Altcoin refers to any cryptocurrency other than Bitcoin. They share some common features with Bitcoin, the world’s most popular cryptocurrency, but they differ in other ways. While Bitcoin holds a large portion of the cryptocurrency market, altcoins are also attractive investment options, particularly for analysts. To buy and sell altcoins, similar to Bitcoin, you need an active account on a cryptocurrency exchange. In this article from the Bitpin Academy, you will learn about different types of altcoins, and at the end, we will introduce the top 10 altcoins of 2022. So, stay with us until the end of this article.
What is an Altcoin?
Altcoins were created after Bitcoin. Any cryptocurrency other than Bitcoin is called an altcoin. They share common characteristics with Bitcoin but differ in other ways. For example, some altcoins use a different consensus mechanism to create blocks or validate transactions. They also distinguish themselves from Bitcoin by offering new or additional features, such as smart contracts or lower price volatility. As of July 2022, there are estimated to be about 9,000 cryptocurrencies. According to CoinMarketCap, altcoins make up more than 40% of the total cryptocurrency market at this time. Since the concept of altcoins is similar to Bitcoin, the price movements of altcoins tend to mirror Bitcoin’s trajectory. However, analysts suggest that with the maturation of the cryptocurrency investment ecosystem and the development of new markets for these coins, the price movements of altcoins will eventually diverge from Bitcoin.
Summary of the Article
- The term “altcoin” refers to all cryptocurrencies other than Bitcoin.
- By July 2021, more than 9,000 cryptocurrencies had been listed, with altcoins representing 40% of the entire cryptocurrency market.
- Key types of altcoins include proof-of-work-based, stable, security tokens, and utility tokens.
- Ethereum (ETH) and Binance Coin (BNB) are among the altcoins with high trading volumes until July 2022.
The Core Concept of Altcoins
The term “altcoin” is a combination of the words “alternative” and “coin,” referring to all Bitcoin alternatives. The fundamental framework of Bitcoin and altcoins is similar. Therefore, they, like a supercomputer, have the ability to process large amounts of data and transactions simultaneously. Some believe that an altcoin, by becoming an inexpensive method for digital transactions, could become the next Bitcoin. However, despite these similarities, there are still many differences between the two.
Bitcoin is one of the first digital currencies, and its philosophy and design served as a model for developing other coins. However, the Bitcoin project has many limitations and drawbacks. For instance, its consensus mechanism for creating blocks is energy-intensive and time-consuming. Additionally, Bitcoin’s smart contracts are limited.
Altcoins have created their own market by differentiating themselves from Bitcoin. Several altcoins use the proof-of-stake (PoS) consensus method to minimize energy consumption and time required to create blocks and validate new transactions. For example, Ethereum’s Ether is the second-largest cryptocurrency, used as “gas” (or to pay transaction fees) in Ethereum’s smart contracts.
These differences have drawn the attention of investors who view altcoins as potential alternatives to Bitcoin. Investors expect to earn higher profits, as altcoins will increase in value with the growth in their user base.
Types of Altcoins
Depending on their features and consensus mechanisms, altcoins come in different categories. Below is a summary of the main types, although some altcoins may fit into more than one category.
- Mining-Based Altcoins These altcoins are mined using proof-of-work (PoW), where systems solve complex problems to generate new coins and create new blocks. Examples include Litecoin, Zcash, and Monero. The majority of top altcoins in 2020 were mining-based. An alternative to mining-based altcoins is pre-mined coins, which are distributed before they are officially released and listed on cryptocurrency exchanges. Ripple (XRP) is an example of a pre-mined coin.
- Stablecoins Cryptocurrency trading has always been associated with price volatility. Stablecoins are designed to minimize this volatility by pegging their value to fiat currencies, precious metals, or other cryptocurrencies. This stability allows them to serve as a store of value, helping investors to avoid extreme price fluctuations. Tether (USDT) is one of the most well-known stablecoins, backed by the US dollar. Other examples include USD Coin (USDC) and MakerDAO.
- Security Tokens Security tokens are digital versions of securities traded in stock exchanges but with a digital origin. These tokens are similar to traditional stocks and are mainly used for dividend payments or ownership sharing.
- Utility Tokens Utility tokens provide services within a blockchain network. They can be used to purchase services on the platform. Unlike security tokens, utility tokens do not support dividends or transfer of ownership. Filecoin (FIL) is an example of a utility token used to buy storage space on the network.
Is Altcoin a Good Investment Option?
The altcoin market is still in its early stages. The number of altcoins in the cryptocurrency market has rapidly increased over the past decade, attracting many retail investors. Altcoins can offer short-term profits for investors, who often enter the market with small capital. Small markets, due to the lack of regulations, create high volatility, leading to lucrative profits for altcoin investors.
