If you’re familiar with the crypto world and the standard terms used in the crypto community, you must have heard about altcoins. So, what are altcoins? Why was such a nomenclature chosen? In this article, we explore altcoins in detail. We’ll also see why altcoins are becoming popular amongst crypto enthusiasts and how it can be profitable for you.
Definition and Overview
As you might know, Bitcoin is the first cryptocurrency to be launched in 2009 and is also called the progenitor of digital currencies. Altcoins are referred to all those cryptocurrencies that were launched after Bitcoin. The literal meaning of the word “altcoins”, as you may guess, is “alternative to Bitcoins”.
According to CoinMarketCap, there are around 5,100 altcoins in the crypto market. The crypto market price-tracker and observer also reported that altcoins amounted to 34% of the total crypto market share in February this year.
There are primarily four types of altcoins if you classify them- stablecoins, mining-based cryptocurrencies, utility tokens, and security tokens. As the usage of cryptos changes, there’s a possibility that altcoins will include only mining-based cryptocurrencies in a few years.
Out of the 34% market share of altcoins, RippleCoin and Ethereum were the largest altcoins in terms of market capitalization as of early 2020.
Understanding Altcoins in Detail
As you may have figured out, the word “altcoins” is made of two root words, “alt” and “coin”. So, they are alternatives to Bitcoin. After the success of Bitcoin as the first P2P cryptocurrency, developers began to create altcoins.
Now, you might ask what the purpose of developing altcoins was if Bitcoin already existed. The main reason for creating altcoins like Ethereum, RippleCoin, and LiteCoin was to cover Bitcoin’s bases. Many experts believe that Bitcoin has its limitations and altcoins, by targeting them, gain a competitive edge over Bitcoin. Since Bitcoin is the most trusted cryptocurrency around the world, any altcoin must offer more than Bitcoin to be successful.
Most altcoins, like Bitcoin, are backed by blockchain technology. Blockchain technology is the basic foundation of almost every cryptocurrency that exists in the world. So, most altcoins are P2P or Peer-to-Peer digital currencies. Since the volume of Bitcoin transactions being carried out is more than the transaction of any cryptocurrency, it can be expensive. The entire process becomes long-drawn as well. Altcoins try to offer affordable and efficient transactions for customers. Altcoins may have coinciding specifications but each has its own purpose and varies extensively.
Classification of Altcoins
As mentioned above, though many altcoins seem to have similar features, they vary widely from each other. They can be divided into four major types- stablecoins, mining-based cryptocurrencies, utility tokens, and security tokens. It must also be known that some altcoins may fall in more than just one category.
One of the major drawbacks of Bitcoin is its market volatility. The price is never stable. The market is always fluctuating which makes earning profits uncertain. This is where stablecoins come into play. They target the limitation of the extreme volatility of Bitcoin by offering stable alternatives.
Stablecoins try to back the value of coins with existing currencies. Some of the currencies that are used as a standard to back the stablecoins include Euro, USD, and gold. Libra, launched by Facebook in January 2020 is the most trusted stablecoin. Other examples of stablecoins include Tether (USDT), USD Coin, Dai, TrueUSD, and Paxos Standard (PAX).
As you may understand, mining-based cryptocurrencies or altcoins are similar to Bitcoin. Bitcoins are created or developed using the process of mining. In such a process, cryptocurrencies are developed by solving complicated problems and unlocking new blocks in the entire chain of blocks. If you look at the world’s top altcoins, most of them fall into the “mining-based” category. The most popular altcoin has to be Ethereum, followed by RippleCoin, LiteCoin, and Dash.
This type of altcoin shouldn’t be confused with mining-based cryptos as they can’t be mined. Their creation is based on third-party blockchain. It provides a claim on the services offered by the network. It finances the network providing such tokens. The company can offer them as a part of ICOs.
Filecoin is the most appropriate example of a utility token. It’s offered to customers as a part of ICOs. It can be exchanged for decentralized storage space. Funfair, Basic Attention Token, Timicoin, and Brickblock are some other examples of utility tokens.
Security tokens have features similar to utility tokens as both are offered in ICOs (Initial Coin Offerings). They are the closest to conventional stocks. They offer some kind of interest on tokens such as dividends and payouts. They also offer ownership in a business, unlike utility tokens.
Initial Altcoin Examples
The first altcoin to be launched was NameCoin in 2011. It had the basic foundation of the Bitcoin model as the same algorithm was used to create or mine it. Another similarity of NameCoin to Bitcoin is that the number of available coins is exhaustive (21 million). NameCoin made user domains more private and secure. It allowed crypto miners to mine NameCoins on their own by registering using .bit domains. This increased censorship resistance and anonymity, making the domains more secure.
Just after the launch of NameCoin, LiteCoin was developed and released in October 2011. It was hyped as being the “silver to Bitcoin’s gold”. For many years, it was said that LiteCoin will emerge as the successor to Bitcoin.
Even though LiteCoin is fundamentally quite similar to Bitcoin, it offers other features that make it different. It helps customers have an efficient and faster transaction experience, unlike Bitcoin that takes a lot of time to validate transactions. The number of LiteCoins that can be mined is 84 million, which is 4 times the number of Bitcoin.
Should you Invest in Altcoins?
Now, we’ll discuss whether you should invest in altcoins or not. Most crypto investors find altcoins to be less expensive than Bitcoin and invest heavily in it. Others believe that the peak of Bitcoin was already achieved in August 2017 when it touched the $20,000 mark, so there’s no chance of earning huge profits with Bitcoin now.
In contrast, altcoins can be more profitable and provide higher returns than Bitcoin. If you’re risk-averse, you can start by investing in Ethereum and RippleCoin. You can invest in and back new altcoins offered in ICOs if you love to take risks.