Altcoins and All You Need To Know About Them
As demand for cryptocurrencies grows, so too does the number and variety of available options. If you have hardly ever dabbled in crypto before, you might have only heard of Bitcoin, but there are plenty of other fish in the pond that you need to learn about, especially if you are just starting in crypto. That is why we put together this article - to help you navigate the full array of alternative cryptocurrencies, also known as alternative coins or altcoins, and assess whether they are an option for you.
What Are Altcoins: Altcoins are all coins that are an alternative to Bitcoin, each with its unique set of features and roles in the digital economy.
Types of Altcoins: Different altcoins serve different purposes - learn more about major types of altcoins below.
Bitcoin vs. Altcoins: By contrast with Bitcoin, altcoins are more prone to volatility, which can bring higher rewards as well as higher risks.
Evaluating Pros and Cons: Altcoins come with their advantages and disadvantages that are worth knowing about as you plan on investing
FAQ: Find out answers to all of the major questions you might have about the topic.
Altcoins are any cryptocurrencies other than Bitcoin, which is famously the original cryptocurrency. These cryptocurrencies emerged as the demand has grown for increased options for portfolio diversification as well as alternative technologies that Bitcoin doesn’t cater to.
For example, some altcoins were developed to improve known issues with Bitcoin such as the transaction speed, user-handling capacity, and energy efficiency. Other altcoins enable new technologies such as smart contracts (agreements that automatically execute when specific conditions are met) or provide extra privacy enhancements for users. Additionally, some altcoins are designed with a particular community or industry in mind.
We have put together different types of altcoins and their functions so that you can learn how to distinguish between them. But first, let’s learn the difference between coins and tokens.
Coins vs Tokens
When reading about altcoins below, you will notice that some of them are referred to as “coins”, while others as “tokens”. Let’s quickly clarify the nuance behind either to help you with the context.
Coins are digital currencies that primarily operate on their own blockchain, like Bitcoin or Ethereum. They are typically used as a medium of exchange, a store of value, or a unit of account. Tokens, on the other hand, are created on existing blockchains, most commonly on Ethereum. They can have a variety of purposes including access to a specific service (utility tokens), ownership in a project (security tokens), or voting power in a decentralized organization (governance tokens).
To sum up, coins work more like digital money, whereas tokens are more akin to vouchers, which can nonetheless be used for a variety of purposes.
Stablecoins, Their Origins & Purpose
Stablecoins, as their name suggests, are designed to maintain a stable value. This happens because they are often tied to real-world assets such as the US dollar, which minimizes the likelihood of extreme volatility that other cryptocurrencies can experience. This makes stablecoins useful for those who use cryptocurrencies for everyday transactions but also for saving money for longer periods of time, particularly for those living in countries with unstable local currencies.
Governance Tokens, Their Origins & Purpose
Governance Tokens may appeal to active investors who enjoy being involved and influencing the cryptocurrency they are holders of. This is because holders can be invited to participate in major changes to the system via voting, allocating the funds, or shaping the project’s goals or direction. These tokens play an important role in decentralized finance (DeFi), where decisions are made collectively by the community rather than by a central authority.
Meme Coins, Their Origins & Purpose
Meme coins are a cryptocurrency that often start as a joke or a “meme” in an online community, but unlike other coins, meme coins do not necessarily address any specific problem. Instead, they work more as an entertaining trend. Meme coins have their origins in “Dogecoin”, created as a parody of Bitcoin in 2013 and using the Shiba Inu Dog that was part of the popular “Doge” Meme. But despite a passionate community that often drives their value, the lack of serious underlying technology makes meme coins susceptible to higher volatility than other coins.
Security Tokens, Their Origins & Purpose
Like stablecoins, security tokens are rooted in real-world asset ownership e.g. stocks, real estate, or alternative investments. These tokens are also closely regulated to protect investors, making them one of the most reliable tokens to invest in. Security tokens essentially work as a bridge between traditional finance and the cryptocurrency world, which combines the benefits of blockchain technology—like transparency and ease of transfer—with the reliability of established financial assets.
Utility Tokens, Their Origins & Purpose
Utility tokens work similarly to vouchers that can help you access specific services or products within a specific blockchain network. For example, Ethereum’s Ether (ETH) is used for transactions within the cryptocurrency’s network. Utility tokens are essential to fueling many blockchain ecosystems by boosting their value through practical uses.
While Bitcoin still holds the crown for being the pioneer in the industry and the best-known cryptocurrency, alternative coins offer the variety and accessibility that Bitcoin lacks. As altcoins continue to address emerging needs and features that Bitcoin does not cover, it is best to be equipped with knowledge that will help you pick the right ones for you to invest in.
Let’s look at three key aspects that might help us see the contrast between the two more clearly.
