Altcoins: An Overview Altcoins, short for alternative coins, refer to all cryptocurrencies that are not Bitcoin (BTC). They get their name because they provide options beyond Bitcoin and regular fiat currencies.
Altcoins first appeared in 2011, and today, their number has grown into the thousands. Early altcoins aimed to enhance certain aspects of Bitcoin, such as transaction speeds or energy efficiency. More recent altcoins have various purposes, depending on the objectives of their creators.
Given the significant role altcoins play in the market, it’s crucial for crypto investors to understand their workings. This guide will delve into the uses of altcoins, their advantages and disadvantages, and much more.
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Types of Altcoins
Altcoins come in several forms, including stablecoins, mining-based coins, staking-based coins, and governance tokens. The classification of an altcoin depends on its functionality and purpose. Here’s a brief overview of the main types of cryptocurrencies you’ll encounter when exploring altcoins.
Stablecoins
Stablecoins are cryptocurrencies engineered to track the price of another asset. Most major stablecoins are pegged to the U.S. dollar and strive to mirror its value. If the price deviates, the coin’s issuer will take corrective measures.
People usually don’t pick stablecoins for cryptocurrency investments because of their consistent value. They’re more commonly used for savings or transferring money. It’s also possible to earn interest on stablecoins through lending or specific savings protocols.
Mining-based Coins
These cryptocurrencies use a process known as mining to validate transactions and increase the coin supply. Miners use devices to solve mathematical problems. The first miner to solve the problem gets to validate a block of transactions and receive crypto rewards.
Bitcoin, a mining-based cryptocurrency, pioneered this method for processing crypto transactions. However, mining requires substantial energy, which is a notable drawback.
Staking-based Coins
These cryptocurrencies use a process called staking to validate transactions and increase the coin supply. Holders of staking-based cryptocurrencies can stake their coins, pledging them for transaction processing. The blockchain protocol of the cryptocurrency selects a participant to validate a block of transactions, who then receives crypto rewards.
Peercoin, an early altcoin, first introduced the concept of staking. Despite Peercoin’s lack of mainstream recognition, staking has gained popularity due to its higher energy efficiency compared to mining.
Governance Tokens
Governance tokens are cryptocurrencies that grant holders voting rights to influence the project’s future. These tokens often let you draft and vote on cryptocurrency-related proposals, enhancing the cryptocurrency’s decentralization. Every holder gets a voice, preventing decisions from being centralized.
Pros and Cons of Altcoins
Pros:
- NFTs act as digital proof of ownership, existing on the blockchain network
- The creation of an NFT, known as minting, involves its publication on the blockchain, facilitating its purchase or sale
- While 2021 witnessed a significant expansion in the NFT market, it experienced a contraction in the following year.
Cons:
- Since the majority of NFTs represent static assets that don’t produce any standalone income, their worth is mainly dictated by subjective elements like the demand from buyers.As a result, the current high prices may not be sustainable, and NFTs could experience a significant drop in value
- The creation and sale of NFTs are not free, and the associated fees can exceed the value attributed to an NFT by other users on a marketplace
- NFTs and the underlying blockchain technology have an environmental footprint, as they consume a substantial amount of energy to create and validate transactions
- Some NFT projects may not provide the rights to the digital asset itself, so it’s important to do your due diligence to determine the location of the digital asset (at a web address, in centralized cloud storage, etc.) and whether you have the ability to move the asset to a different location
Comparison of Altcoins and Bitcoin
There are several key differences between altcoins and Bitcoin:
- Bitcoin debuted in 2009, while the first altcoins emerged in 2011. Since then, new altcoins continue to surface frequently.
- When it comes to investing in cryptocurrency, altcoins, with the exception of stablecoins, generally present a higher risk and reward. While Bitcoin is known for its volatility, it has already established itself as the market leader and has accrued significant value. Altcoins, on the other hand, have a greater potential for growth but also a higher risk of failure.
- Altcoins, introduced after Bitcoin, boast technological advancements that often enhance transaction speeds and reduce costs, outpacing Bitcoin in these areas.
Examples of Altcoins
The cryptocurrency market is home to thousands of altcoins. Here are a few notable ones:
- Namecoin: Launched in April 2011, Namecoin was the first significant altcoin. It shares similarities with Bitcoin, including being based on Bitcoin’s code and having the same maximum supply of 21 million coins. Namecoin is recognized for introducing .bit web domains, which provide anonymity and are resistant to censorship.
- Ethereum: Launched in July 2015, Ethereum was the pioneer in offering a programmable blockchain for developers. It quickly rose to become the second-largest cryptocurrency, trailing only Bitcoin.
- USD Coin: Launched in September 2018, USD Coin is a stablecoin pegged to the U.S. dollar. Centre, a consortium featuring Coinbase Global, Inc., oversees its governance.
Is It Wise to Put Your Money in Altcoins?
If you’re contemplating diversifying your portfolio with cryptocurrencies and are ready to put in the effort for thorough research, altcoins might be worth considering. Certain altcoins offer projects with wider applications compared to Bitcoin, which primarily serves as a value reserve. As altcoins are not as widely recognized, they could see substantial price surges if they become popular.
However, investing in altcoins comes with considerable challenges. With the sheer volume of altcoins available, pinpointing the most promising ones for investment can be daunting. Altcoins pose a higher risk, and a significant number of the lesser-known ones are dubious investments or even outright frauds.
To sum up, altcoins might be an interesting venture for diligent cryptocurrency investors willing to conduct extensive research. If you’re looking for an investment that’s less risky or less demanding in terms of time, you might want to consider cryptocurrency stocks. It’s crucial to avoid taking on too much risk, so if you choose to invest in altcoins, they should only make up a minor part of your portfolio.