The cryptocurrency community has a penchant for coining new words (no pun intended). Without context, even basic terms like “altcoin” could make you scratch your head.
So what is an altcoin, anyway? How does it differ from Bitcoin?
If you want to get your foot into the crypto market and know how to invest in altcoins, keep reading.
What Is An Altcoin?
“Altcoin” is short for “alternative to bitcoin.” So, any cryptocurrency not named bitcoin is an altcoin.
Is there a need to draw a distinction between bitcoin and the other 99.99% of the crypto market? For now, there is.
More often than not, altcoins collectively account for just less than 50% of the total value of the crypto asset class. Therefore, they don’t impact the market as much as bitcoin does.
The vast majority of altcoins have yet to reach the level of the king of crypto’s brand recognition. Only a handful of these cryptocurrencies are poised to benefit from network effects—phenomena where something gains greater value as more people and companies adopt it.
These altcoins have carved out a niche for themselves as groundbreaking projects and/or valuable investments. But, in terms of market capitalization, even ether – the second-most popular crypto – is nowhere near big as bitcoin.
Although usually grouped together, altcoins are not the same. Most of them are probably going to be gone and forgotten in 5 or 10 years.
Wondering how to invest in altcoins? You have to understand what problem one aims to solve and find out about the credibility of the people behind it.
Doing so will enable you to identify which prices are likely to increase multiple times over the short, medium, or long term.
How Do Altcoins Work?
So, what is an altcoin designed to do?
As a general rule, every altcoin aspires to be different. Bitcoin’s open-source technical blueprint has inspired them all, however.
That’s why bitcoin and many altcoins have the same foundational technologies and even share the same code to an extent.
Altcoins are peer-to-peer networks engineered to process significant amounts of data all at once without any central authority. They’re systems of nodes operated by volunteers located across the globe to form worldwide supercomputers.
Likewise, they can move from one altcoins wallet to another privately and securely using cryptography. They depend on a decentralized distributed ledger called blockchain too. Blockchain is a database that publicly and permanently records digital transactions.
Nobody owns decentralized networks, so you can’t buy a piece of Ethereum, Cardano, and the like. What you can purchase are the digital coins and tokens native to or built on them.
Many crypto enthusiasts like to talk about altcoins as if they’re just one breed of assets. But in reality, they belong to one or more well-defined categories. As follows are the most common types of altcoins:
The supplies of these altcoins aren’t readily available. Like resources buried in the ground, these cryptos increase in quantity through altcoins mining only.
Instead of digging, bitcoin and altcoin miners solve complex mathematical questions to validate transactions before adding them to the blockchain. Once mined, these altcoins become newly minted in an instant.
There are different mining methods. But the roles of miners are always to ensure that transactions are authentic and to protect the integrity of the blockchain. They help guarantee that no counterfeit coin or token circulates, preventing double-spending.
Miners earn cryptocurrencies they can sell or hold.
The opposite of mining-based cryptocurrency altcoins, these ones enter circulation, not through mining. Rather, they’re already distributed before hitting the market. XRP is a prominent example.
These altcoins are called as such because they’re supposed to have stable market value. They’ve been conceived to address the wild price fluctuations that have characterized the crypto sphere.
Market forces don’t easily affect stablecoins because they’re being backed by reserve assets (collateral). These altcoins can be pegged to a single asset or a basket of strong fiat currencies, scarce commodities, or other cryptocurrencies.
By design, stablecoins bridge the gap between the crypto and fiat worlds.
They combine the affordability, speed, privacy, security, and borderlessness of cryptocurrency with the typical non-volatile market value of fiat money.
Having said that, they are not exactly cut from the same cloth. In fact, they fall into three sub-categories.
- Fiat-Collateralized – Despite what their name suggests, these altcoins aren’t necessarily supported by fiat currencies. Fiat-backed stablecoins may also use precious metals such as gold and silver or valuable commodities like oil as collateral. Independent custodians are responsible for maintaining adequate asset reserves to justify altcoin prices. Auditors review them regularly to ensure they play by the rules. USDT (Tether) is one of the most widely used fiat-collateralized stablecoins.
- Crypto-Collateralized – To avoid volatile price swings, various crypto assets back the altcoin value of these stablecoins. Crypto-backed altcoins are over-collateralized, which means that their crypto reserves exceed their supplies. Perhaps no crypto-backed stablecoin is more well known than Maker DAO’s Dai.
- Non-Collateralized – They aren’t pegged to any traditional or crypto asset. Instead, self-executing agreements called smart contracts to stabilize their prices. The network of an uncollateralized alt currency burns coins when its price becomes too high and mints new ones when the price drops too much. Kowala’s kUSD is a good case in point.
Like securities traded in stock markets, security tokens are investment contracts that promise an ownership stake in a company, voting rights, or dividend payouts.
Sold to investors during initial coin offerings, security tokens are subject to the strict guidelines defined by security laws. That’s why buying and transferring them isn’t as straightforward as other cryptocurrencies.
These altcoins give you access to certain decentralized peer-to-peer networks. Utility tokens, like Filecoin, don’t represent some form of company equity. They’re like money you can exchange for services or rewards.
