Altcoin Explained: Pros and Cons, Types, and Future
All cryptocurrencies outside Bitcoin (BTC) are referred to as altcoins. Because most cryptocurrencies are forked from one of Bitcoin or Ethereum (ETH), some people define altcoins as all cryptocurrencies other than those two. Some alternative currencies aim to differentiate themselves from Bitcoin and Ethereum by offering new or extra features or objectives. In contrast, others employ alternative consensus processes to validate transactions and open new blocks.
Most altcoins are created and published by programmers with distinct goals or purposes for their currencies or tokens. Please find out more about other cryptocurrencies and how they vary from Bitcoin.
Knowing altcoins
The term “Altcoin” combines the terms “alternative” and “coin.” It frequently refers to all digital currencies and tokens other than Bitcoin. Altcoins are a part of the blockchains that they were specifically created for. Many are forks from Bitcoin and Ethereum, the splitting of a blockchain incompatible with the primary chain. Usually, there are several causes for these forks. Most frequently, a group of developers who disagree with one another quit to start their own business.
Many alternative currencies, like ether, used in Ethereum to pay transaction fees, are employed within their blockchains to carry out specific tasks. To compete with Bitcoin as a payment option, several developers have built forks of the cryptocurrency, including Bitcoin Cash. Some fork and promote themselves to collect money for certain purposes. For instance, the cryptocurrency Bananacoin branched from Ethereum in 2017 to generate money for a Laos-based banana farm that advertised the production of organic bananas.
The restrictions of the cryptocurrency and blockchain that altcoins are split from or are supposed to compete with are the focus of their improvements. Litecoin, a 2011 branch of the Bitcoin network, was the first alternative cryptocurrency. Scrypt, which is pronounced “es-crypt,” is Litecoin’s proof-of-work (PoW) consensus algorithm. It is faster and less energy-intensive than Bitcoin’s SHA-256 PoW algorithm.
A different altcoin is ether. It did not, however, split apart from Bitcoin. It was created to enable Ethereum, the world’s biggest blockchain-based scalable virtual computer, by Vitalik Buterin, Dr. Gavin Wood, and others. Network users are compensated with ETH (ETH) for their device’s transaction validation work.
Altcoin types
Altcoins come in a variety of types and tastes. Here is a quick description of some of the many sorts of alternative coins and the applications they are designed for.
Money Token
As their name suggests, payment tokens are intended to be used as currency—to exchange value between parties. The best illustration of a payment token is Bitcoin.
Stablecoins
Since their inception, cryptocurrency trading and use have been characterized by volatility. By tying their value to a variety of commodities like fiat money, precious metals, or other cryptocurrencies, stablecoins seek to lower this overall volatility. If the cryptocurrency falters or has issues, the basket is intended to function as a reserve to redeem holders. Stablecoin price fluctuations shouldn’t go above a specific range.
The USD Coin (USDC), MakerDAO’s DAI, and Tether’s USDT are notable stablecoins. With plans to roll out additional stablecoin settlement capacity later in 2021, payment processing giant Visa Inc. (V) stated in March 2021 that it will start settling some transactions on its network in USDC over the Ethereum blockchain.
Tokens of security
Tokenized assets provided on stock exchanges include security tokens. Tokenization converts an asset’s value into a token, subsequently distributed to investors. Any asset, including stocks and real estate, may be tokenized. The asset has to be kept and secured for this to operate. If not, the tokens wouldn’t have any value because they wouldn’t stand for anything. Because they are intended to function like securities, security tokens are subject to Securities and Exchange Commission regulation.
With the successful completion of a Securities and Exchange Commission-qualified Reg A+ token sale in 2021, the Bitcoin wallet company Exodus was able to convert 75 million shares of common stock into tokens on the Algorand blockchain. This was a historic occurrence because it was the first digital asset instrument to provide equity in a US-based issuer.
Service Tokens
Within a network, utility tokens are employed to deliver services. They might be used, for instance, to pay for services, cover network costs, or get incentives. A utility token is something like Filecoin, used to pay for network storage space and safeguard data.
