Investing In Altcoin: Looking Beyond Bitcoin
Altcoin is an alternative form of cryptocurrencies other than bitcoin. In the early days when bitcoin was discovered, it was the most dominant cryptocurrency. It was like the first bitcoin and then everything else. So, whatever cryptocurrency was not bitcoin was called alternative coin or altcoin. As of December 2021, more than 15,000 cryptocurrencies have been discovered. 40% of the crypto market share is occupied by bitcoin, 20% by ether, and then the remaining 40% by other altcoins. Altcoins share some characteristics with bitcoin but they might have a different consensus mechanism and additional capabilities of providing smart contracts or low volatility. The general framework of bitcoin and altcoin is similar i.e., they are both based on a peer-to-peer network capable of processing large amounts of information at the same time.
Bitcoin was the first cryptocurrency that laid the foundation for the development of alternative cryptocurrencies. Bitcoin has several shortcomings like the huge energy required to get consensus that creates new blocks (proof of work), limited smart contract capabilities, etc. Altcoins are made to improve upon these shortcomings and provide a competitive advantage. For example, reduce the energy consumption and minimize the time taken to validate new transactions using proof of stake instead of proof of work. Altcoins also address bitcoin’s critiques of scalability and sustainability. Providing such advantages over bitcoin, altcoins have attracted many investors in the last couple of years.
Types of Altcoins
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There are different kinds of altcoins depending on their functionality and consensus method. Some of them are described below:
- Mining-based: As their name suggests, these kinds of coins are mined. They use proof of work methods to generate new blocks by solving complex mathematical problems. Examples of such coins are Litecoin and Monero. Most of the top altcoins are mining-based coins.
- Stablecoins: Stablecoins were introduced to reduce the volatility of cryptocurrencies. They are pegged to the value of fiat currencies or precious metals. For example, the USDT is pegged to the value of the US dollar. Therefore, stablecoins are less volatile than bitcoins with fewer price fluctuations. The most famous one is ether.
- Security Tokens: They are like securities traded in the stock market except that they exist in the digital space. These security tokens represent ownership in the company stock. Due to the immutability of blockchain, security tokens can record an ownership stake in the company.
- Memecoins: These coins are based on memes, jokes or silly takes on other cryptocurrencies. They are made popular by crypto enthusiasts and influencers. Unlike other cryptocurrencies whose value is dependent on the crypto market fluctuations, the value of memecoins depends on the trends created by mass followers and enthusiasts. Their value depends on their popularity amongst the crypto community. For example, dogecoin was a popular memecoin based on the meme of a Shiba Inu dog. But as this coin grew in popularity, its market value rose up to $30 billion. Even Elon Musk, Founder of Tesla, had shown interest in dogecoin and asked people to invest in them. However, it should be noted that memecoins are highly volatile assets, even more than bitcoins. People criticize that memecoins are just “get rich social media trends”. Some people think that memecoins might stand the test of time but it’s still speculation.
- Utility Tokens: These types of coins are issued by companies as initial coin offerings (ICOs). Unlike security tokens, these tokens do not provide an ownership stake in the company. Rather they are used by investors to pay for the company’s product and services. The most versatile utility token is ethereum which allows users to pay for minting cryptocurrencies, digital art and perform more operations on the ethereum blockchain. Another example of a utility token is filecoin which is used to buy space on the filecoin blockchain network. It is a new decentralized form of cloud storage offering alternatives to platforms like google drive.
- Governance Tokens: These are a kind of utility tokens that provide certain voting rights to the buyers. They can participate in blockchain-wide polls. The buyers can vote on decisions that impact the blockchain system. Governance tokens exist because of the democratic, decentralized nature of blockchain which allows people on the blockchain to have an opinion and voice.
Should You Invest in Altcoins
Altcoins are highly speculative like bitcoin if not more. The number of altcoins is increasing day by day which has attracted a number of new investors. There is little regulation around altcoins which makes the altcoins even riskier. The absence of defined investment criteria provides it with thin volatility. This is why altcoins have fewer investors than bitcoin. Thousands of altcoin with different purposes exist in the market currently. But that doesn’t mean that all altcoins will continue to exist. Some of the coins may coalesce into each other. Those with strong utility cases will dominate the markets in the future. But for investors looking to diversify their investment portfolios, altcoins provide a way for investors to invest in an inexpensive cryptocurrency. Some of these altcoins have produced greater returns than bitcoin. There are risks of investing in altcoin but as the cryptocurrency market matures, altcoin will more fall under the regulatory purview and receive greater legitimacy.
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A recent example is that of Omicron cryptocurrency which rose by 1000% after the news of the new virus variant spread. But then it suddenly went down as soon as it rose. Therefore, before investing in altcoins you should do your research, get some expert opinion because they have highly volatile assets. But the proliferation of altcoins suggests that more and more people are interested in cryptocurrencies and investing in the crypto market. As the market continues to grow and more altcoins are introduced, it is expected that cryptocurrencies will become a part of mainstream finance.
At Unbanked, we believe that cryptocurrencies have the potential to revolutionize the world of finance and banking. We can help you understand the world of cryptocurrencies. To learn more about how to invest in altcoins and other cryptocurrencies, read our blog.