Crypto News
9 Feb 2021

What Are Altcoins & Why Invest in Them?

Farheen Shaikh

When it comes to cryptocurrency, plenty of us uses the term interchangeably with “Bitcoin”. That’s because Bitcoin was the first cryptocurrency to exist. It’s important to know that since its inception, cryptocurrency has grown at such a terrific pace, that there is more than one type of digital currency in existence today.

“Altcoins” are cryptocurrencies that exist in addition to Bitcoin. They have certain qualities in common with Bitcoin, but they are also distinct from it in other respects. 

For example, some cryptocurrencies employ a different consensus method to generate blocks and validate transactions than others. In other words, they set themselves apart from Bitcoin by offering new or enhanced features and capabilities, like smart contracts or minimal price fluctuation.

What Are Altcoins?

Altcoins are a combination of “alt” and “coin” and they include all the different alternatives to the traditional Bitcoin. When it comes to altcoin mining, they share similar methods to either Bitcoin or other popular currencies like Ethereum or Cardano’s ADA. Altcoins also aspire to become bigger than bitcoin by becoming a more affordable way for digital transactions.

There are almost 9,000 cryptocurrencies in circulation as of March 2021. According to CoinMarketCap, altcoins account for more than 40% of the overall cryptocurrency market in March 2021.  Because they are generated from Bitcoin, the price swings of most altcoins tend to follow in the footsteps of Bitcoin’s trajectory. 

Analysts, on the other hand, believe that as cryptocurrency investing ecosystems mature and new markets for these coins emerge, altcoin price swings will become independent of Bitcoin’s trading signals. 

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Understanding Altcoins

Altcoins are designed to overcome Bitcoin’s perceived restrictions in order to gain a competitive edge. Many cryptocurrencies, including Bitcoin and Ethereum, employ the Proof-of-Stake (PoS) consensus mechanism to reduce energy consumption and the time necessary to produce blocks and confirm new transactions.

Yet another example of altcoin is the usage of ether, the second-largest cryptocurrency by market capitalization in the world, which is utilised in smart contracts on the Ethereum platform as payment for transaction fees. Altcoins also address some of the typical criticisms levelled against Bitcoin. Stablecoins, for example, do not display the price volatility associated with Bitcoin, making them suitable vehicles for everyday transactions.

Altcoins have built a market for themselves by establishing a clear distinction between themselves and the Bitcoin currency. 

As a result, they have garnered the attention of investors who consider them as viable alternatives to Bitcoin. Investors in altcoin anticipate making money as these cryptocurrencies gain more momentum and users, thus increasing in value.

4 Different Types of Altcoins:

Altcoins are classified into a number of different categories and flavours based on their functionality and consensus processes.

Mining-Based Coins 

Mining-based altcoins, as their name implies, are created via the process of mining. Blocks are created using Proof-of-Work (PoW), a mechanism in which computers generate new currencies by solving tough mathematical puzzles.

Litecoin, Monero, and Zcash are examples of cryptocurrencies that are based on mining. The mining-based altcoins accounted for the vast majority of the top ten cryptocurrencies in early 2020.

Stablecoins

Since its inception, cryptocurrency trading and usage have been characterized by high volatility. Stablecoins attempt to decrease overall volatility by placing their value on a basket of commodities, such as fiat currencies, rare metals, or other cryptocurrencies, in order to lessen the instability that the traditional crypto market faces. The basket is intended to serve as a reserve for holders in the event that the coin fails or has difficulties.

Security Tokens 

Unlike traditional securities, security tokens have a digital origin and are exchanged on stock exchanges like other types of securities found in the stock markets. Security tokens are similar to traditional stocks in that they guarantee holders equity in the form of ownership or a dividend distribution if they keep the token for a certain period of time. 

Investing in such tokens is primarily motivated by the promise of profiting from the increase in value of the token. Initial coin offerings, often known as ICOs, are a common method of distributing security tokens to investors.

Utility Tokens

Utility tokens are used to offer services inside a network and are used to store value. Among other things, they may be used to make service purchases or redeem incentives. 

Utility tokens, in contrast to security tokens, do not pay dividends or transfer ownership of the underlying asset. A utility token is a cryptocurrency that can be used to acquire storage space on a network. 

Filecoin is an example of such a token. Diem, a stablecoin developed by Facebook, is the most well-known example. It is a coin that is backed by the United States dollar. DollarCoin (USDC) and MakerDAO are two more instances of stablecoins.

Are Altcoins Good Investments?

Now, let’s come to the question that’s on your mind – which altcoins to buy, and are they good investments. There are more than 9,000+ altcoins to choose from, so doing your own research is vital to help you find the ones that match your goals. 

The market for alternative cryptocurrencies is still in its infancy. In the past decade, the number of cryptocurrencies listed on cryptocurrency exchanges has grown at an exponential rate, attracting swarms of retail investors who are hurriedly betting on their price fluctuations in order to make short-term profits. 

Altcoin values are subject to quicksilver fluctuation as a result of thin marketplaces and a lack of regulatory oversight. 

Pros of Investing in Altcoins (Why Invest in Altcoins?)

  1. Altcoins are considered “better copies” of Bitcoin since they are designed to address the limitations of the cryptocurrency. Stablecoins, for example, have the ability to fulfil Bitcoin’s initial goal of serving as a medium for everyday transactions.
  2. In particular, ether (Ethereum) and Ripple (XRP) have already acquired widespread acceptance among conventional institutions, leading to skyrocketing values for these digital assets.
  3. A diverse range of altcoins, each of which serves a distinct role in the cryptocurrency system, are available to investors.

 Cons of Investing in Altcoins:

  1. When compared to Bitcoin, the investment market outcomes are much smaller. Currently, Bitcoin has a 60% market share of the total cryptocurrency sector, according to data from April 2021.
  2. Many altcoins are relatively new with less exposure.
  3. Making the distinction between different cryptocurrencies and their individual use cases may be challenging at times, which makes making investment decisions even more complex and complicated.

Future of Altcoins

Altcoins are a low-cost option for investors wanting to diversify their portfolios within the cryptosphere. For investors looking to go beyond Bitcoin or on the prowl for a future Bitcoin, altcoins are apt. Additionally, in recent years, rallies in the crypto market for altcoins have generated gains that are several times greater than those generated by Bitcoin. 

However, there are risks associated with altcoin investment that can be offset by sound research before investing. The maturity of the crypto market will certainly result in more expertise and cash flowing into the industry, opening the door for tougher regulations and less volatility in the process. 

FAQs on Altcoins

What is the purpose of altcoins?

Any alternate crypto to Bitcoin is called an altcoin. Cryptocurrencies known as altcoins make use of a technology known as “blockchain,” which enables the transmission of secure peer-to-peer transactions. Building on the popularity of Bitcoin, they tweak the regulations a little to appeal to a wider range of customers. 

What are some altcoins examples?

Aave, Compound, Ripple and ADA are examples of altcoins.

Are altcoins better than Bitcoin?

Many cryptocurrencies have faster confirmation periods than bitcoin. This is desirable to both consumers and businesses for a variety of reasons that are readily apparent. Altcoins, alternatively entail dangers linked with their lesser size and lower popularity than bitcoin.

 

Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.

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Farheen Shaikh

Content Writer

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