What is an Altcoin?
An altcoin (alternative coin) is any digital currency that was created after Bitcoin (BTC) was introduced to the general public in 2009.
The concept of altcoins emerged as developers and entrepreneurs began to explore and develop new cryptocurrencies that could build upon Bitcoin’s capabilities and address its limitations. Some alternative coins use their own blockchain, while others are built on top of other existing blockchain platforms.
Types of Altcoins
Altcoins can be categorized by their characteristics, use cases, and functionalities. Popular types of alternative coins include:
- Payment altcoins: An altcoin that is used to transfer value between two parties.
- Stablecoins: An altcoin is tied to another asset that acts as collateral in order to maintain a relatively consistent value.
- Meme coins. An altcoin that is inspired by internet pop culture and may or may not have intrinsic value or an expectation of financial return.
- Utility tokens: An altcoin that is often built on the Ethereum network to take advantage of Ethereum’s smart contract functionality and established ecosystem. It can also be used as a form of currency.
How Alternative Coins Are Different From Bitcoin
Bitcoin and altcoins both use blockchain technology for their underlying network infrastructure, but alternative coins can have unique purposes and functionalities that go beyond Bitcoin’s primary function: transferring value.
Here are some ways that Bitcoin and altcoins differ:
|First-Mover Advantage||Bitcoin is the first cryptocurrency.||Altcoin developers have the advantage of leveraging what others have learned from building and using Bitcoin.|
|Market Dominance||Bitcoin has achieved mainstream brand recognition and holds the largest market share among all cryptocurrencies.||Altcoins collectively make up the remaining market share and have varying degrees of brand recognition.|
|Development Community||Bitcoin has a large, well-established development community.||Each altcoin has its own development community. The size of the community depends on the altcoin’s adoption, utility, and overall value proposition.|
|Consensus||Bitcoin uses the Proof-of-Work (PoW) consensus algorithm.||Altcoins can use PoW, but they often employ different consensus mechanisms to reduce energy consumption and/or improve network security, scalability, and performance.|
|Privacy and Anonymity||Bitcoin identities are pseudonymous, and transaction histories are transparent.||Some altcoins use ring signatures, stealth addresses, and zero-knowledge proofs to obscure identities, transaction details, and transaction histories.|
|Trading||Bitcoins can be traded or exchanged for fiat currency.||The availability of fiat trading pairs for altcoins varies depending on the specific altcoin and the exchange platform.|
|Supply||The Bitcoin protocol specifies a limited supply of 21 million coins.||Altcoins can have different supply limits; some have no upper limit at all.|
|Coin Distribution||Bitcoins are created and distributed to the community through a process known as mining.||Altcoins are created and distributed through various methods, including staking, mining and pre-mining, crypto faucets, initial coin offerings (ICOs), and yield farming.|
|Throughput||Bitcoin allows a limited number of transactions to be included in each block of the blockchain.||Many altcoins have implemented larger block sizes that can handle a greater number of transactions per block.|
|Market Liquidity||Bitcoin’s order book depth supports large trading volumes without significantly impacting the market price.||Altcoins with lower market capitalization and trading volumes have thinner order books; this makes it more challenging to execute large trades without impacting the market price.|
Today, there are thousands of alternative coins in existence, and they vary greatly in terms of their design, purpose, and popularity. Popular altcoins include:
Ether (ETH): Ethereum enables the creation of smart contracts and decentralized applications. Its native token, Ether (ETH), is the second-largest digital currency by market cap and is widely accepted as a payment method.
Cardano (ADA): Cardano aims to provide a secure and scalable infrastructure for the development of decentralized applications (dApps). Its native token, ADA, is used for staking, transaction fees, and participating in the platform’s governance.
Ripple (XRP): Ripple is a business altcoin that allows digital and fiat currencies to be transferred across international borders on the same network. XRP is its native currency.
Polkadot (DOT): Polkadot enables interoperability between different blockchains. DOT is the native utility token of the Polkadot network.
Tezos (XTZ): Tezos allows token holders to vote on proposed protocol upgrades. Its native token, XTZ, is used for staking, participating in governance decisions, and receiving rewards.
VeChain (VET): VeChain focuses on supply chain management (SCM) and product authentication. VET, which is its native utility token, is used for transactions, staking, and accessing various services on the network.
Augur (REP): Augur allows users to create and participate in prediction markets. REP is the native token used for reporting on market outcomes and participating in the platform’s governance.
Zcash (ZEC): Zcash is a privacy-focused altcoin that uses zero-knowledge proofs to hide transaction details. It operates on its own blockchain and provides users with the option to conduct either transparent or private transactions.
Investing in Alternative Coins
By the end of 2011, BTC investors began to show interest in a Bitcoin fork called Namecoin, and the term “altcoin” gained popularity within the crypto community as a shorthand way to refer to this hard fork.
Namecoin was developed to decentralize domain-name registration and make internet censorship more difficult. Its unique functionality quickly caught people’s interest and created a lot of press.
Despite its innovative intent, however, the first altcoin did not see widespread adoption. It did, however, pave the way for the development of thousands of new altcoins in the years that followed, each with its own unique features, use cases, and investment opportunities.
Investing in altcoins carries higher risks when compared to traditional investments. Over the years, it’s become apparent that altcoins appeal to specific types of investors. They include:
Early Adopters: These are investors who are interested in exploring new technological developments and trends. They often invest in newer, less-established altcoins with the expectation that these coins will grow in popularity and value over time.
Tech-Savvy Investors: These investors have a deep appreciation for blockchain technology and understand the mechanics of specific altcoins. This type of investor is often drawn to alternative coins because of their innovative features.
Speculators: Speculators are primarily interested in the potential for high returns. They buy altcoins with the hope of selling them later at a higher price.
Risk-Tolerant Investors: Due to their high volatility, altcoins tend to provide investors with either substantial gains or significant losses. Investors who have a high-risk appetite often find these two potential outcomes attractive.
Diversifiers: These are investors who want to diversify their portfolio and spread the risk of investing in cryptocurrencies other than Bitcoin across multiple alternative coins.
Long-term Believers: These are individuals who believe in the long-term potential of a specific altcoin project or the technology it’s built upon. They invest with the expectation that the project will be successful over the long run.
Altcoins in the decentralized finance (DeFi) space contribute to a vibrant and dynamic ecosystem by expanding the range of financial opportunities, fostering innovation, and offering diverse investment options for participants. Altcoins are often highly volatile, can be susceptible to market manipulation and face regulatory uncertainties.
As such, it’s important for all types of investors to conduct due diligence when trading or investing in alternative coins and only invest what they can afford to lose.