Value on the Market
Bitcoin’s value rests on two major factors - its widespread recognition as the original cryptocurrency and its limited supply - with only 21 million bitcoins being available in total. It is the combination of its scarcity and established reputation that gives Bitcoin its unique status. Altcoins, on the other hand, vary in value, starting with the likes of well-established names like Ethereum and ending with smaller, newer currencies. Additionally, some altcoins have different growth potential, depending on factors like adoption, technology, and market sentiment, so an assessment of their long-term value should be made accordingly.
Volatility & Its Frequency
As we’ve mentioned before, altcoins tend to be more volatile than Bitcoin, meaning their prices are more prone to frequent and drastic fluctuation. The extent of this volatility depends on how new or well-established the currency is and how on-demand it is based on the market trends. For example, something like an announcement can swing the price either way: if it is about something innovative that’s never been done before, it is more likely to boost the value. On the other hand news about something like a security risk might cause it to plummet immediately. This is why researching any potential investment in an altcoin carefully is critically important.
That is what happened with Dogecoin when Elon Musk, the CEO of Tesla and SpaceX, tweeted that Dogecoin was "the people's crypto", referring to it as "the future currency of Earth," which led to a massive spike in its value at the time.
Diversity of Use
While Bitcoin is first and foremost used as digital money, altcoins can have a variety of uses. Some serve specific purposes e.g. running decentralized apps (DApps) on platforms like Ethereum, which allows developers to create a wide range of services beyond just payments. Others are an improvement on the transaction process, such as Ripple (XRP), which focuses on fast and low-cost international money transfers.
There are also altcoins like Chainlink (LINK), which serves as a bridge between smart contracts and real-world data, or privacy-focused coins like Monero (XMR) that ensure anonymous transactions. This diversity of functions makes altcoins the perfect territory for innovation and filling in gaps with new solutions that Bitcoin does not address.
Innovation: Altcoins offer the sort of innovative technology and features that push the boundaries of what cryptocurrencies can do.
Diverse Investment Opportunities: With different altcoins serving different purposes, investors can diversify their portfolios and explore different areas of the crypto market.
Potential for High Returns: Altcoins have the potential to offer significant returns, especially if they gain popularity and adoption.
High Volatility: Altcoins are more prone to volatility, making them more unpredictable investments.
Regulatory Risks: Altcoins can be subject to changes in regulations - or to new regulations altogether, which might affect their value.
Lower Liquidity: By contrast with Bitcoin, many altcoins have less liquidity, making it harder to buy or sell large amounts without impacting the price.
Overall, what makes altcoins especially appealing is their ability to address various niches of the crypto ecosystem, including issues with privacy, smart contracts, or decentralized finance (DeFi). They are great assets for diversifying your portfolio and getting potentially high returns. However, they also come with risks, such as higher volatility, uncertain regulations, and varying degrees of market acceptance.
If you have assessed all of the pros and cons, understand the risks well, and have done research on the specific altcoin/s you are interested in, they can become a valuable addition to your cryptocurrency portfolio.
How do I choose which alternative coins?
When choosing the right altcoins to invest in, it is essential to do research and learn about the project's goals, technology, and market potential of the particular altcoins you are interested in. Start by looking into the team behind the project, and the problem it aims to solve, and then further check out factors such as market liquidity, community support, and whether it has real-world applications or partnerships.
Can altcoins be used for payments like Bitcoin?
Yes, just like Bitcoin, alternative coins can be used for payment. The more widely known altcoins such as Ethereum have a higher likelihood of being accepted than others. Since not all altcoins are accepted everywhere and the demand for them varies from platform to platform, it is always best to double-check whether your altcoins can be used for payment with the specific retailer you wish to complete the transaction with.
How are altcoins taxed?
Altcoin taxation varies by country and jurisdiction, though mostly the same regulations apply as with Bitcoin. Capital gains taxes often apply when selling altcoins or trading them for other cryptocurrencies in most countries. Factors such as the difference between the purchase and sale prices or for how long you have been holding the altcoins can have an impact on taxation as well. It is best if you keep a detailed record of all transactions and seek advice from local tax professionals.
What happens to altcoins if Bitcoin’s value drops?
Alternative coins are often influenced by Bitcoin’s performance on the market. That means that when Bitcoin drops in value that can negatively impact altcoin value as well. Nonetheless, altcoins also depend on factors including individual demand, regulatory and technical factors, etc.
What should I do if an altcoin I own suddenly drops in value?
If an altcoin you own suddenly drops in value, it’s important to stay calm and assess the situation. Start by checking if there is any information related to the reasons behind the price drop and try to evaluate, through personal assessment or by doing further research into credible sources whether the drop is a temporary market reaction or a sign of deeper issues with the project. Consider your investment goals and whether you believe in the long-term potential of the altcoin. It might be wise to consult with a financial advisor before making any decisions to buy, sell, or hold.
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