What Are Altcoins: Simply Explained
Alternative cryptocurrencies, or altcoins, were created following Bitcoin’s popularity. They present themselves as superior alternatives to Bitcoin in general. The development of Bitcoin as the first peer-to-peer digital money paved the path for many others to follow. Most altcoins are looking to solve any perceived Bitcoin flaws by developing advantages over bitcoin in their versions.
They differ from bitcoin not only in terms of market capitalization, popularity, price, and very often in terms of mechanism but also in terms of cost. Some of them offer new or additional features than bitcoins, such as intelligent contracts.
Bitcoin and Ethereum represent almost 60% of the total market for cryptocurrencies for December 2021. The so-called altcoins make up the rest. Because they are often somehow tied to bitcoin, very often they follow the trajectory of Bitcoin itself.
The basic framework of bitcoin and most altcoins is quite similar. This is due to the fact that they often share a common code and function on the principle of peer-to-peer systems or are supported by giant computing systems, which are capable of processing huge amounts of data and transactions simultaneously. In some cases, the altcoins also tend to turn into the next bitcoin, even in the better of its alternatives, which is why they are fighting for it.
There are also some differences between bitcoin and other altcoins. Bitcoin is the first cryptocurrency and its philosophy and design are a benchmark for the development of other cryptocurrencies. However, the application of its principles to other cryptocurrencies has several shortcomings. For example, proof of computational work or PoW, which is essentially the consensus mechanism used to create blocks is energy-consuming and time-consuming. The capabilities of smart contracts based on bitcoin are also severely limited.
Altcoins are improving the constraints that bitcoin has to bring it a competitive advantage. Several altcoins use the consensus method to prove work or PoS, their goal is to minimize energy consumption and the time required to create blocks and validate new transactions. Thus, for example, Ethereum, the second largest capitulator in the world in terms of market capitalization is used to pay for transaction costs in smart contracts, situated in its blockchain.
Based on their distinctions and different capabilities, some altcoins have managed to create their own niche markets, which managed to attract public attention, although most people around the world hardly suspected it before it was born and promoted, that there is a real need for this type of altcoins and they have something to bring to the world. In turn, all this has attracted investors who see potential in cryptocurrencies as an alternative to bitcoin. Investors expect to make money as the altcoin exchange rate often allows multiple quantities to be purchased, which promises quick and big profits if their exchange rate rises even with a not-very colossal difference in price.
The trade and use of cryptocurrencies have been marked by instability since their inception. Stablecoins are so-called because they reduce total volatility by linking their value to a set of objectively valuable assets, like fiat currencies, precious metals, and other cryptocurrencies. The purpose of these assets is to act as a redemption reserve for holders if the cryptocurrency fails or encounters problems.
As you probably thought, their technology is also based on mining, at least in the general case. Most mining-based altcoins use PoW, a method by which systems generate new coins by solving difficult problems of creating new blocks. Examples of altcoins based on mining are Litecoin, Monero, and ZCash. Most of the best altcoins today are based on mining.
You may be wondering does all altcoins are based on mining. The alternative version of mining-based currencies are these, which are pre-established and are often marketed through initial offers. Just like with the shares of companies on the stock exchange. Such cryptocurrencies are not created by an algorithm. One example of a pre-created cryptocurrency is Ripple’s XRP.
Security tokens are similar to securities traded on stock markets, with the difference being that they have a digital origin. In many cases, however, they are similar to traditional stocks and are often directly targeted by investors.
As their name suggests, they are inspired by a joke or irony by enthusiasts, who started out mainly driven by their desire to have fun or gain more popularity. This type of crypto usually gains popularity in a short period of time and is often advertised online by prominent crypto influencers and retail investors, who are trying to make big short-term profits from them.
They often serve as a way to access a network or platform. Utility tokens are generally unregulated and help create an internal economy within the blockchain of a certain project. Examples of utility tokens include:
Filecoin, Siacoin, Golem (GNT), and Basic Attention Token (BAT)
Altcoins are “better copies” of bitcoin that try to compensate for its flaws. They may be able to fulfill Bitcoin’s initial promise of becoming a new form of mass payment and transaction. Some altcoins, such as Ethereum or Cardano, have already earned a reputation among the general public. Investors can choose from a wide variety of altcoins, which perform various functions in the crypto economy.
Altcoins have a smaller investment market than bitcoin. The lack of regulation and defined criteria means, that the altcoin market is characterized by fewer investors and poor liquidity. As a result, their prices are more volatile than those of bitcoin. It is not always easy to understand what is the idea behind certain altcoins, respectively and what they can be used for, which makes investment decisions even more difficult and confusing.
After you’ve done your research, open an account with the crypto exchange of your choice. You must provide personal information as well as a funding source for your account. You may start investing in altcoins once you’ve set up your account.
Are altcoins a good investment?
The altcoin market is still in its infancy, although there are a huge number of different altcoins. Their number has multiplied rapidly over the last decade and has attracted many investors driven by their dream and desire to make short-term profits.
Cryptocurrency markets are still relatively young and there are no defined investment criteria or indicators for assessing their value. For the most part, the altcoin market is driven by speculation. Therefore, the altcoin market is for investors, who wish to take the high risk of operating in an unregulated and emerging market, which is prone to huge volatility.
Your knowledge of cryptocurrencies and your financial goals will determine if altcoins are a good investment for you. Altcoins can be risky, with some posing a greater risk than others. Do your homework before investing in any cryptocurrencies, just as you would before investing in any traditional investment.
You May Also Like
What Are Altcoins?