For example, Ethereum reached its highest price of $1,299.95 on January 12, 2018. Less than a month later, its price dropped to $597.36, and by the end of the year, it had fallen further to $89.52. However, three years later, Ethereum set a new record above $4,000. Predicting the market movements of altcoins and entering and exiting at the right time can lead to significant profits.
However, there is a major issue with altcoins: as mentioned at the beginning, the altcoin market is still immature. Despite much effort, there are no clear and reliable metrics for evaluating or making investment decisions on these cryptocurrencies. In many cases, altcoin markets are driven by speculation. Many digital currencies fail to attract sufficient investment or disappear entirely after collecting funds, turning into “dead” cryptocurrencies. A dead cryptocurrency refers to coins with no market activity.
Thus, investing in altcoins is akin to investing in a high-risk market with little regulation and high volatility. Altcoin investors must be prepared to handle the pressure of extreme price fluctuations. If you are such an investor, you may find a great opportunity. With the right strategy, the cryptocurrency market can offer substantial profits.
To make better decisions when buying and selling altcoins, it’s important to consider both the pros and cons of these cryptocurrencies, so you can enter the market with well-rounded knowledge.
Critics’ View on Altcoins
Compared to Bitcoin, altcoins have a smaller investment market. As of January 2022, Bitcoin holds 60% of the entire cryptocurrency market. The lack of regulations and clear investment criteria means that the altcoin market operates with fewer investors and smaller liquidity. As a result, their prices experience higher volatility compared to Bitcoin. It is often difficult to distinguish between different altcoins and their use cases. This makes investment decisions harder and more confusing. There are several “dead” altcoins that have resulted in the loss of investor money.
Proponents’ View on Altcoins
Altcoins are considered better versions of Bitcoin because they aim to address the flaws in the cryptocurrency world. Altcoins, like stablecoins, could potentially fulfill Bitcoin’s original purpose of being a medium for everyday transactions. Some altcoins, like Ethereum and Ripple’s XRP, have already been examined by official institutions, leading to more fundamental evaluations and approvals. Investors have a wide variety of altcoins to choose from, each serving different purposes in the cryptocurrency economy.
First Altcoin
The first-ever altcoin, Namecoin, was based on Bitcoin’s code and used the same algorithm. Namecoin, like Bitcoin, has a limited supply of 21 million units. Introduced in April 2011, Namecoin allows users to register and mine using .bit domains. Its goal was to enhance user privacy. Another early altcoin, Litecoin, was introduced in October 2011 and is often referred to as the “silver” of the cryptocurrency world. While it is based on Bitcoin’s code and works similarly, Litecoin differs in several key ways. Its total coin supply is four times that of Bitcoin, at 84 million units. Some believe that Litecoin might offer a better investment option than Bitcoin.
Future of Altcoins
The current market status of altcoins suggests that not all of them will survive in the long run. However, there are over 1,800 altcoins listed on CoinMarketCap, and it is likely that many of them will continue to thrive. Altcoins that offer strong use cases and additional functionalities are more likely to dominate the markets.
For investors looking to diversify their cryptocurrency investments, altcoins offer an affordable way to expand beyond Bitcoin. Investing in altcoins can yield significant returns, but one should be aware of the associated risks, such as the lack of regulation. As the altcoin market matures, it is expected to become more complex, attracting further investments and reducing volatility.
Frequently Asked Questions About Altcoins
What is Altcoin?
Altcoin refers to any cryptocurrency other than Bitcoin. These coins distinguish themselves from Bitcoin by expanding the functionality of cryptocurrencies and addressing its shortcomings.
What are the top 10 Altcoins?
As of July 2021, the top 10 altcoins include Ethereum, Binance Coin, Tether, Cardano, Polkadot, XRP, Uniswap, Theta, and Litecoin.
What is the price of Altcoin?
Altcoins can range widely in price, from a few cents to thousands of dollars. For example, while XRP was priced at $0.89 on the same day Ethereum traded at $1,979.
Which Altcoin is the best for investment?
Based on market capitalization, Ethereum is the largest and most stable altcoin. Its smart contract functionality has proven its value, and Ethereum is among the most complex blockchain systems in recent times.
Is Altcoin a good investment?
The risks of investing in altcoins are similar to Bitcoin, but many small altcoins lack liquidity. However, stable altcoins like Ethereum and XRP are competitors to Bitcoin.
Conclusion
Altcoins can be a good option for cryptocurrency investors, offering a range of opportunities. However, with nearly 9,000 altcoins still lacking recognition, it’s essential to conduct thorough research before making any investment decisions. While altcoins represent potential for changes in the financial system and the growth of digital currencies, investors must be aware of the risks involved.
