Altcoins Explained: A Comprehensive Guide to Alternative Cryptocurrencies
Newcomers to the crypto industry may find it to be quite intimidating at first. One of the reasons for this, is the fact that the digital assets industry comes with new terminology. Among the most common new terms that would-be crypto investors encounter is “altcoin.” The word sounds similar to Bitcoin, which is the industry’s oldest and largest crypto, however, altcoins have nothing to do with Bitcoin.
This guide will address the term “altcoin” and explain what it is. It will also talk about the advantages and risks of altcoins, different types of altcoins and offer some investment tips and strategies.
What Are Altcoins?
To start off, let’s explain what altcoins are. Altcoin, as a term, is a short form of “alternative coin.” It was invented as a word that would include all cryptocurrencies except for Bitcoin. With Bitcoin being the original cryptocurrency, all that came after it are alternatives to it.
It is worth noting that there are some who believe that Ethereum should be exempt, as well. The project’s contribution to the crypto industry easily makes it the second-most important crypto asset ever created. Whether you agree with this or not, the fact is that the term puts almost every cryptocurrency under one umbrella.
Altcoins belong to different projects, where they can serve different purposes. Some projects only have a single altcoin, while others can have several. In that case, each of them plays its own role in the project’s ecosystem. Before Ethereum, each altcoin emerged as a fork of Bitcoin, or launched its own blockchain. However, Ethereum created different cryptocurrency models, and that made it easier to launch new altcoins.
Instead of building coins and new networks from scratch or forking them off Bitcoin, developers discovered a shortcut. This led to a major surge in new projects, and the available token number grew rapidly. This led to the creation of an entire altcoin market.
Some of the new projects allow users to engage in altcoin mining. This is a process where users contribute computing and electrical power to the network. In doing so, they allow it to use its resources to process transactions. In return, they receive a certain portion of the project’s digital assets. This actually started with Bitcoin, but many new projects adopted it. These days, altcoin mining is considered to be a more expensive and less efficient method of earning crypto.
Instead, staking — locking up your tokens in a smart contract in return for rewards — seems to be the preferred option. However, mining is still possible, and many still engage in it to this day.
Advantages and Risks of Altcoins?
Most cryptocurrencies have emerged to solve issues within the crypto industry. Additionally, many altcoins tend to solve real-world problems, thus providing some sort of utility to that specific token.
Another advantage of altcoins is that they generally have more utility than Bitcoin. The more utility a token has, the greater its chance to survive longer. Some altcoins offer access to unique networks with unique features. Others let users earn money through staking, lending, and similar services. There are even those that give users voting power and let them contribute to deciding the project’s future.
However, investing in altcoins also comes with its own risks. For example, the altcoin market cap is smaller compared to Bitcoin’s. Historically, Bitcoin’s market cap was as large as the rest of the crypto industry put together. At the time of writing, Bitcoin’s market cap is $477.5 billion. Meanwhile, the market cap of the total crypto industry is $1.073 trillion. This suggests that roughly 40% of all the capital within the industry goes into Bitcoin. This leads to higher volatility within the altcoin market, making it a riskier investment compared to Bitcoin.
An additional disadvantage of the altcoin market is that it has fewer investors and less activity. This is something that may or may not be an issue, depending on the token or a coin in question. You will not struggle to exchange Ethereum for example, however, some small-cap coins suffer from this issue frequently.
Another risk associated with altcoins is that many of them are fraudulent projects. Scammers came to the crypto industry seeking a way to earn, like everyone else. Unfortunately, they have selected unethical methods, and their goal is to trick people out of their money. Usually, their schemes revolve around fraudulent ICOs (Initial Coin Offerings). They hype up their project, attract investors, sell them coins, and then abandon the project and disappear with the money, otherwise known within the industry as a ’rug pull’.
Arguably one of the largest risks of investing in altcoins is the fact that regulators might decide that it fits the description of a security. Securities are a different type of asset than utilities. If developers accidentally create unregistered security, they will end up in trouble. Finally, there is also a possibility that an altcoin is simply a bad project. It might be completely legitimate, but if it fails to capture attention, it will eventually die.
What Types of Altcoins Are There?
Over the last 14 years, the crypto industry has launched well over 23,000 altcoins. The real number is likely more than that, but 23,000 are currently considered live, active projects. The rest of them disappeared after being too weak, or they ended up abandoned. The surviving projects can be split into several categories of digital assets, such as:
Utility Tokens
Utility tokens are digital assets that aim to provide a service within a network. They might let users purchase something, like storage space. They might also let users receive discounts on transactions or allow them to vote on project-related proposals. As long as they represent a way to obtain something, altcoins can be considered utility tokens.
Security Tokens
Security tokens are assets that were tokenized and as such, brought up to represent a cryptocurrency investment. They are supposed to represent assets offered on stock markets that went through a tokenization process to become digital assets. However, this is not a general rule, and pretty much anything of value can be tokenized. Of course, in order for this to work, the underlying asset needs to be held by a trusted entity. Otherwise, the tokens themselves would be worthless.
