcoins, like Litecoin, have emerged to improve on Bitcoin's flaws and limitations or to achieve an alternative goal.
More than 14,000 altcoins are now on the market with diverse purposes, like increased transaction speed, lower trading fees, more environmentally friendly verification processes, and improved accessibility and storage capabilities.
Why do altcoins exist?
Altcoins emerged as an attempt to reinvent Bitcoin and improve upon its existing code and trading technology. Alternative coins — or altcoins — emerged around 2011, with the first generation formed using the same blockchain engine as Bitcoin.
Namecoin, the first altcoin and Bitcoin fork, was released in April 2011. It is based on Bitcoin's code and designed to be a decentralized domain name system (DNS) to improve the system for establishing ownership of domain names on the web with blockchain technology.
Namecoin is integral to the history of altcoins, showing there's enough room in the crypto markets for more than one kind of coin. Today, blockchains can run hundreds of "altcoins," fueling similar currency projects with unique rules and mechanisms.
Types of altcoins
Let's explore different types of altcoins.
Stablecoins
These types of altcoins are a new subset of the crypto market that's meant to reduce volatility. By design, they're digital assets with value pegged to fiat and physical assets (off-chain) and crypto collateral (on-chain). Algorithmic stablecoins are not backed by on-chain or off-chain assets but are governed by a smart contract at their core.
Examples of stablecoins include USD Coin (USDC), Gemini Dollar (GUSD), and Tether (USDT).
Mining-based coins
Mining-based coins are altcoins created and verified using the proof of work (PoW) consensus mechanism, like Bitcoin. Miners solve complex cryptographic puzzles to add new blocks to the blockchain and earn rewards.
The PoW consensus mechanism drives competition for faster and more powerful computational processing power. The faster a miner's computer can complete the formula, the higher their odds of winning a block reward. However, these advanced computers require a substantial amount of costly and extremely environmentally damaging energy.
Examples of mining-based coins include Litecoin (LTC), Ethereum Classic (ETC), and Dogecoin (DOGE).
Staking-based coins
Altcoins that use a proof-of-stake (PoS) consensus mechanism. PoS requires investors to hold funds in a cryptocurrency wallet in exchange for rewards over time. When investors choose to stake their holdings, the network can use them to forge new blocks on the blockchain.
Staking is also more energy-efficient than Bitcoin mining. Therefore, staking-based coins are more environmentally friendly and affordable than coins mined using a PoW mechanism.
Examples of stake-based coins include Cardano (ADA) and Solana (SOL)
Governance tokens
Governance tokens give token holders voting rights on certain decisions affecting a blockchain project and protocols, such as adding new features, changing rules, structural changes, and fee adjustments.
These tokens aim to ensure that network participants have a fair distribution of power over the network's future rather than relying on a centralized authority. Governance tokens also encourage investors to be active participants and facilitate long-term engagement.
Examples of governance tokens include Uniswap (UNI), Maker (MKR), and Aave (AAVE).
Utility tokens
Utility tokens aren't pegged to any currency or tangible value. Instead, utility tokens act as vouchers for purchasing goods or services within the blockchain ecosystem. Utility tokens are usually awarded to investors who participate in the early stages of a coin's initial offering.
Examples of utility tokens include Filecoin (FIL) and Basic Attention Token (BAT).
Security tokens
These types of altcoins are digital or liquid assets representing an ownership stake in a tangible asset. Stored on a distributed ledger, security tokens are the blockchain equivalent to shares, but they can also represent a stake in an asset like IP or property.
Examples of security tokens include Polymath (STO), WeWork, and RealBlocks.
Key differences between altcoins and Bitcoin
Altcoins have notable key differences from Bitcoin, like:
- Purpose: Bitcoin's primary objective is to be a store of value and a medium of exchange. While some altcoins have a similar objective, many coins and tokens have more specific use cases. Governance tokens, for example, provide participants with voting power on blockchain projects.
