Since Bitcoin was launched in 2009, the world of cryptocurrency has kept evolving rapidly, with altcoins earning significant traction and attention in the last few years. The first altcoins were established in 2011, and, right now, there are currently thousands of them in the market. These tokens, which were founded to improve upon the shortcomings of the original cryptocurrency, rapidly became a huge part of the market. Since altcoins are now such a huge part of the crypto market, every crypto investor needs to understand how they operate. So what are altcoins and how do they work? This guide will walk you through all you need to know about them.
What are Altcoins?
So for a start, what are altcoins? Altcoins, short for alternative coins is an umbrella term used to define all cryptocurrencies other than the original one, Bitcoin. The name “Alternative coins” was coined from the fact that these digital coins are alternatives to Bitcoin and fiat money.
Many altcoins are forks. A fork is the split of a blockchain that is not compatible with the authentic chain. For instance, Litecoin is a Bitcoin fork. It was forked from the Bitcoin blockchain in 2011 and started as a clone of the source code for the blockchain. Nevertheless, it incorporated changes to enhance transaction times and boost storage efficiency.
Litecoin uses an entirely different proof-of-work (PoW) consensus mechanism than the blockchain from which it was forked (Bitcoin blockchain). This PoW consensus mechanism is called Scrypt, which is generally less energy-intensive and faster than the original Bitcoin’s SHA-256 proof-of-work consensus mechanism.
Another prominent altcoin is Ether. However, it wasn’t forked from Bitcoin like Litecoin. Ether was designed by Vitalik Buterin, Dr. Gavin Wood, and some other experts to support Ethereum, the largest blockchain-based scalable digital machine in the world.
Ether (ETH) is generally used to reward Ethereum network participants for the intense transaction validation work their machines execute. This blockchain is special because of the smart contract mechanism it employs to execute deals without interference from a third party.
How do Altcoins differ from Bitcoin?
The mode of operation of altcoins is similar to Bitcoin. Just like Bitcoin, altcoins make use of blockchain technology as a distributed public ledger to authorize and record legitimate transactions. Nevertheless, many altcoins make use of this premise to accomplish different goals or improve upon the shortcomings found in Bitcoin.
As we stated earlier, Litecoin was forked from Bitcoin and started as a clone. It was modified to improve upon the speed of transaction times and storage efficiency, which was a shortcoming of the Bitcoin blockchain. Although Litecoin served the same goal as the blockchain from which it was forked, its founder found ways to improve the whole process.
As for the Ethereum blockchain, it founded an opportunity in blockchain technology that goes beyond recording valid financial transactions. This blockchain-developed smart contract is a program that is automatically executed when the predetermined conditions of the consensus are met. Smart contracts may disrupt enterprises that depend on middlemen to negotiate and execute transactions, especially banking and insurance companies.
What are the categories of Altcoins?
Generally, we can break down altcoins into four different categories. These categories include:
1. Native cryptocurrencies
These are the digital coins that were built to function on specific blockchain networks. For instance, Ether, which is the second largest cryptocurrency by market cap, is a native cryptocurrency that only operates on the Ethereum network. Binance coin is another native cryptocurrency because it operates only on the Binance Chain, which is the largest crypto exchange in the world.
2. Stablecoins
Stablecoins are cryptocurrencies that people developed to take advantage of the components of cryptocurrency without the downside of price volatility. Generally, these kinds of cryptocurrencies are pegged to the value of fiat currencies. For instance, the largest stablecoin based on market cap, Tether, is pegged to USD. This means that one Tether is equivalent to one US dollar.
One of the most popular uses for stablecoins is its role in decentralized finance (DeFi). Basically, these platforms permit their users to loan out their stablecoins and in return, they earn interest without depending on any intermediary. Some platforms also incentivize this by proposing tokens in addition to the interest they receive from the stablecoins.
3. Tokens
Tokens operate on an already existing blockchain, and users can employ them for distinct purposes in that environment. For instance, Chainlink, which the creators designed on the Ethereum blockchain, allows developers to transform real-world data into a better and more blockchain-friendly format with which smart contracts are compatible.
The Chainlink service’s token is known as LINK. So, crypto investors and enthusiasts who believe that the demand for smart contract services will increase in the future may purchase LINK tokens in hopes that the higher demand would increase the value of the token.
4. Forks
The crypto blockchain organizes each group of recorded transactions into blocks and each block gets linked to the next via a complex cryptography mechanism. For a fresh block to get linked to the chain, each prior transaction and each previous block on the chain must be duly verified. Also, the general consensus must declare that every transaction is legitimate.