Governance Tokens
Governance tokens are cryptocurrencies that allow users to participate in the project’s governance. They emerged as part of an attempt to bring decentralization in the crypto industry to the next level. There is no central authority — just community members that hold governance tokens, which grant them voting rights. Whatever the community decides on, the project’s developers implement.
Memecoins
Memecoins are another popular group of altcoins that emerged with Dogecoin (DOGE) in 2013. At the time, Dogecoin was supposed to be just a fun little joke coin with no ulterior motives. It wasn’t even supposed to survive for more than a few weeks. However, it somehow managed to stay strong for a decade and grow stronger with each year. Eventually, it inspired an entire sub-category of memecoins — cryptos that live off of popularity and memes. While they can technically serve as payment coins, they don’t have any real use cases.
Privacy Coins
Privacy coins used to be a very popular group of altcoins, as they allowed users to make transactions privately. The crypto industry’s biggest feature is decentralization and transparency. With that said, all transactions should be public, and nothing can be hidden. Privacy coins offered users to make hidden transactions, which is why they were eventually banned on most platforms. Regulators estimated that their usage could aid criminals, so any exchange that wants to register must remove them.
Stablecoins
Lastly, there are stablecoins — altcoins tied to other assets of value, that transfer their value to the coins. Most of the biggest stablecoins use fiat currencies, like the USD, so each coin has a fixed price of $1. However, stablecoins can maintain their value by using algorithms or even using other cryptos as underlying assets.
Strategies for Investing in Altcoins
When it comes to altcoin-investing strategies, there are several that are fairly simple. One of them is to go all in when you find a coin/token that you like and HODL. This essentially means that you would invest your money, lock the coins in your cryptocurrency wallets, and keep them. No matter what happens, you keep them, waiting for their price to (hopefully) rise someday. This is not the best strategy for altcoins, but most people believe that it is perfect for Bitcoin.
A safer approach is to diversify your portfolio by investing in multiple assets. In this situation, you would focus on those altcoins that have the greatest potential, whether that's based on their technology, goals, popularity, or some other aspect. Identify multiple assets that you believe might have a future and invest in all of them.
Another approach worth considering is actively trading cryptocurrency. When it comes to investing, you simply lock up your assets and forget about them. Investments are meant to be long-term. Cryptocurrency trading is not. Some traders buy assets only to sell them a few days later. Others may keep them for a few weeks, but there are those who only keep them for a few hours. The idea is to purchase them and then wait for an opportunity to sell them. Hopefully, in doing so, you will make a bit of money from the price difference.
Tips for Investing in Altcoins
Lastly, we would share some useful tips that you might want to remember if you wish to invest in altcoins. For example:
- Do your research
- Understand the market and how different developments affect it
- Remember that the market is highly volatile
- Use private cryptocurrency wallets to store your coins, not exchange-owned ones
- Try to stay disciplined and not give in to your emotions
- Start small until you learn the nuances of trading
- Be aware that crypto profits are likely to subject to taxation
- Do not participate in suspicious ICOs
- Learn how to use risk management
- Think long-term
- Only use the money that you can afford to lose
The Future of Altcoins
There was a time when investors believed that most altcoins would die out. As such, they considered them worthless and a waste of time. Whether or not this will happen is unknown to us at this time. However, with new developments, such as Web3, such a dire future now seems less and less likely to happen. It is more likely that many altcoins — although not all — will survive and find their role in the future.
The real challenge is discovering which altcoins have that long-term potential. In the end, no one can claim anything with any certainty. The altcoin market is volatile and still relatively easy to manipulate. It is deemed an immature market, and while it is maturing, the process is slow and full of painful lessons. The best thing you can do is research as much as possible and try to gather information before each move.
FAQs
What Is an Altcoin?
Altcoin is a term for any digital currency that is not Bitcoin. Since Bitcoin is the first original cryptocurrency, the coins that followed came as alternatives to it. The name “altcoin” is just a short version of “alternative coin.”
What Is an Example of an Altcoin?
With nearly 23,000 cryptocurrencies active at the time of writing, there are nearly 23,000 examples of altcoins. Some of the largest altcoins include Solana, Dogecoin, XRP, BNB, Cardano, Litecoin, and more. Many more altcoins will emerge in years to come, some of which will likely replace the current leading cryptos.
Is Bitcoin an Altcoin?
No, Bitcoin is the original — the first one that was created. As such, all other cryptocurrencies that came after it are the ones called altcoins. In addition to being the first, Bitcoin is also the largest cryptocurrency by market cap.
Is Ethereum an Altcoin?
Yes, Ethereum is another example of an altcoin. More than that, Ethereum is the largest altcoin by market cap and the second-largest cryptocurrency in the industry. Ethereum is the project that enabled smart contracts and other blockchain products, but it is still second to Bitcoin.
