For those interested in crypto investing, it is crucial to be familiar with altcoins.
Altcoins, short for alternative coins, refer to all cryptocurrencies except Bitcoin (BTC -1.07%). They are named as such because they provide alternatives to Bitcoin and traditional fiat money. The first altcoins emerged in 2011, and since then, thousands have been introduced. Early altcoins aimed to improve upon aspects of Bitcoin, such as transaction speeds or energy efficiency. Today’s altcoins serve various purposes based on the developers’ goals. As altcoins play a significant role in the market, understanding how they function is essential for every crypto investor. Let’s explore their uses, pros, cons, and more.
Types of Altcoins: Altcoins come in several types, including stablecoins, mining-based coins, staking-based coins, and governance tokens. Each type operates differently and serves specific purposes. Here are the main categories of altcoins you will encounter when researching:
- Stablecoins: Stablecoins are designed to mirror the price of another asset, often pegged to the U.S. dollar to maintain value stability. They are commonly used for savings, sending money, or earning interest through lending protocols.
- Mining-based: Mining-based cryptocurrencies employ a process called mining to verify transactions and add new coins to the supply. Miners use devices to solve mathematical equations, with the first miner to solve the equation getting to verify a block of transactions and receiving crypto rewards.
- Staking-based: Staking-based cryptocurrencies use a process called staking for transaction verification and coin creation. Holders can stake their coins, pledging them for transaction processing. Participants chosen by the blockchain protocol receive rewards for verifying blocks.
- Governance: Governance tokens offer holders voting rights to influence the project’s future. Holders can propose and vote on changes related to the cryptocurrency, ensuring a decentralized decision-making process.
Pros and Cons of Altcoins: Here are the advantages and disadvantages of altcoins:
- Improvement on aspects of Bitcoin
- Potential for high rewards
- A wide range of altcoins with unique purposes and advantages
- Lack of Bitcoin’s first-mover advantage and market share
- Significant risk, with many altcoins being scams or failing
- Limited availability on certain altcoin exchanges, making them difficult to buy
Altcoins vs. Bitcoin: Altcoins and Bitcoin differ in several ways:
- Bitcoin is older, launched in 2009, whereas altcoins started appearing in 2011, with new ones continually being introduced.
- Altcoins generally offer higher risk and reward as investments compared to Bitcoin, which already holds substantial value as the market leader.
- Altcoins are more advanced technologically since they were developed after Bitcoin and have improved upon its shortcomings.
Examples of Altcoins: The cryptocurrency market is filled with thousands of altcoins. Here are some early and prominent examples:
- Namecoin (CRYPTO:NMC): Released in April 2011, Namecoin was the first notable altcoin, based on Bitcoin’s code. It introduced .bit web domains, offering anonymity and censorship resistance.
- Ethereum (ETH -0.52%): Launched in July 2015, Ethereum was the first to offer a programmable blockchain for developers. It quickly became the second-largest cryptocurrency.
- USD Coin (USDC 0.0%): Introduced in September 2018, USD Coin is a stablecoin pegged to the U.S. dollar and governed by Centre, a consortium that includes Coinbase Global, Inc. (COIN -7.08%).
Considering Investing in Altcoins: Investing in altcoins may be suitable for crypto enthusiasts willing to research and engage in hands-on investing. Some altcoins offer more use cases than Bitcoin, potentially leading to larger price increases if they gain traction. However, due to the vast number of altcoins, picking the right ones can be challenging, and they carry higher risks compared to established cryptocurrencies like Bitcoin.
In conclusion, altcoins are worth exploring for proactive cryptocurrency investors with ample research time. For those seeking lower-risk or less time-intensive investments, cryptocurrency stocks may be a more suitable option. Remember to manage risk carefully and allocate altcoins cautiously in your portfolio.