The Difference Between Altcoins and Bitcoin
Bitcoin is a revolutionary financial technology, but it’s not perfect.
Satoshi Nakamoto, its elusive creator, envisioned it to be a “Peer to Peer Electronic Cash System”. It’s an inefficient and inconvenient medium of exchange, however, due to its technical limitations.
That’s why bitcoin’s narrative has changed. Now, it’s being viewed as an alternative to gold as a store of value.
So, what is an altcoin used for?
To try to do what bitcoin can’t.
Every noteworthy altcoin is an enhanced iteration of bitcoin. Bitcoin is engineered to do simple tasks only. But when it’s tweaked, it’s possible to create cryptocurrency networks capable of more complex activities.
Some altcoins try to compete against bitcoin. Others want to complement it. So, are altcoins solid investments? Here are the draws and dangers of putting your money on altcoins:
- Efficient Consensus Algorithms – Bitcoin’s Proof-of-Work consensus mechanism is time-consuming and energy-intensive. It is unsustainable once mass crypto adoption happens.
Some altcoins use a different approach: Proof-of-Stake. It’s not that resource-heavy and much faster in validating more transactions.
Efficient and speedy transactions are a must.
- Low Transaction Fees – The price of moving crypto from one altcoins wallet to another is usually just a fraction of the cost of transferring bitcoin. Little to no transaction fee is paramount if cryptocurrencies are to be used on a daily basis.
- Flexibility Scalability – The third and current generation of crypto networks is undergoing development with ease of scalability in mind. First- and second-gen crypto assets – including bitcoin – didn’t adapt to increased demand as quickly as they should have.
- High Return on Investment Potential – Bitcoin is the safest bet if you want to turn a profit in the crypto space. While it could still grow exponentially, its massive valuation makes it the most expensive crypto asset to buy.
If you want to rake in more gains faster, you may want to park your money in cryptocurrency altcoins. Undervalued cryptos have the potential to double, triple, or quadruple your cash in months, if not days or weeks.
- More Choice – Altcoins are in the thousands. Not all of them merit funding, but you won’t run out of options to diversify your portfolio. Although very few cryptos may deserve to be your biggest holdings, you can use some altcoins to hedge against risk.
- Obscure Utility – As a newbie, it can be hard to wrap your head around the concept of cryptocurrency. But it can be much more difficult to grasp the fundamentals of a crypto asset without reading its whitepaper and without having software development background.
Most first-time crypto investors rely only on intuition and usually make decisions based on the hype surrounding some altcoins. While there’s nothing wrong with having exposure to popular coins or tokens, it’s a huge no-no to pick an investment that you don’t understand.
Unfortunately, novice investors usually convert their cash into crypto without knowing their use cases. Any altcoin that has no practical use and generates its value from pure hype is trash.
- Deceptive Value – The crypto space is full of sleazy characters. They know that many beginners enter the altcoin market every day and are likely to invest with emotion.
Sadly, scammers can launch their own altcoins and publicly back worthless ones to rip naive investors off.
- Great Price Volatility – Crypto assets with smaller market cap could experience dramatic altcoins price fluctuations. If only a handful of holders control a significant quantity of an altcoin, they can drive down the value of crypto when they sell.
- Susceptibility to Market Manipulation – Greedy and fraudulent market participants could use different tactics to play inexperienced investors.
“Pump and dump” is a common manipulative practice. Groups of malicious investors would “pump” capital into an asset and “dump” it once the altcoin price skyrockets.
Casting fear, uncertainty, or doubt on certain assets is another shady strategy to influence public sentiment. Some market participants do this to discourage others from buying or selling in order to maximize their profits or minimize their losses.
How To Invest in Altcoins
Now that you know the basics, it’s time to discuss investing.
Decide Between Holding and Trading
First of all, be honest with yourself about how hands-on you can be. You have three options: buy and hold crypto assets, trade altcoins actively, or do both at the same time.
The first one is the least demanding, for it’s practically a set-and-forget approach. The second requires some advanced knowledge of the crypto market. The third isn’t any less challenging than the second.
Whichever path you take in cryptocurrency investing, realize that you have to put some hours in on this activity to avoid losing your hard-earned cash fast.
Explore Your Options
Go to an altcoin price tracker like coinmarketcap.com. It’s a good place to start your research.
It can show you the rankings, prices, valuations, and 24-hour trading volume stats of crypto assets in real-time. Each listed digital currency comes with its own page where you can find more information.
You can view historical price charts, read the latest news, and check an asset’s availability in different exchanges.
Do Some Technical Analysis
The golden rule of altcoin investing is to buy an asset when its price is low and sell it when its value is higher.
But how would you know if an altcoin’s price is trending upward or downward?
Technical analysis. Read altcoins price charts, which is usually easier than it sounds.
It would help to familiarize yourself with different patterns and their meanings like experienced traders. But as a novice, you can simply check the trajectory of an asset’s price over the past days and months.
Price discovery is the process of determining a cryptocurrency’s value through the interactions between buyers and sellers. When the alt currency is going through it, its price would normally move within a certain range over a meaningful period.