- Technology: Altcoins use many different technologies and processes than Bitcoin, including proof-of-stake or proof-of-work consensus mechanisms, enhanced privacy features, reduced fees, and faster transaction speeds.
- Market capitalization: Altcoins have varying supply, demand, market caps, and liquidity.
Evaluating altcoins
Altcoins are highly speculative and volatile investments. Trading based on rumors is exactly what the experts advise against.
"Before plunking down hard-earned money, you need to do the research," says Shone Anstey, CEO of LQwD. "Who is the team behind it, especially on the engineering side? What problem are they solving? And who are the financial backers?"
Those interested in adding altcoins to an existing, diversified portfolio can evaluate altcoins based on the following criteria.
Purpose and use case
Altcoins aim to improve Bitcoin's flaws and limitations, directly impacting the coin's market potential and function. While Bitcoin's primary objective is to be a store of value, altcoins often have varying purposes that impact the risk, success rate, demand, and use case of owning the asset.
Crypto investors should seek out altcoins with well-defined purposes and strong use cases, as they are more likely to be successful. Other factors to consider are the general demand and scope for the functionality the altcoin attempts to address.
Altcoin's technology
Evaluate the underlying technology an altcoin operates on and the potential advantages it may offer. This includes the altcoin's consensus mechanism, security, scalability, and the degree of decentralization on the network.
All these factors impact the effectiveness of the altcoin, its functionality, and the limitations participants have over the network and the coin's future.
Team and community
The altcoin developers and their surrounding community are just as important as the underlying asset being invested in. The best altcoins are created and managed by a team of developers with a strong, trustworthy history who are actively working to improve the network.
The community's support and activity are also important, especially since many blockchain networks rely on the integrity of the participants who mine, stake, and verify the blocks.
Whitepaper
A whitepaper outlines an altcoin's purpose, rules, and technology. It provides insights into the project's goals, team, token utility, use cases, roadmap, and market fit. Whitepapers are typically published before an altcoin's launch and are readily available online.
A well-structured whitepaper should clearly outline the token's purpose, the team's expertise, the token's utility and potential use cases, the project's roadmap, and its market viability.
Tokenomics
Tokenomics examines the economic principles behind cryptocurrency creation, distribution, and usage. By understanding tokenomics, you can gain insights into an altcoin's purpose, distribution, and supply within the blockchain ecosystem.
Risks of investing in altcoins
- Volatility: Cryptocurrencies, in general, are highly volatile assets. Some altcoins, like Ethereum, have maintained their position in the market through constant innovation and the strength of their community. However, speculation has a more dramatic effect on newer altcoins.
- Scams and rug pulls: Technically, anyone can create an altcoin, so it's important to thoroughly research the team's history behind it to avoid scams and rug pulls. A "rug pull" is when developers create a coin and collect funding only to later abandon the project and keep the invested funds.
- Lack of liquidity: An altcoin with a low trading volume is more difficult to buy or sell, thus lacking liquidity.
- Regulatory uncertainty: Cryptocurrencies like altcoins are relatively new assets that lack a regulatory process, especially since they are decentralized. These regulations include clarity on tax rules, ensuring investors have all the necessary information, and protecting against scams and market manipulation.
FAQs about altcoins
Are altcoins a good investment?
Altcoins may be a good investment option for investors with a high risk tolerance and an existing, diversified portfolio of stocks, bonds, and other securities. Adding altcoins to your portfolio increases your exposure to the market, limiting loss when the traditional market is declining and providing more growth opportunities. However, altcoins aren't suitable for beginners or risk-averse investors.
How do I choose which altcoins to invest in?
You can choose which altcoins to invest in by evaluating altcoins' purpose, use case, technology, whitepaper, and tokenomics to ensure you're investing in cryptocurrency developed by a strong, reliable team and with a strong use case.
Where can I buy and sell altcoins?
You can buy and sell altcoins through top cryptocurrency exchanges like Coinbase, Kraken, and Binance.US. Not all exchanges offer every altcoin, so be sure the exchange you're interested in offers the cryptocurrency you want.
