What are altcoins? Pros and cons of altcoins explained

What are altcoins? Altcoins are generally defined as all cryptocurrencies other than Bitcoin (BTC). However, some people consider altcoins to be all cryptocurrencies except Bitcoin and Ethereum (ETH), as most cryptocurrencies branch off from one of these two. Some altcoins use different consensus mechanisms to verify transactions and create new blocks. Others try to distinguish themselves from Bitcoin and Ethereum by offering new or additional features. Developers with a different vision for their tokens or cryptocurrency usually develop and release most altcoins. They aim to provide unique functionalities or improvements over existing cryptocurrencies. Learn more about altcoins explained and the pros and cons of altcoins, and how they differ from Bitcoins.

Understanding Altcoins

“Altcoin” is a combination of the two words “alternative” and “coin. People commonly use it to refer to all cryptocurrencies and tokens that are not Bitcoin. Altcoins refer to the blockchains they were specifically designed for. 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 serve specific purposes within their respective blockchains. For example, ether is used in Ethereum to pay transaction fees. Some developers have created forks of Bitcoin, like Bitcoin Cash, to compete with Bitcoin as a payment method.

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 aim to improve the perceived limitations of the cryptocurrencies and blockchains they branch from or compete with. They seek to address these flaws and offer better solutions. 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, Ethereum is not descended from Bitcoin. Vitalik Buterin, Dr. Gavin Wood, and others developed it to support Ethereum. Ethereum is the world’s largest scalable blockchain-based virtual machine. Users pay ether (ETH) to network members for validating transactions.

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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 serve as currency for exchanging value between parties. Bitcoin exemplifies a payment token.

Stablecoins

Cryptocurrency trading and use have experienced volatility since their 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 serves as a reserve for holders to redeem if the cryptocurrency fails or encounters 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 represent tokenized assets offered in stock markets. Tokenization transfers value from an asset to a token, making it available to investors. Investors can tokenize any asset, like real estate or stocks. The asset must be protected and held for tokens to have value. Without this, tokens represent nothing. The Securities and Exchange Commission regulates security tokens since they function 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 provide online services. For example, they can buy services, pay network fees, or redeem rewards. Filecoin is a utility token for buying online storage space and protecting information.

Ether (ETH) is also a service token. You can use it on 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.

You can purchase and store utility tokens on exchanges. However, they are meant to be used on the blockchain network to make it work.

Meme Coins

Meme coins take inspiration from jokes or playful looks at other famous cryptocurrencies, as their name suggests. 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 give holders certain rights on the blockchain. These rights include voting for protocol changes or participating in Decentralized Autonomous Organization (DAO) decisions. They are native to the private blockchain and used for blockchain purposes. Although they are service tokens, they are often considered a separate type due to their specific purpose.

Pros and cons of altcoins

Let’s dive into the pros and cons of altcoins to understand their potential benefits and drawbacks. Knowing these can help you make informed decisions about investing in these alternative cryptocurrencies.

Pros of Altcoins Explained

Altcoins are ‘improved versions’ of the cryptocurrency they originated from. They aim to eliminate perceived flaws in the original cryptocurrency.
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.

It’s difficult to summarize the current state of the altcoin markets 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.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”)

Before diving into the cryptocurrency craze, it’s crucial to keep up with Altcoin news. Staying informed can help you navigate the volatile waves of bitcoin and beyond, making smarter investment choices.