Altcoins: Everything to Know
By Beluga Research August 13, 2023
- Cryptocurrency altcoins are digital assets that often offer features and functionalities that Bitcoin does not
- These emerged after Bitcoin with Namecoin being the first altcoin developed in 2011
- Altcoins have different types, consensus mechanisms, and use cases
- Advantages include diversification, innovation and lower entry barriers than Bitcoin while disadvantages include lack of liquidity and regulatory uncertainty
Cryptocurrency altcoins are digital assets that often offer features and functionalities that Bitcoin does not. Altcoins, short for alternative coins, refer to any cryptocurrency other than Bitcoin. Bitcoin remains the most well-known and widely adopted cryptocurrency. Altcoins benefit the crypto market by driving use and increasing the diversity of offerings.
Altcoins aim to address various limitations and shortcomings of Bitcoin. Bitcoin exhibits concerns as to scalability, transaction speed, and privacy. Altcoins utilize different technologies, consensus mechanisms, and governance models than Bitcoin. They provide a wide range of options for users and investors.
A Brief History
After Bitcoin was introduced in 2009, entities in the crypto market assessed what Bitcoin could accomplish and its limitations. They used this information to craft other digital coins. In 2011, entrepreneurs launched the first altcoin, Namecoin. Namecoin aimed to create a decentralized domain name system (DNS) to resist censorship and enhance online privacy. This marked the beginning of a wave of altcoin innovation.
In the following years, entrepreneurs introduced other altcoins. Each had its unique features and goals. Litecoin, launched in 2011, aimed to improve transaction speed and efficiency. Ripple, introduced in 2012, focused on facilitating fast and low-cost international money transfers. Ethereum, one of the most prominent altcoins, was launched in 2015. It introduced contracts and decentralized applications (dapps) to the blockchain world.
Altcoins: Everything to Know
- Different Types of Altcoins: Altcoins can be categorized into various types based on their underlying technology and purpose. Some altcoins, like Litecoin and Bitcoin Cash, are considered "forks" of Bitcoin. This is because they share a common blockchain history with Bitcoin but have made specific modifications. Other altcoins, like ether, introduce entirely new functionalities. This has encouraged the development of decentralized applications. There are also privacy-focused altcoins like Monero and Zcash. These utilize advanced cryptographic techniques to enhance transaction privacy.
- Consensus Mechanisms: Altcoins employ different consensus mechanisms to validate transactions and maintain the integrity of their blockchains. Bitcoin uses proof-of-work (PoW), which requires miners to solve complex mathematical problems. Altcoins have explored a number of other consensus mechanisms. For example, in 2022, Ethereum switched from PoW to proof-of-stake (PoS). This mechanism relies on validators who hold and "stake" coins to secure the network.
- Utility and Use Cases: Altcoins serve a variety of purposes beyond being a medium of exchange or store of value. Some altcoins are designed to facilitate specific use cases, such as decentralized finance (DeFi) platforms, tokenized assets, supply chain management, and identity verification. The diverse use cases highlight the potential for altcoins to disrupt traditional industries.
- Market Volatility and Risk: Altcoins, as all cryptocurrencies, are subject to significant market volatility and investment risks. The value of altcoins can fluctuate dramatically, influenced by factors that include market sentiment, regulatory developments and technological advancements. Investors should conduct thorough research, consider risk tolerance. They should exercise caution when investing in altcoins.
- Acquire a digital wallet to store and manage altcoins securely. Wallets come in various forms, such as software applications, hardware devices or even online platforms. Each type has its own advantages and considerations regarding security and convenience.
- Choose a reliable cryptocurrency exchange to buy, sell and trade altcoins. An investor should select an exchange that aligns with their specific requirements, such as liquidity, supported altcoins, fees and user experience. The investor should conduct research and consider factors like reputation, security measures and regulatory compliance before making a decision.
- Become familiar with the altcoin landscape. There is a wide variety of altcoins, and each presents a different set of opportunities to make a profit.
- Underlying technology or blockchain protocol to power the coin. Ethereum introduced smart contracts, enabling developers to build dapps on its blockchain. This feature opened up a new realm of possibilities, including DeFi applications and non-fungible tokens (NFTs).
- Different consensus mechanism than PoW. Some altcoins employ proof-of-stake (PoS), where participants "stake" their coins to validate transactions and secure the network. This approach offers energy efficiency, scalability, and potentially lower barriers to entry for participants.
- Different supply models, governance structures, and privacy features than Bitcoin. Some altcoins enhance privacy by implementing advanced cryptographic techniques to protect users' identities and transaction details. Other altcoins focus on governance models that allow token holders to participate in decision-making processes. Then investors can shape the future development and direction of the projects.
- Diversification - Altcoins provide diversification opportunities for cryptocurrency investors. This allows investors to spread risk across multiple digital assets.
- Innovation - Many altcoins introduce innovative technologies and concepts. They push the boundaries of what is possible in the cryptocurrency space.
- Specialization - Certain altcoins focus on specific use cases or industries. They offer tailored solutions that can meet the unique needs of those sectors.
- Lower entry barriers - Altcoins often have lower entry barriers compared to Bitcoin. This makes them more accessible for individuals with limited resources.
- Potential for higher returns - Altcoins offer the potential for higher returns compared to more established cryptocurrencies. This is because of lower market capitalization and higher volatility.
- Community-driven development - Altcoins often have strong and passionate communities that actively contribute to their development. This encourages a collaborative and decentralized approach to innovation.
- Lack of liquidity - Many altcoins suffer from limited liquidity. There may not be enough buyers or sellers in the market. This can make it challenging to buy or sell large amounts of these cryptocurrencies without significantly impacting the price.
- Higher risk - Altcoins, particularly those with smaller market capitalizations, can be more susceptible to price manipulation and fraud. Investors have to deal with a higher level of risk than when trading in bitcoin.
- Regulatory uncertainty - Altcoins operate in a regulatory landscape that is still evolving. Their legal status can vary from jurisdiction to jurisdiction, creating uncertainty for investors and users.
- Limited adoption - While bitcoin has gained wider acceptance and recognition, many altcoins struggle to achieve widespread adoption and real-world integration. This limits their practical utility.
- Technical challenges - Altcoins often face technical challenges related to scalability, security, and network stability. The concerns impact their usability and hinder growth.
- Lack of proven track record - Unlike bitcoin, which has a longer track record, many altcoins are relatively new and untested. This makes it more difficult to assess their long-term viability and stability.