Altcoins are cryptocurrencies other than Bitcoin. They share characteristics with Bitcoin but are also different from them in other ways. F...
KEY TAKEAWAYS
- The term "altcoins" refers to all cryptocurrencies other than Bitcoin.
- As of March 2021, altcoins accounted for 40% of the total cryptocurrency market, with more than 9,000 cryptocurrencies and counting.
- Some of the main types of altcoins include mining-based cryptocurrencies, stablecoins, security tokens, and utility tokens.
- Altcoins might include only mining-based cryptocurrencies other than Bitcoin in the future as usage continues to develop with technology.
- Ethereum and Binance Coin were the largest altcoins by market capitalization as of March 2021.
Understanding Altcoins
"Altcoin" is a combination of the two words "alt" and "coin" and includes all alternatives to Bitcoin. The basic framework for Bitcoin and altcoins is similar. Thus, they share code and function as peer-to-peer systems or as a giant computer capable of processing large amounts of data and transactions at the same time. In some instances, altcoins also aspire to become the next Bitcoin by becoming an inexpensive method for digital transactions.
But there are also several differences between the two entities.
Bitcoin is among the first iterations of a cryptocurrency and its philosophy and design set the benchmark for the development of other coins. However, its implementation has several shortcomings. For example, Proof-of-Work (PoW), the consensus mechanism used to create blocks, is energy-intensive and time-consuming. Bitcoin’s smart contract capabilities are also limited.
Altcoins improve upon Bitcoin’s perceived limitations to establish a competitive advantage. Several altcoins use the Proof-of-Stake (PoS) consensus method to minimize energy consumption and the time required to create blocks and validate new transactions.
Another example is that of ether, the world’s second-biggest cryptocurrency by market cap, which is used as gas (or payment for transaction costs) in smart contracts on Ethereum. Altcoins also address traditional critiques against Bitcoin. For example, stablecoins do not exhibit Bitcoin’s price volatility, making them ideal vehicles for daily transactions.
By distinguishing themselves from Bitcoin in this manner, altcoins have created a market for themselves. In turn, this has attracted investors who see potential in them as alternatives to Bitcoin. The investors expect to profit as altcoins garner more traction and users and appreciate in price.
Are Altcoins Good Investments
The market for altcoins is nascent. It is an unequal pairing. The number of altcoins listed in cryptocurrency markets has rapidly multiplied in the last decade and attracted hordes of retail investors, feverishly betting on their price movements to amass short-term profits. But such investors do not have the capital necessary to generate sufficient market liquidity.
Thin markets and an absence of regulation produces quicksilver volatility in altcoin valuations.
Consider the case of Ethereum’s ether, which reached a peak of $1299.95 on Jan 12, 2018. Less than a month later, it was down to $597.36 and by the year’s end, ether’s price had crashed to $89.52. The altcoin reached record prices of above $2,000 two years later. Timed trades can provide a wealth of profits for traders.
But there is a problem. Cryptocurrency markets are not yet mature. In spite of several attempts, there are no defined investment criteria or metrics to evaluate cryptocurrencies. For the most part, the altcoin market is driven by speculation. Several cases of dead cryptocurrencies, those which failed to gain enough traction or simply vanished after collecting investors’ money, exist.
Therefore, the altcoin market is for investors willing to take on the outsized risk of operating in an unregulated and emerging market that is prone to volatility. They should also be able to handle stress resulting from wild price swings. For such investors, cryptocurrency markets offer great returns.