This means that the blockchain network demands a consensus for both the list of transactions and the rules that preside over the network. So whenever a group chooses to alter the rules, it can produce a split in the chain called a “Fork”. When this happens, a new chain is developed and is ready to start recording fresh transactions under those predetermined rules agreed upon by the group that decided to validate the fork.
Meanwhile, the original blockchain from which the new one was forked will continue to operate as normal. These forks can occur frequently and develop new cryptocurrencies and protocols for each time they occur. For instance, Bitcoin Cash is a fresh fork that broke out from the original Bitcoin blockchain.
What are some examples of Altcoins?
Although the crypto market comprises thousands of altcoins, here’s an example of some of the notable altcoins:
1. Namecoin (NMC)
Launched in April 2011, Namecoin is the first known altcoin. This crypto is similar to Bitcoin since it was built based on Bitcoin’s code and also has an identical maximum supply of just 21 million digital coins. Namecoin is well known for proposing .bit web domains, which gives anonymity and solid resistance to censorship.
2. Ethereum (ETH)
Ethereum was launched in 2015 and is the first cryptocurrency to provide a programmable blockchain that developers can use. In no time, this cryptocurrency became the second-largest digital coin behind Bitcoin.
3. USD Coin (USDC)
USD Coin was launched in September 2018 and is a stablecoin tied to the U.S. dollar. This coin is currently under the administration of Centre, a consortium that comprises Coinbase Global, Inc.
What are the types of Altcoins?
Listed below is a summary of some of the kinds of altcoins and what these coins are hoped to be used for.
1. Proof-of-work and Proof-of-stake Altcoins (PoS vs PoW)
These kinds of altcoins make use of the Proof of Work (PoW) consensus to link fresh blocks of transactions to their individual blockchain by doing some “work”. By work, we mean the generation of a hash. The hash generated has to be identical to the target hash for the existing block. Generally, the crypto miner who does this “work” gets rewarded for linking that block to the blockchain. Litecoin (LTC) and Dogecoin (DOGE) are two good examples of PoW altcoins.
On the other hand, altcoins that make use of Proof-of-Stake consensus can decrease the total amount of computational work needed to verify blocks and the valid transactions that make the blockchain secure. The Proof-of-Stake mechanism changes the way blocks are verified by digital coin owners’ machines. Essentially, the owners offer their cryptos as collateral in exchange for the power to validate blocks on the blockchain. Some good examples of Proof-of-Stake altcoins are Cardano, Solana, and Tezos.
2. Stablecoins
Stablecoin is another type of altcoin that has its value pegged to an asset class to stabilize its price. The asset class in which the value of a stablecoin can be pegged to could either be a fiat currency or gold. This means that 1 stablecoin is equivalent to 1 fiat currency. Stablecoins generally seek to decrease the high volatility associated with cryptocurrencies.
While the underlying collateral structures of different stablecoins vary, they all seek to achieve one goal – stability. The most popular stablecoin at the moment is Tether (USDT), which is pegged to the U.S. Dollar.
3. DeFi Altcoins
DeFi altcoins depict a mixed set of altcoins. These kinds of coins are used on native to automated, decentralized platforms that run using smart contracts. DeFi generally has a non-custodial element, which means that the users maintain custody of their DeFi coins.
Usually, the DeFi tokens are tied to their individual DeFi protocols and are well-known due to the different ways they can be used in their native networks. For instance, some DeFi tokens are governance tokens, which means that they grant other users voting rights and management power. Chainlink, UniSwap, and Aave, are good examples of Defi altcoins.
4. Mining-Based Altcoins
Many altcoins are developed because of mining. PoW cryptocurrencies employ mining to develop new coins and also verify new transactions. Miners generally contend with each other by figuring out difficult mathematical equations that help to both verify altcoin transactions and upgrade the blockchain.
The reward they receive for solving these difficult problems is a percentage of the digital coin associated with the blockchain in which they partake in mining. DOGE is a good example of a mining-based altcoin.
Rather than mining, some altcoins may use proof-of-stake (PoS) algorithms. Essentially, PoS algorithms permit users to “stake” their cryptocurrencies to partake in the validation process on the blockchain and receive rewards.
5. Governance Altcoins
Governance altcoins authorize token holders to support in shaping a protocol’s future. Essentially, these altcoins represent the ownership and rights in a decentralized protocol. The tokens grant its holders certain privileges that have a major impact on the path of a protocol.
Governance altcoins are often offered to the active users of a blockchain in exchange for their devotion and immense contributions to the community. Holders of these cryptos can control project decisions, such as suggesting or voting on a new feature proposal, changing the whole governance system, and even allocating budgets.
A popular example of a governance altcoin is Maker (MKR). Holders of MKR have the right to draft and influence decisions made about the future of the system.
