What are altcoins? Pros and cons of altcoins explained

Altcoins are generally defined as all cryptocurrencies other than Bitcoin (BTC). However, some people think that altcoins are all cryptocurrencies except Bitcoin and Etherium (ETH) because most cryptocurrencies branch off into one of the two. Some altcoins use different consensus mechanisms to verify transactions and open new blocks or try to distinguish themselves from Bitcoin and Etherium by providing new or additional features or targets.

Most altcoins are developed and released by developers who have a different vision or use of their tokens or cryptocurrency. Learn more about altcoins and how they differ from bitcoins.

Understanding Altcoins

“Altcoin” is a combination of the two words “alternative” and “coin. It is commonly used to include all cryptocurrencies and tokens that are not bitcoins. Altcoins refer to blockchains for which they were specifically designed. Many of them are forks – separations of blockchain incompatible with the original chain – from Bitcoin and Etherium. These forks usually have more than one reason for originating. In most cases, a group of developers disagree with others and go off to create their own coin.

Many altcoins are used in their respective blockchains to achieve something, such as ether, which is used in Ethereum to pay transaction fees. Some developers have created forks of Bitcoin and reappeared in an attempt to compete with Bitcoin as a payment method, such as Bitcoin Cash.

Others splurge and market themselves as a way to raise funds for specific projects. For example, the Bananacoin token branched off Ethereum and appeared in 2017 as a way to raise funds for a banana plantation in Laos that claimed to grow organic bananas.

Altcoins attempt to improve the perceived limitations of any cryptocurrency and blockchain from which they are branched out or with which they compete. The first altcoin was Litecoin, branched off the Bitcoin blockchain in 2011. Litecoin uses a different Proof-of-Work (PoW) consensus mechanism than Bitcoin, called Scrypt (pronounced es-crypt), which is less energy intensive and faster than Bitcoin. SHA-256 PoW consensus mechanism.

Ethereum is another altcoin. However, it is not descended from Bitcoin. It was developed by Vitalik Buterin, Dr. Gavin Wood, and several others to support Ethereum, the world’s largest scalable blockchain-based virtual machine. Ether (ETH) is used to pay network members for the transaction validation work their machines do.

Types of Altcoins

Altcoins come in many flavors and categories. Here’s a brief description of some types of altcoins and what they are for.

Payment Token

As the name implies, payment tokens are intended to be used as currency – to exchange value between parties. Bitcoin is a prime example of a payment token.

Stablecoins

Cryptocurrency trading and use has been marked by volatility since its launch. Stablecoins seek to reduce this overall volatility by tying their value to a basket of commodities, such as fiat currencies, precious metals or other cryptocurrencies. The basket is intended to be used as a reserve for holders to redeem if the cryptocurrency fails or runs into problems. Stablecoin prices should not fluctuate beyond a narrow range.

Known stablecoins include USDT Tether, DAI MakerDAO and USD Coin (USDC). In March 2021, payment processing giant Visa Inc. (V) announced that it would begin conducting some transactions on its USDC network via Ethereum blockchain, and later in 2021 plans to deploy additional settlement capacity in Stablecoin.

Security Tokens

Security tokens are tokenized assets offered in stock markets. Tokenization is the transfer of value from an asset to a token, which then becomes available to investors. Any asset can be tokenized, such as real estate or stocks. For this to work, the asset must be protected and held. Otherwise, tokens are useless because they represent nothing. Security tokens are regulated by the Securities and Exchange Commission because they are designed to be used as securities.

Bitcoin wallet company Exodus successfully completed a Securities and Exchange Commission-certified Reg A+ token offering in 2021, converting $75 million worth of common stock into Algorand blockchain tokens. This was a historic event because it was the first digital asset security to offer shares of an issuer from the United States.

Utility Tokens

Utility tokens are used to provide services online. For example, they can be used to buy services, pay network fees or redeem rewards. Filecoin, which is used to buy online storage space and protect information, is an example of a utility token.

Ether (ETH) is also a service token. It is intended for use in the Ethereum blockchain and virtual machine to pay for transactions. The USTerra stablecoin uses service tokens to try to maintain its peg to the dollar, which it lost on May 11, 2022, by minting and burning two service tokens to create downward or upward pressure on its price.

Utility tokens can be purchased on exchanges and stored, but they are meant to be used on the blockchain network to make it work.

Meme Coins

As their name suggests, meme coins are inspired by a joke or silly look at other famous cryptocurrencies. They tend to gain popularity over a short period of time, often promoted online by famous influencers or investors trying to exploit short-term profits.

Many are calling the surge in altcoins of this type in April and May 2021 a “meme coin season,” with hundreds of these cryptocurrencies showing huge percentage gains based on pure speculation.

Governance Tokens

Governance tokens allow holders of certain rights on the blockchain, such as voting for protocol changes or participating in Decentralized Autonomous Organization (DAO) decisions. Because they tend to be native to the private blockchain and are used for blockchain purposes, they are service tokens, but they are commonly treated as a separate type because of their purpose.

Pros of Altcoins Explained

• Altcoins are “improved versions” of the cryptocurrency from which they originated because they aim to eliminate perceived flaws.
• Altcoins with more utility have a better chance of survival because they have uses, such as Etherium ether.
• Investors can choose from a wide range of altcoins that serve different functions in the crypto-economy.

Cons of Altcoin Explained

• Altcoins have a smaller investment market compared to bitcoins. Bitcoin as a whole has held about 40% of the global cryptocurrency market since May 2021.
• The altcoin market has fewer investors and less activity, resulting in low liquidity.
• It is not always easy to distinguish between different altcoins and their respective use cases, making investment decisions even more complex and confusing.
• There are several “dead” altcoins that ended up taking investors’ dollars.

Future of Altcoins

Discussions about the future of altcoins and cryptocurrencies have precedent in the circumstances that led to the federal issuance of the dollar in the 19th century. Various forms of local currency circulated in the United States. Each had unique characteristics and was backed by another instrument.

Local banks also issued currency, in some cases backed by fictitious reserves. This variety of currencies and financial instruments is consistent with the current situation in altcoin markets. Today there are thousands of altcoins available in the markets, each claiming to serve a different purpose and market.

The current state of affairs in the altcoin markets can hardly be consolidated into a single cryptocurrency. But it is also likely that most of the thousands of altcoins listed on the cryptocurrency markets will not survive. The altcoin market is likely to coalesce around a group of altcoins – those with high utility, use cases, and a solid blockchain purpose – that will dominate the markets.

If you want to diversify the cryptocurrency market, altcoins can be cheaper than bitcoins. However, the cryptocurrency market, regardless of the type of coin, is young and unstable. Cryptocurrency is still finding its role in the global economy, so it is best to approach all cryptocurrencies with caution.

What Is the Best Altcoin to Invest in?

The best altcoin to invest in depends on your financial situation, goals, risk tolerance and market circumstances. It’s best to talk to a financial advisor to help you decide which one is best for you.

What Are the Top 3 Altcoins?

By market cpacity, the top three altcoins are Ethereum, USD Coin, Tether (USDT).

Is It Better to Invest in Bitcoin or Altcoins?

Which cryptocurrency is better is a subjective argument based on an investor’s financial circumstances, investment goals, risk tolerance and beliefs. You should talk to a professional financial advisor about investing in cryptocurrency before you buy it.

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