If the price chart shows a sharp rise or a steep drop, it indicates that emotional investors are fueling an altcoin’s price movement. In this case, it may be wise to let the market calm down before making a purchase.
Check the Bitcoin Dominance
This metric represents the percentage of crypto market capitalization bitcoin owns. If its slice of the pie is more or less 60%, it suggests that altcoin prices are cheap. If bitcoin’s value nears 40%, it means that all of the other cryptocurrencies are more expensive than usual.
Pick the Right Place to Buy
To get started in cryptocurrency investing, create crypto exchange accounts to start buying and holding altcoins. Some exchanges are built for ordinary investors while others appeal to traders.
The legality of crypto exchanges depends on where you live, so find out which ones accept users from your location.
By 2020, there had been more than 300 crypto exchanges in the world. Not all of them are legitimate. Some occasionally hit the news for being a sham.
To err on the side of caution, create an account with the leading crypto exchanges only and think twice before taking a chance on platforms with thin track records.
Most altcoins aren’t a household name like bitcoin. Some of them, however, have the potential to be as big of a deal in the near future.
It’s good that you’re interested in gaining a foothold in the crypto space now, for it’s still early. You may not get rich right away and may suffer losses before you pocket profits, but it will be worth it.
One word of caution: the crypto market can be tough on reckless and uninformed altcoin buyers.
Whether you want to be a prolific altcoin trader or a passive investor, you ought to know the fundamental value of your prospective altcoins. Remember to also listen to reliable technical analysts, and never let your emotions get the best of you.
Bitcoin is the first cryptocurrency ever launched. “Altcoin” means “alternative to bitcoin.” In other words, every crypto asset other than bitcoin is an altcoin.
Altcoins are out there to do the things bitcoin isn’t designed to do.
Some altcoins directly compete with bitcoin and claim to be “better versions” of it. But many of their so-called advantages are merely psychological. They haven’t dethroned bitcoin because they’re not as secure and as scarce.
Others exist to further advance decentralized finance – a concept that promotes financial services without any central authority.
Cryptocurrency rankings are in a constant state of flux. Only bitcoin has held its position at a top unopposed.
At the time of writing, as follows are the 10 altcoins by market cap.
- Ether (ETH) – Ether is the native cryptocurrency of Ethereum. The network’s users need ETH to pay for the computing power necessary to do and complete tasks. In short, ether is the gas the decentralized apps residing on Ethereum run on.
- Binance Coin (BNB) – This token is designed to cover fees on Binance, the second-leading crypto exchange in the world. Built on the Ethereum blockchain, BNB is limited to 200 million tokens only. Although optional, spending Binance Coin comes with a rebate during the first four years of a Binance membership.
- Dogecoin (DOGE) – Dogecoin is a memecoin, a crypto-based on a silly joke, that has taken the altcoin market by storm. Although it has been hacked in the past, it has become a goldmine for speculative investors, thanks to its leading Twitter cheerleader Elon Musk.
- Tether Token (USDT) – This stablecoin is popular among traders. Tether tokens help preserve altcoin value in a way that other cryptocurrencies can’t. USDT allows faster and cheaper bitcoin conversion.
- ADA – It’s the native token of Cardano, a third-generation blockchain whose protocol is being built from the ground up. Its engineers envision it to have a much better governance system and avoid the scaling issues that have plagued Bitcoin and Ethereum.
- XRP – XRP is the fuel that powers Ripple’s blockchain-like network, which facilitates cross-border payments between banks and money transfer agencies. This crypto serves as a “bridge asset” for two parties that don’t have any relationship with one another and that use different fiat currencies.
- DOT – The DOT token has surged in popularity due to Polkadot’s novel technical solutions for the interoperability problems between blockchains. Polkadot uses two blockchains. One is for permanently recording transactions. The second is for launching and operating user-generated blockchains.
- Bitcoin Cash (BCH) – Bitcoin Cash was a product of the 2017 Bitcoin hard fork, an event where a change in a blockchain protocol occurred.BCH proponents broke away from the main BTC circle to increase the number of transactions each block can accommodate. As a result, they created a bitcoin version that functions as a better medium of exchange. BCH and BTC communities may have philosophical differences, but they still agree on the same consensus mechanism and the maximum coin supply limit.
- Litecoin (LTC) – Altcoin investing experts like to dub litecoin as the silver to bitcoin’s gold. Litecoin promises faster transaction speed than the original crypto. It’s less scarce, however, for its supply can reach up to 84 million. Litecoin and bitcoin use different cryptographic algorithms too. The Litecoin network allows the use of ordinary personal computers for mining. Miners with more sophisticated hardware are likely to beat machines built for everyday use only. Ease of altcoins mining tends to attract cryptojackers, though. Although litecoin has advantages over bitcoin in some areas, its smaller value makes it more prone to more dramatic price swings.
- UNI – The native token of the decentralized exchange Uniswap, UNI gives holders voting rights in running the protocol.
If you wonder what is an altcoin for? What distinguishes one from bitcoin? Read the above article to learn everything you need to know about altcoins.