Altcoins: The Perfect Investment Opportunity or Risky Venture?
If you’ve been around the crypto world for any length of time, you’ll almost certainly have come across altcoins. The term might sound like a terrifying piece of jargon that describes something overly complex, but the essence of altcoins is actually very simple. However, the finer details of how the coins differ and whether you should invest in cryptocurrency gets somewhat more complicated, so let’s begin.
There’s more to cryptocurrencies than just bitcoin. Ever heard of something called dogecoin? How about ethereum? That’s what we thought. These two examples prove that, whether you know the term or not, you’ve almost certainly come across altcoins at one point or another. But that doesn’t necessarily mean you understand what they are or how to approach them.
Our mission is to eliminate your knowledge gap. In this post, we’ll dive right into the topic to help you understand what you need to know about altcoins, different types, a few prominent examples, and the pros and cons of investing in them.
What are altcoins?
Let’s work backward on this one. The word “altcoin” consists of two other words: “alternative” and “coin.” In a nutshell, it’s a term used to describe cryptocurrencies that offer an alternative to bitcoin.
Some define altcoins as the cryptocurrencies that are direct bitcoin competitors (aka they’re trying to become the dominant digital means of payment). Nano coin is one example of this—it aims to be just like bitcoin but better and faster—and there are many more. This definition excludes cryptocurrencies that aren’t designed to be used as a medium of exchange (e.g., ether).
But for the most part, the term altcoin is used to describe every cryptocurrency under the sun that isn’t bitcoin. Since this definition is nice and simple, we’ll be sticking to it for the rest of the article.
The role of altcoins
So, every cryptocurrency other than bitcoin is an altcoin. That’s easy enough to digest. But something a little more complicated (and important) is understanding why we need them. Is it all just a money or attention grab?
To answer this question, try to imagine a world where bitcoin was the only cryptocurrency. It would have a monopoly over the cryptocurrency market—and therefore there would be no incentive to improve things like its transaction speeds, reduce transaction costs, or reconsider the coin’s environmental impact.
Besides, bitcoin alone can’t meet all the needs that cryptocurrencies are able to fulfill. Bitcoin was made to be a medium of exchange, but other cryptocurrencies were made for very different reasons. Let’s look at some of them now.
Types of altcoins
New altcoins enter the market every single day, and there are more than 14,000 of them. It makes little sense to put them all in one unified category.
Because altcoins are cryptocurrencies, they all use blockchain technology and operate using peers rather than a centralized authority. However, there are arguably more differences than similarities. Here are a few different types of altcoins it’s important to differentiate between.
First of all, there are stablecoins, which are pegged to another currency like the US dollar to give them a more stable value.
Then there are decentralized finance (DeFi) coins. Although all cryptocurrencies have elements of decentralization, DeFi coins go beyond simple transactions and are used as part of crypto protocols that create decentralized versions of other financial processes (like lending).
The final altcoin type we’re examining here is the proof-of-stake coin. One of bitcoin’s most prominent features is that it’s a proof-of-work coin, but this is also one of the reasons it has expensive transaction costs and lacks energy efficiency—the proof-of-work process requires an awful lot of power.
Proof-of-stake coins replace the mining process with a more efficient process that incentivizes users to validate transactions correctly.
With so many different altcoins out there, this is far from an exhaustive list of potential use cases, but these are the most important categories.
Examples of prominent altcoins
Knowing some examples of prominent altcoins is a good way to appreciate their role in the crypto economy. We’ve already mentioned a few of the best-known examples, but let’s take a deeper look at what they do.
Litecoin was perhaps the original altcoin—it was created to rival bitcoin. Like bitcoin, it’s a mining-based coin, but it’s always aimed to be faster and better than bitcoin. This is partly achieved by requiring different computer equipment to mine, which makes things more efficient (hence the name “litecoin”).
Another well-known altcoin is ethereum, which is a proof-of-stake coin. It doesn’t exactly warrant much introduction—it’s the second-biggest cryptocurrency on the market after bitcoin. Instead of being a medium of exchange, ether fuels a protocol that allows developers to build decentralized applications, creating crypto solutions to more areas of life.
Tether (USDT) is a key example of a stablecoin. It’s pegged to the US dollar, meaning that (except for a few blips) it mirrors the dollar’s value. This is perfect for making payments within apps, and many exchanges and other crypto projects use it.
As for DeFi coins, there’s chainlink (LINK). LINK is primarily used to power the Chainlink protocol, a decentralized network that makes smart contracts more reliable. The role of LINK is for users to pay for information provided within the protocol.
Pros and cons of altcoins
Whether you’re worried that “Is it too late to invest in bitcoin?” or you’d just like to find the best portfolio rebalancing strategies, investing in altcoins is worth considering. However, it’s important to be aware of the potential risks beforehand.
As we’ve touched on already, bitcoin has some serious flaws—it might have been the first cryptocurrency, but that doesn’t automatically make it the best. Altcoins improve on these flaws, giving them a solid value proposition that could make them more useful (and valuable) in the future.
And because they’re more obscure, new altcoins prices may have more scope for growth than bitcoin. Every week, there’s a new cryptocurrency that unexpectedly sees three-figure returns in a matter of days.
On the other hand, some altcoins are more established, like ether. This might mean that they don’t have the “hidden treasure” appeal, but their prominence in the market reduces the risk involved.
Having a combination of more established and newer altcoins is a great way to diversify and start your smart crypto investment strategy.
But before you get too carried away, remember that bitcoin still has a 40% market share. It has already secured its positions, while other altcoins are far more likely to fade into obscurity (perhaps with the exception of ether). And because it’s anyone’s guess which will make it, they end up attracting a great deal of speculation, which can make or break your portfolio.
But at the same time, all cryptocurrencies tend to follow the price movements of bitcoin. This isn’t necessarily a huge problem, but it does mean that you shouldn’t invest in altcoins expecting true diversification. However, some believe this could change in the future.
And although there are undoubtedly some gems out there, there are also plenty of dodgy coins. Since most cryptocurrency protocols are open-source, some developers will take the code of a different cryptocurrency, recreate it, copy its marketing materials, and try to make money from a launch. Always do your research before thinking about compound interest investment!
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