Sep 14, 2022
What Are Altcoins? Alternative Coins, Explained
An altcoin, or “alternative coin,” is generally defined as any type of cryptocurrency coin or token that is not Bitcoin. While Bitcoin, the original crypto coin, remains one of the most popular cryptocurrencies today, some developers want to use their crypto coins and tokens differently than the Bitcoin blockchain allows. Hence the development of altcoins. Altcoins belong to the blockchains they were designed for and often serve a specific purpose like payment, security, utility, or governance.
In this article, we’ll cover:
How do altcoins work?
Like Bitcoin, altcoins are a form of currency used in decentralized finance that rely on blockchain technology. Altcoins generally work the same way that Bitcoin does: the blockchain acts as an incorruptible distributed public ledger that records and validates authorized transactions. However, altcoins are designed to work on alternative blockchain systems while iterating on Bitcoin’s original technology. Altcoins may speed up transaction times, execute smart contracts, improve storage efficiency, or perform some kind of additional function. Many altcoins can be purchased on a standard crypto exchange, just like Bitcoin.
As with many types of cryptocurrency, as well as traditional currencies, altcoins can be used as a way to make and receive payments as well as an investment opportunity. The value of any given coin is generally based on supply and demand; when demand for a coin increases, its value usually does too. Various cryptocurrencies use different methods to influence the supply of coins in circulation, such as issuing a cap on the number of new coins that can be minted through mining, “burning” existing coins to reduce supply, or releasing more coins to increase supply.
Ether is the cryptocurrency of the Ethereum blockchain, and it’s one of the most popular altcoins. Ethereum was the first cryptocurrency to offer a programmable blockchain upon which developers can build and run distributed applications, which can be applied in a vast number of ways. Ether differs from Bitcoin in that it enables the execution of smart contracts and decentralized applications, and it relies on a proof-of-stake model.
Top 9 popular altcoins
Since the creation of Bitcoin in 2009, the crypto market has grown exponentially. As of August 2022, more than 20,000 types of altcoins exist. However, not all altcoins are created equal. Thousands of types are inactive, and only a handful of cryptocurrencies outside of Bitcoin have amassed significant market value. Bitcoin remains the market leader, but altcoins are gaining ground.
Altcoins by USB market cap:
- USDC (US Dollar Coin)
- Binance Coin
Types of altcoins
The types of altcoins available are nearly unlimited, but they can generally be divided into three categories: mining-based, staking-based, and stablecoins. These categories are based on whether the altcoin relies on proof-of-work, proof-of-stake, or a fiat currency to confirm its value.
Bitcoin and some altcoins operate on a decentralized, mining-based proof-of-work model. Mining is the “work” in the proof-of-work mechanism; it’s a process by which new coins are created and entered into circulation, and the way the network confirms new transactions. Mining relies on sophisticated hardware and software that solves complex computational math problems. Each time a transaction is requested on the blockchain, the first computer to find the solution receives the next available block of coins. Mining-based altcoins include LiteCoin, Dogecoin, Bitcoin Cash, and Solana.
One of the main advantages of mining crypto is the potential to yield high profits, but the downsides are that it calls for a sophisticated degree of tech know-how, requires expensive equipment, and demands a lot of electricity, which adds to the cost of mining and contributes to pollution.
A different approach to mining is crypto staking, which is based on a proof-of-stake model. With this approach, users, known as validators, “stake” their coins by locking them in an exchange for a fixed period, during which they may earn interest on their stake. The blockchain network assigns a validator to confirm blocks on the chain and rewards them with additional coins when they do so. Proof-of-stake altcoins include Ethereum, Luna, and Cardano.
One major pro of crypto staking is that it requires much less processing power than mining, making it more accessible and cost-effective for validators. Staking-based coins also represent an opportunity for investors, who can loan coins to specific validators in the hopes of earning interest or rewards when the validator does. A disadvantage is that validators and investors have to lock their assets into staking for a fixed period of time, during which they cannot spend or withdraw their coins.
Stablecoins are digital currencies pegged one-to-one to a fiat currency, such as the US dollar or another form of collateral. Stablecoins provide the privacy and security of crypto with the flexibility of fiat currency to pay for everyday goods and services. Types of stablecoins include Tether, USD Coin, and Binance.
Because they’re tied to tangible assets, stablecoins are generally less volatile than other forms of cryptocurrency, which many people see as an advantage. Some investors see a benefit in holding stablecoins as a hedge against other more volatile cryptocurrencies in their portfolio. That said, the stability of stablecoins’ value may be a downside in the eyes of investors who hope to realize returns on their crypto holdings. And the tie to fiat currency also means that their value is, in effect, governed by a centralized system, which is a turn-off to people whose interest in crypto is based on a completely decentralized approach unencumbered by traditional financial systems.
Pros and cons of altcoins
Like every form of investing, there are pros and cons to investing in altcoins. On the plus side, there are a wide variety of altcoins available, and many of them were created specifically to improve on aspects of Bitcoin, such as higher transaction speeds and lower fees. Some are also built with additional functions that enable a broader array of use cases beyond finance.
On the other hand, some altcoins may be difficult to purchase on an exchange. Their value is often even more volatile than Bitcoin’s, and they may have a higher chance of failing. The large number of altcoins also means that it can be harder for them to gain market value. So while there is potential for reward, there is also significant potential for risk.
|Pros of altcoins||Cons of altcoins|
|Large selection to choose from||Can be difficult to purchase on an exchange|
|Often more advanced than Bitcoin||Generally lower value than Bitcoin|
|Potential for faster transaction speeds||Higher potential volatility risk|
|Potential lower costs|
|High potential rewards|
Is altcoin investing right for you?
If you’re curious about crypto investing beyond Bitcoin, altcoins may be an avenue you’d like to explore. There’s no clear answer as to which altcoins are the best for investors; it comes down to your risk tolerance and the specific features that matter most to you.
When it’s time to put your crypto wallet to work, remember that a diversified portfolio can be an important way to mitigate risk. Stash recommends holding no more than 2% of your overall portfolio in any one crypto in order to limit crypto-specific risks.
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