Altcoin Cryptocurrencies: What Investors Need To Know

If we go virtual, will currencies follow? It is clearly not, especially with cryptocurrency becoming a hot topic in trading and investment circles. Though bitcoins have dominated attention in this rarefied space, several other cryptocurrencies are gaining attention as well. Among these, altcoin cryptocurrencies are rapidly gaining popularity, and cryptocurrency isn't limited to Bitcoin...

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By definition, altcoins are any cryptocurrencies other than bitcoin. There are more than 10,000 altcoins on CoinGecko, according to the website. More than half of the total value of the crypto market is held by altcoins, as bitcoin currently represents around 40% of the total crypto market cap.

Alternative cryptocurrencies aren't all created equal. Prices can range from pennies to many hundreds of dollars per coin. A few are well-suited to long-term use, while others are just a flash in the pan. Bitcoin's successes are being built upon, while its issues are being addressed.

The altcoin universe is vast and rife with risk because of all these factors. Here's what you need to know to get started.

What Are Altcoins?

Besides Bitcoin (BTCUSD), altcoins are cryptocurrencies that function differently. These cryptocurrencies have many characteristics in common with Bitcoin but are unique as well. Many altcoins use different consensus mechanisms in order to create blocks and validate transactions. In other words, they offer new features or capabilities that set them apart from Bitcoin, such as smart contracts and low volatility.

Approximately 10,000 cryptocurrencies will exist this month (November 2021). By now, Altcoins accounted for nearly 60% of the total cryptocurrencies market, according to CoinMarketCap. The price of altcoins resembles that of Bitcoin because they are derived from it. Altcoins' price movements will, however, be independent of Bitcoin's trading signals due to the maturity of cryptocurrency investing ecosystems.

Understanding Altcoins

'Altcoin' is the combination of "alternative" and "coin" and refers to all alternatives to Bitcoin. Altcoin frameworks are similar to those of Bitcoin. The systems share code and therefore operate similarly to peer-to-peer systems or as a gigantic computer that can process large amounts of data and transactions at once. Some altcoins aim to become a digital payment method that is cheaper than Bitcoin by becoming an inexpensive alternative to Bitcoin.

Although Bitcoin and altcoins share many similarities, there are also a few differences. As the first version of a cryptocurrency, Bitcoin set the benchmark for the design and philosophy of other cryptocurrencies. Bitcoin's implementation, however, contains several flaws. PoW - the consensus mechanism using which blocks are created - is time- and energy-consuming. The Bitcoin smart contract features are limited, as well.

"Because Bitcoin has been adopted widely, it was the first PoW application to gain widespread attention. As a result of PoW, many other cryptocurrencies are also secure and decentralized.

Alternatives provide a competitive advantage over Bitcoin by overcoming its perceived limitations. There are several altcoins utilizing the Proof-of-Stake consensus method in order to minimize energy consumption and transaction processing time.

In smart contracts on the Ethereum blockchain, Ethereum is used as gas (or payment for transaction costs). It is the second-biggest cryptocurrency by market cap. Ethereum 2.0's highly anticipated launch illustrates how altcoins typically address Bitcoin's traditional critiques, such as scalability and sustainability.

By establishing their own market, altcoins have differentiated themselves from Bitcoin. Due to this, investors are becoming increasingly interested in them as an alternative to Bitcoin. By gaining more traction and users, altcoins are expected to appreciate in value as an investment.

Types of Altcoins

Different types of altcoins exist, depending on their functionality and consensus mechanism. The following is a brief overview of some of the most widely used ones:

P.S: In some cases, an altcoin can fall into more than one category.

Mining-Based

The mining-based altcoins are derived from the process of mining. Blocks are generated by solving difficult problems for mining-based altcoins that use Proof-of-Work (PoW). There are several altcoins that rely on mining, including Litecoin, Monero, and Zcash. During early 2020, mining-related altcoins dominated the market. Alternatives to mining-based altcoins include those that are pre-mined. ICOs are often associated with pre-mined altcoins.

 A cryptocurrency such as this is not produced via an algorithm, but it is distributed before it is listed on cryptocurrency exchanges. For example, Ripple's XRP is a pre-mined coin.

Stablecoins

The trading and usage of cryptocurrency have been marked by great volatility since its launch. A stablecoin aims to reduce the overall volatility of other cryptocurrencies and fiat currencies by tying their value to a basket of goods, such as gold, precious metals, or fiat currencies. In case the cryptocurrency fails or suffers problems, holders will be able to redeem their coins from the basket. There is a narrow range in which stablecoins' prices should fluctuate.

The USD Coin (USDC) and Tether's USDT are among the more notable stablecoins. Visa Inc. announced in March 2021 that it would begin settling some of its network transactions in USDC over the Ethereum blockchain; more stablecoin settlement capacity will be added later in the year.

Security Tokens

The underlying technology behind security tokens is similar to the technology used for securities traded on stock exchanges, but with a digital provenance. A security token resembles a stock and often promises shareholders equity, in the form of ownership, or dividends. A major draw for investors is the potential for price appreciation for such tokens.

