Altcoins: Everything You Need to Know
The definition of altcoins is simple — any cryptocurrency that is not bitcoin is an altcoin. That means there are a ton of them out there: over 10,000, according to CoinGecko. Because bitcoin makes up about 40% of the total market, over half of the total value of the crypto market is in altcoins.
But all altcoins are not the same. For example, some might cost pennies, while others can cost hundreds or thousands of dollars per coin. In addition, many altcoins aim to build on bitcoin’s success, while others claim to solve the cryptocurrency’s problem.
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How Altcoins Differ From Bitcoin
To grasp the concept of altcoins, it’s essential first to understand bitcoin. It also helps to understand the basics of the blockchain — the technology on which every cryptocurrency operates.
Altcoins operate on the same premise as bitcoin, which uses blockchain technology as a distributed public ledger to allow and record only legitimate transactions. However, many altcoins use this premise to achieve different goals or improve flaws found in bitcoin.
For example, Litecoin began as a bitcoin clone with changes to improve storage efficiency and speed up transaction times. While it served the same purpose, its founder looked for ways to improve the process.
On the other hand, Ethereum saw an opportunity in blockchain technology beyond recording financial transactions. It created smart contracts, which a program automatically executes when the conditions of the agreement are met. These smart contracts could disrupt industries that rely on middlemen, particularly banking and insurance companies.
We’ve seen many other altcoins emerge with promises of being even faster, more scalable, more secure, more decentralized, or combining those core cryptocurrency tenets. As a result, we can break down altcoins into four categories.
These are the coins created to operate on specific blockchain networks. For example, bitcoin is a native cryptocurrency because it runs on the bitcoin blockchain.
Ether, which is second behind bitcoin by market cap, is also a native cryptocurrency that operates on the Ethereum network.
Binance coin, in fourth place, is yet another native cryptocurrency. It operates on the Binance Chain, the largest cryptocurrency exchange worldwide
You can think of using tokens like when you go to an arcade and exchange money for a token accepted by the game machines. They operate on an existing blockchain, and you can use them for specific purposes in that environment.
For example, Chainlink, which is built on the Ethereum blockchain, lets developers convert real-world data into a more blockchain-friendly format that smart contracts can use. The service’s token is called LINK. So, investors who believe the demand for smart contract services will rise might buy LINK tokens with the thought that the higher demand would also raise the token’s value.
For another example, look at the Uniswap platform — an exchange built onto the Ethereum system. While centralized exchanges like the stock market require investors to deposit into a wallet or account connected to the exchange, decentralized exchanges like Ethereum allow direct peer-to-peer trading. UNI is the token used on the Uniswap exchange and is what we call a governance token. That means holders of UNI have a say in how the platform operates, like how traditional shareholders can influence corporate governance.
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People develop stablecoins to take advantage of the features of cryptocurrency without price volatility. Stablecoins are tied to the value of existing currencies. For example, the largest stablecoin, Tether, is linked to USD — one Tether is equal to one US dollar.
Price appreciation is not a feature of stablecoins, but there are applications for coins with a relatively stable value.
One of the most common uses for stablecoins is decentralized finance (DeFi). Essentially, these platforms allow users to lend out their stablecoins, earning interest in return without an intermediary. And some platforms incentivize this by offering tokens in addition to the interest they receive.
In the cryptocurrency blockchain, each group of recorded transactions gets organized into blocks, and then each block gets connected to the next through complex cryptography. In order for a new block to get added to the chain, each previous transaction and every previous block must be verified, and the general consensus must state that everything is legitimate.
The blockchain network requires a consensus for both the rules that govern the network and the list of transactions. So when a group decides to change the rules, it can create a split in the chain, which we call a fork. Then a new chain emerges and is ready to start logging new transactions under those rules agreed upon by the people who validated the fork. Meanwhile, the original prongs of the fork continue operating as normal.
These forks can happen repeatedly and create new cryptocurrencies and protocols each time. For example, bitcoin cash is a fork that came from the original bitcoin blockchain.
As an investor, if you like the rules, changes, and ideas found in a fork of a blockchain, you could purchase that fork’s currency with the hope that it rises in value.
Interested In Investing In Altcoins?
Before purchasing altcoins, it’s crucial to read through what the network behind them is trying to achieve. For example, ask yourself:
- Does the altcoin improve upon other cryptocurrencies?
- For tokens, do they have a real-world application?
- For stablecoins, how do you plan to use them?
For forks, why were they created, and do you agree with the new rules and changes?
You should also understand that it’s a nascent market, and a shakeout is inevitable. Many altcoin projects will fail — and many already have — while others will succeed.
Financial experts often categorize altcoins as an alternative investment. They are something most people dabble in once they already have a healthy, diversified investment portfolio.
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