ENIf you are interested in cryptocurrencies, chances are you have already heard about Bitcoins. It is the most popular cryptocurrency known to date. But besides Bitcoins, several other cryptocurrencies are available for trading, called Altcoins.
An altcoin is a portmanteau of alternative and coin, referring to all other cryptocurrencies besides Bitcoin.
Altcoins use a different consensus mechanism to build blocks or to validate transactions. These may also have additional features to distinguish themselves from Bitcoins, like smart contracts or low-price volatility. If you are interested in investing in cryptocurrencies, it is essential to know the various options available. Some of these altcoins are also on the list of best cryptocurrencies to invest in in 2021.
Some interesting facts about altcoins
- Altcoins are cryptocurrencies developed after the success of Bitcoins.
- They started to emerge in 2011 as an attempt to improve on Bitcoin.
- The first Altcoin was Namecoin, developed based on the codes of Bitcoin in April 2011.
- As of March 2021, there are around 9000 cryptocurrencies available in circulation.
- Altcoin constitutes 40% of the cryptocurrency market, according to a report by CoinMarketCap.
- Some of the significant Altcoins include mining-based cryptocurrencies, stablecoins, security tokens, and utility tokens.
- Since it is derived from Bitcoin, Altcoin prices mimic the trajectory of Bitcoin.
- Ethereum and Binance Coin were the two most significant Altcoins in the market by the market capitalization value.
- As the market matures and the cryptocurrency ecosystem develops, the price of Altcoins will start moving independently of Bitcoin.
Understanding Altcoins
The term Altcoin means alternative cryptocurrencies other than Bitcoin. Bitcoin was the first peer-to-peer digital currency that brought cryptocurrency to the fore. After the success of Bitcoins, several other cryptocurrencies emerged. Together they are called Altcoins. Since erupting from the same framework of Bitcoin, Altcoins share several similar features, with slight differences, which we will discuss eventually.
Most Altcoins are peer-to-peer and depend on the process of mining, but they still vary widely in features.
Bitcoin is the first cryptocurrency responsible for setting the benchmark in the market. However, its implementation has several shortcomings, like using Proof-of-Work (POW) - the consensus mechanism used to create blocks in Bitcoin transactions - is energy-intensive and slow processing. Altcoins improved the limitations of Bitcoin and set a competitive advantage. For instance, several altcoins use the Proof-of-Stake (POS) consensus method, a better alternative to POW in energy consumption and speed.
Altcoins have also tried to fix the price volatility issue of Bitcoin. For instance, Stablecoin doesn't exhibit price volatility like Bitcoin, making it an ideal tool for daily transactions.
Altcoins have distinguished themselves from Bitcoin and created a separate market. They are now attracting many investors along with Bitcoins. These investors hope to earn profit while altcoin demand increases and price appreciates.
Categories of Altcoins
Based on their functionalities and consensus mechanism, there are different types of Altcoins available for transacting. Below are some of the most prominent ones.
Mining-based
Mining-based Altcoins depend on mining, as their name suggests. Most of these cryptocurrencies use Proof-of-Work (POW), where the computer solves complex problems to analyse demands and generate new coins. In early 2020, most of the top Altcoins were mining-based. Litecoin, Monero, and Zcash are some of the popular mining-based Altcoins.
Alternative to mining-based Altcoins is pre-mined coins where a fixed number of coins are distributed among users before listing in the cryptocurrency market.
Stablecoins
The next is stablecoin which improved on the price volatility of Bitcoin. Stablecoin's price is non-volatile. It pegged its value against a basket of goods, like fiat currencies, commodities, and other cryptocurrencies to minimise price fluctuations. Facebooks' Diem is a famous example of stablecoin. The basket of goods it follows functions as a reserve to redeem investors if the cryptocurrency faces a problem or fails.
Security tokens
Security tokens are a digital format of equity investment. These are like regular stocks; even promise fractional ownership and dividend payouts. Investors are attracted to security tokens in anticipation of value appreciation.
These coins are distributed initially through Initial Coin Offerings or ICOs.
Utility coins
Utility coins are used for paying for services or redeeming rewards within a network. Unlike security tokens, these altcoins don't pay dividends. Filecoin is a utility coin used for buying storage space in a network.
Pros and Cons of Investing in Altcoins
Pros
- Altcoins improved on Bitcoins' shortcomings.
- Altcoins, like stablecoin, offer price stability and are used as a medium of daily transactions.
- Several Altcoins have already gained traction and seen an increase in their valuation.
- Investors who don't want to invest in Bitcoin can choose from available Altcoins.
Cons
- Compared to Bitcoin, the Altcoin market is smaller. In April 2021, Bitcoin occupied 60% of the cryptocurrency market.
- In the absence of regulation, the market is highly speculative.
- It isn't always easy to distinguish between different Altcoins, making the investment decision difficult.
- Some of the Altcoins in the past had failed, causing massive losses to investors.
The bottom line
Altcoins are highly speculative and volatile. However, speculation is one of the major attractions for investing in cryptos. The Altcoin segment is snowballing, with 9000 cryptocurrencies already in the space. The decentralised, trustless, peer-to-peer Altcoins ecosystem is gradually maturing as an investment alternative. However before you invest, do your research on the best Altcoins to invest in 2021. Investing based on half-baked information or rumours is what you should avoid. It is essential to be cautious and prevent investment pitfalls made on hypes. Despite several efforts, there are still no standard regulations and investment criteria to govern the Altcoin market, making it highly volatile. Investors investing in these coins often bet against oversized risks of trading in an unregulated market. Hence, one should handle the stress and the risks associated with Altcoin investing resulting from wild price swings.