Altcoins are cryptocurrencies, or virtual currencies, that are not Bitcoin. Each altcoin has its own set of rules.
Learn more so you can decide whether to invest in altcoins.
What Are Altcoins?
Altcoins are alternatives to Bitcoin, hence their name, a blend of “alternative” and “Bitcoin.”
Alternate coins are cryptocurrencies that use a technology called “blockchain” to facilitate secure peer-to-peer transfers. They improve on the success of Bitcoin by slight changes in rules to appeal to different users, and may use less energy than Bitcoin. As of November 2021, there are more than 10,000 altcoins.
How Do Altcoins Work?
In general, altcoins work much like Bitcoin. Using a private key, you can transfer funds from your digital wallet to another user’s wallet. A blockchain, or recording ledger, records the transactions permanently and publicly, so exchanges cannot be altered or denied after the fact.
A blockchain is secured by mathematics proofs that confirm transactions in blocks. Some cryptocurrencies, like Bitcoin, utilize “proof-of-work,” which is a cumbersome and energy-inefficient way of verifying transactions.
Ethereum, for example, uses a “proof-of-stake” algorithm instead. Proof-of-stake validates transactions via other accounts within the network, making them faster, simpler, and more energy-efficient.
Altcoins vs. Bitcoin
Bitcoin is not the only cryptocurrency that follows the same rules. While Bitcoin will only ever mine bitcoins every 10 minutes, an alternative coin called Litecoin will mine coins around 2.5 minutes. This makes Litecoin able to handle payments faster. Litecoin will also produce 84 million Ltecoins, while Bitcoin will only produce 21 million.
As for mining, Litecoin uses a different set of rules than bitcoin. In contrast to bitcoins, Litecoins can be mined with common computer hardware.
There are thousands of altcoins available on the market, and Litecoin is just one of them. Altcoins are popular alternatives to Bitcoin, but none of them can reach Bitcoin’s $1.2 trillion market value.7 Other examples of altcoins include:
- Ethereum (ETH)
- Stellar (XLM)
- Polkadot (DOT)
- Monero (XMR)
- Litecoin (LTC)
- Bitcoin Cash (BCH)
- Cardano (ADA)
- Solana (SOL)
- Dogecoin (DOGE)
- Shiba Inu (SHIB)
Altcoins: Pros and Cons
Pros
- Fix the flaws in Bitcoin
- by providing competition
- for low transaction fees
Cons
- Volatility is very high
- . Fraud and scams are very likely
Pros Explained
- Improve on Bitcoin’s flaws: Altcoins are typically designed to fix the shortcomings of the Bitcoin framework, whether it’s speed, mining costs, or anything else.
- Provide competition: by tweaking the rules through which Bitcoin operates, altcoin creators enable new competitors to enter the Bitcoin market.
- Low transaction fees: In addition to the secure blockchain technology, altcoins offer the advantage of relatively low transaction fees.
Cons Explained
- Value is very volatile: Altcoins are relatively new investments, so their value can fluctuate wildly.
- High potential for scams and fraud: As with Bitcoin, altcoins are frequently the subject of scams and other fraud schemes.
Types of Altcoins
Altcoins are sometimes the work of enthusiasts, and sometimes they are the basis for whole new businesses. In fact, they can be much more than coins, creating entire new frameworks for everything from messaging to online marketplaces.
In most cases, an altcoin will change Bitcoin’s rules in a way that makes it uniquely useful, and it may have a specific application.
For example, solarcoin is designed as a unit of exchange for solar power production. Many others, such as namecoin, have formed the basis for a new system of domain names on the Internet.
There are several types of altcoins to consider.
Stablecoins
The purpose of stablecoins is to combat cryptocurrency volatility by tying their value to an underlying index, commodity, or security. One example of a stablecoin is Tether (USDT).
Digital Tokens
As digital tokens, altcoins are supported by a blockchain platform. Tether, which is built on Ethereum and other blockchains, can also be considered a digital token.
It is possible for investors to earn returns by exchanging altcoins with each other, but it is risky as an investment. Virtual currencies trade on unregulated exchanges, leaving you susceptible to price manipulation, fraud, and other risks.
Are Altcoins a Good Investment?
Your understanding of cryptocurrency and investing goals will determine whether altcoins are a good investment for you. Some altcoins carry greater risks than others. Do your research before investing in any altcoin, just as you would when investing in any traditional security.
How to Get Started Investing in Altcoins
Many cryptocurrency exchanges are available online, and it can be easy to invest in altcoins. Among the most popular exchanges are Coinbase, Binance, eToro, Kraken, and Gemini.
Signup to Create an account with your chosen crypto exchange after researching your options. You will be asked to enter your personal information and to choose a funding method for your account. Once you have set up your account, you can begin investing in altcoins.