The bitcoin wallet company, Exodus, published an SEC-qualified Reg A+ token offering in 2021 in which it sold $75 million shares of its common stock for tokenization on the Algorithm blockchain. There has never been security that offered equity in such a United States-based company before.

Meme Coins

A meme coin is a joke or a silly interpretation of another cryptocurrency. It is common for prominent crypto influencers and retail investors to promote them online in an attempt to harvest short-term gains.

In the case of Dogecoin (DOGEUSD) and Shiba Inu, Tesla’s CEO, Elon Musk, regularly tweets cryptic tweets about their prices that move them considerably. Many referred to the rallying of these altcoins during April and May 2021 as the "meme coin season," when hundreds of these cryptocurrencies enjoyed phenomenal gains on pure speculation.

Initial coin offerings (ICOs) are similar to initial public offerings (IPOs) in the cryptocurrency industry. As a method of raising funds, ICOs are used by companies that plan to create new coins, apps, or services.

Utility Tokens

In a network, utility tokens serve as a means of providing services. For instance, you could use them to pay for services, redeem rewards, or pay network fees. A utility token does not pay dividends or provide ownership stakes like security tokens. One example of a utility token is Filecoin, which is used to pay for storage on a network.  

Do Altcoins Make Good Investments?

Altcoins are just starting to gain traction in the market. They are unbalanced. Over the course of the past decade, the number of altcoins available on cryptocurrency exchanges has increased rapidly, and hordes of retail investors have been feverishly betting on their fluctuating prices to generate short-term profits. Unfortunately, they lack the capital necessary to make the market liquid enough. Altcoin valuations are subject to quicksilver volatility due to thin markets and the absence of regulation.

As an example, let us examine Ethereum's ether, whose prior peak was $1,299.95 on 12th January 2018. It plummeted in price to $597.36 within a month, and it reached $89.52 by the end of the year. Two years later, the altcoin reached record prices, reaching over $4,500 in the Fall of 2021. Traders can add great value to their portfolios by timing their trades well.

However, there is an issue. It is still too early for cryptocurrency markets. The metrics and parameters for evaluating cryptocurrencies are not defined, despite several attempts. The majority of speculation happens in the altcoin market. Some cryptocurrencies have been dead for many years, either because they failed to gain enough traction or simply vanished after they collected investors' money.

Because altcoins have outsized risks associated with their unregulated and volatile nature, investors should avoid them. It is also imperative that company executives can handle the stress associated with wild price swings. Successful investors in digital currency markets can earn high returns.

What are the advantages and disadvantages of Altcoins?

Pros

  • The goal of altcoins is to fill the shortcomings of Bitcoin by making it better.
  • Stablecoins, for example, could fulfill Bitcoin's original promise of being a daily transaction medium.
  • There are a few altcoins that have already gained traction among mainstream institutions, such as Ethereum's ether and Cardano's ADA.
  • Various altcoins are available in the cryptocurrency economy, each with its own function.

Cons

  • The Bitcoin investment market is much larger than the Altcoin market. Around 42% of the total cryptocurrency market is occupied by Bitcoin as of November 2021.
  • There are few investors and thin liquidity in the altcoin market due to the lack of regulation and defined criteria for investment. This leads to higher volatility in their prices compared to Bitcoin.  
  • Investment decisions can often be difficult and confusing because it's not always clear what altcoins are or what use cases they have.
  • The 'dead' altcoins have caused investor dollars to sink.       

The future of Altcoins

In the 19th century, circumstances led to the issue of a dollar issued by the federal government that led to discussions about the future of altcoins and cryptocurrencies. In the United States, various types and forms of local currencies were in circulation at that time. There was a variety of instruments backing the different currencies.

In some cases, local banks also created their own fiat currency. The current situation in altcoin markets parallels the multiplicity of currencies and financial instruments. There are thousands of alternative coins available today, each of which claims to serve a different purpose and have a different market.

It is unlikely that altcoins will merge into one cryptocurrency anytime soon. There is also a high likelihood that most of the more than 1,800 altcoins listed in crypto markets won't survive. A handful of altcoins will dominate the altcoin market-those with strong utility and use cases.

Alternative cryptocurrencies are a good way for investors to diversify within the crypto market without spending too much money. There have been a number of cryptocurrency rallies that have produced returns that are multiples of those generated by Bitcoin. Investing in altcoins, however, is not without risks, not least of which is the lack of regulation. With the maturation of cryptocurrency markets, the industry is likely to become more sophisticated and more capital intensive, cutting volatility and paving the way for regulation.

In the crypto market, investors looking for diversification should examine altcoins, which produce returns that are usually several times greater than Bitcoin's.

In A Nutshell

Investors interested in diversifying their portfolios can consider altcoins as good alternatives to cryptocurrencies. Despite some altcoins, such as Ethereum's ether, being recognizable by name, an overwhelming majority haven't made a mark. Alternative cryptocurrencies are an example of cryptocurrencies' potential to revolutionize the modern financial system. Before investing in them, investors should do thorough research first. Investing in altcoins entails similar risks, or even greater risks, than in Bitcoins.