6. Utility Tokens
Utility tokens, also called user tokens or app coins, are digital tokens that are specially designed to be utilized as a method of exchange within a precise platform or app. Usually, these assets are issued by companies of these platforms to help fund the building and development of any new product or service. Also, you can use these coins to buy goods or services within the environment of the issuing company.
Utility tokens are generally not designed to serve as investments, and they do not deliver any entitlements or ownership rights to their holder. Rather, they were created to be used as a mode of exchange within an ecosystem or a specific platform.
7. Memecoins
Memecoins are kinds of altcoins that acquire popularity and value because of their link to a meme, a joke, or any other prevalent internet trend. These coins mostly capitalize on the immense popularity of a meme or joke to induce hype and attraction to the cryptocurrency.
Usually, Memecoins are depicted by their low price and market capitalization. Also, they often have a precise theme or idea that links them to a precise meme or internet trend. For instance, Dogecoin is a popular Memecoin that was developed as a parody of Bitcoin and is founded on the popular Doge meme. This meme features a funny-looking Shiba Inu dog with amusing captions.
What is the future of Altcoins?
In the last few years, there have been discussions about the future of altcoins, especially from investors who want to know the fate of their investments. Unfortunately, the future of altcoins is not certain due to the volatile nature of cryptocurrencies. Due to the volatility of the crypto market, there’s no guarantee of which altcoin will do well in the future. There’s no assurance that some of these coins will survive if there’s a crash in the market.
Some crypto experts believe that with the current state of affairs in the crypto markets, the different altcoins are unlikely to converge into a single cryptocurrency. Also, these experts believe that most of the thousands of altcoins available in the crypto market will not survive in the future. They predict that the altcoin market will likely center around altcoins with strong utility, solid blockchain purpose, and use cases. These advantages will help these coins to monopolize the markets.
For this reason, it is advisable to do your own research and due diligence before you invest in any altcoin. Also, endeavor not to invest an amount of money you are not willing to lose. By doing this, you mitigate your losses if the altcoin project doesn’t do well in the future.
What are the pros and cons of Altcoins?
Highlighted below are the advantages and disadvantages of investing in altcoins.
Pros of investing in Altcoins
Check out the advantages of altcoins below:
- Higher survivability
- They offer you an improved version of other cryptocurrency’s weaknesses
- You have thousands of options to choose from
Cons of investing in Altcoins
Check out the disadvantages of altcoins below:
- They are less liquid than Bitcoin
- Altcoins generally have lower popularity and much smaller market cap
- It is difficult to determine the use cases of many altcoins
- Many altcoins are scam projects or bound to lose developer and community interest
What is the best Altcoin to invest in?
The best altcoin to invest in primarily depends on what you want. You have to take into consideration your goals, financial situation, risk tolerance, and the crypto market’s circumstances before making your final decision on what coin to invest in.
What are the top 3 Altcoins of 2023?
Based on market capacity, the top three altcoins in 2023 are Ethereum, Tether (USDT), and Binance Coin (BNB). You can choose to invest in any of these leading coins
Is it better to invest in Bitcoin or Altcoins?
The best cryptocurrency to invest in is a subjective argument that is based on your financial circumstances, risk tolerance, investment goals, and beliefs about the market. You can speak with a professional to help you through this process.
How can I buy Altcoins?
There are thousands of altcoins in the crypto market. For this reason, you should exercise caution before joining the bandwagon. If you want to decrease the risk associated with the extremely volatile crypto market, consider only trading top altcoins such as Ethereum, Tether, Solana Binance Coin, Cardano, and others.
Once you finish shopping around for the best altcoin to buy, follow the steps below:
1. Download the Bitmama app, register, and log in.
2. Navigate to the verification page in your ”Account” section. Click on the verification button to submit the necessary documents and verify your account up to level 3.
3. Fund your fiat wallet by clicking on “fund” on the home dashboard
4. Select “Fund with Bank Transfer” and follow the prompts till completion
5. Return to your dashboard and select “Buy”
6. Select your preferred Altcoin and fill in the amount you wish to purchase. The system automatically fills out the cost. Note that you need to fill in a sum lower than the balance in your fiat wallet.
7. Click on “Buy” and follow the prompts till completion.
Note that before you decide on the exchange platform to use, you need to conduct extensive research and select only popular crypto exchanges.
So. What are altcoins? Altcoins are simply an alternative form of Bitcoin, the original cryptocurrency. If you’re seeking to diversify your investment within the cryptocurrency market, then you can go for altcoins as they are generally less expensive than Bitcoin.
Bitmama offers a secure marketplace for crypto enthusiasts. Perform activities like crypto trading and creating virtual dollar cards for online payment. Get started today by downloading the Bitmama app.