ETH is a utility token as well. It is intended to be used as payment for transactions on the Ethereum blockchain and virtual machine. By minting and burning two utility tokens to put pressure on the price of the stablecoin USTerra, which lost its peg to the dollar on May 11, 2022, the stablecoin tries to keep it. Utility tokens are supposed to be utilized on the blockchain network to maintain it; nevertheless, they may be bought on exchanges and retained.
Meme Dollars
Meme coins, as their name indicates, are parodies or humorous interpretations of other well-known cryptocurrencies. They usually become well-known quickly and are frequently promoted online by well-known influencers or investors looking to make quick money.
The rapid rise in this category of altcoins between April and May 2021 is sometimes called “meme coin season,” with hundreds of these cryptocurrencies recording large percentage increases based only on conjecture.
Regulatory Tokens
Holders of governance tokens have particular privileges within a blockchain, such as the ability to vote on protocol updates or influence the actions of a decentralized autonomous organization (DAO). They are utility tokens because they are often native to a private blockchain and utilized for blockchain functions. Still, because of their usage, they have gained acceptance as a different category.
Why Altcoins Are Good
Because they seek to address perceived flaws, altcoins are “improved versions” of the cryptocurrency they were developed from. Because they have uses, such as ether from Ethereum, altcoins with greater usefulness have a better chance of surviving.
Investors can access various alternative currencies for various purposes in the cryptocurrency market.
Reasons Why Altcoins Are Bad
Compared to Bitcoin, the investment market for altcoins is smaller. Since May 2021, Bitcoin has consistently had a 40% share of the worldwide cryptocurrency market. There is little liquidity because there are fewer investors and traders in the altcoin market.
Making investment selections more difficult and perplexing is the difficulty with which it is sometimes possible to discern between various cryptocurrencies and their particular use cases.
Several “dead” cryptocurrencies ultimately cost investors money.
Altcoins’ potential
The conditions that resulted in a dollar being printed by the federal government in the 19th century provide a precedent for discussions concerning the future of altcoins and cryptocurrencies. In the US, different regional currencies were in use. Each was supported by a separate instrument and had distinctive qualities. Additionally, local banks were issuing money occasionally backed by phony reserves. The current state of the altcoin markets is mirrored by the range of currencies and financial instruments. There are dozens of alternative currencies on the market, all claiming to fulfill a distinct market and purpose.
Given the current situation, it’s doubtful that the altcoin markets would merge into a single cryptocurrency. However, it’s also likely that the vast majority of the tens of thousands of altcoins listed on cryptocurrency exchanges will fail. Most altcoins with significant usefulness, use cases, and a clear blockchain purpose will likely dominate the markets when the altcoin market begins to consolidate around them.
Altcoins might be less expensive than Bitcoin if you want to diversify your cryptocurrency holdings. Nevertheless, the cryptocurrency market is still developing and unstable, irrespective of the coin type. Since cryptocurrencies are still figuring out their place in the global economy, it is advisable to approach them all with caution.
What Alternative Coin Is the Best Investment?
Your financial status, investment objectives, risk tolerance, and market conditions will all affect which cryptocurrency is the best choice for you. The best way to determine which is ideal for you is to consult with a financial advisor.
What Are the Top 3 Alternative Coins?
The top three cryptocurrencies by market cap are Ethereum, USD Coin, and Tether (USDT).
Is Bitcoin Investment Better Than Other Cryptocurrencies?
Whether cryptocurrency is superior is debatable and depends on an investor’s financial situation, investment objectives, risk tolerance, and views. Before purchasing cryptocurrencies, you should discuss your investment options with a qualified financial advisor.
This article does not constitute a recommendation by Investopedia or the author to invest in cryptocurrencies or other Initial Coin Offerings (“ICOs”). Investing in cryptocurrencies and other ICOs is very hazardous and speculative. Before making any financial decisions, it is always advisable to get the advice of a knowledgeable specialist because every person’s circumstance is different.
Conclusion
- All cryptocurrencies other than Bitcoin (and, to some people, Ethereum) are referred to as altcoins. Tens of thousands of other coins are available.
- Various varieties of alternative coins exist depending on their intended use.
- Although it is hard to anticipate the value of altcoins in the future, they will still exist as long as the blockchain they were created for is utilized and developed.
