What Is Altcoin?
Altcoins are a term used to describe all cryptocurrencies except Bitcoin (BTC). However, some people also include Ethereum (ETH) in this category since most cryptocurrencies are derived from either Bitcoin or Ethereum. Altcoins often utilize different methods to validate transactions and create new blocks, aiming to differentiate themselves from Bitcoin and Ethereum by introducing unique features or serving specific purposes.
Altcoins are created by developers with their vision and goals for their tokens or cryptocurrencies. These coins are designed to offer additional capabilities or cater to specific needs that Bitcoin and Ethereum may not fulfill. Exploring the world of altcoins allows us to grasp the individual qualities that make them stand out from Bitcoin, the trailblazing cryptocurrency.
Understanding Altcoins
The term "altcoin" combines "alternative" and "coin" and is commonly used to refer to all cryptocurrencies and tokens that are not Bitcoin. Each altcoin is associated with a specific blockchain it was created for. Many altcoins are the result of forks, which occur when a blockchain splits and becomes incompatible with the original chain. These forks typically happen due to disagreements among groups of developers who decide to establish their own coin.
Altcoins serve various purposes within their respective blockchains. For instance, Ethereum's native token, ether, is used to pay transaction fees on the Ethereum network. Some altcoins, like Bitcoin Cash, emerge as forks of Bitcoin with the intention of competing as a payment method.
Other altcoins fork from existing cryptocurrencies as a means to raise funds for specific projects. Take Bananacoin, for example, which forked from Ethereum in 2017 to raise funds for an organic banana plantation in Laos.
The primary goal of altcoins is to address perceived limitations of the cryptocurrency and blockchain they forked from or are competing against. One of the earliest altcoins, Litecoin, was created in 2011 by forking the Bitcoin blockchain. Litecoin introduced a different proof-of-work consensus mechanism called Scrypt, which consumes less energy and enables faster transactions compared to Bitcoin's SHA-256.
Ether, on the other hand, is an altcoin that was not forked from Bitcoin. It was purposefully designed by visionaries such as Vitalik Buterin and Dr. Gavin Wood to support the Ethereum blockchain, which has become the largest blockchain-based scalable virtual machine. Ether (ETH) is used to reward network participants for validating transactions on the Ethereum network.
Types of Altcoins
Altcoins exhibit a wide array of flavors and fall into different categories, each serving a distinct purpose. Let's take a brief overview of some of these altcoin types and their intended applications.
Payment Token
Payment tokens, as their name suggests, are specifically crafted to function as a form of currency, facilitating the exchange of value between individuals or entities. A notable example of a payment token is Bitcoin, which serves as a prominent illustration in this category.
Stablecoins
Since its inception, the world of cryptocurrency has been characterized by its notorious volatility. However, in an effort to mitigate this instability, stablecoins have emerged. These specialized cryptocurrencies aim to reduce overall volatility by pegging their value to a reserve of assets, such as fiat currencies, precious metals, or even other cryptocurrencies. The purpose of this asset basket is to provide a safeguard for holders, ensuring that they can redeem their stablecoins in case of failure or issues with the cryptocurrency. As a result, stablecoins are designed to maintain a relatively narrow range of price fluctuations.
Several noteworthy stablecoins have gained recognition in the market. Tether's USDT, MakerDAO's DAI, and the USD Coin (USDC) are among the prominent examples. In a significant development for the acceptance of stablecoins, Visa Inc., a leading payment processing company, announced in March 2021 that it would initiate the settlement of certain transactions on its network using USDC over the Ethereum blockchain. Furthermore, Visa has plans to introduce additional capabilities for settling transactions with stablecoins throughout 2021. This move demonstrates the growing acceptance and integration of stablecoins within the traditional financial landscape.
Security Tokens
Security tokens represent tokenized assets that are traded on stock markets. Tokenization involves converting the value of an asset into a digital token, which can then be accessed by investors. Virtually any asset, ranging from real estate to stocks, has the potential to undergo tokenization. However, it is crucial that the underlying asset is properly secured and held, as, without this assurance, the tokens would lack substance and hold no value. Due to their nature as securities, security tokens fall under the regulatory oversight of the Securities and Exchange Commission (SEC).
In a notable development in 2021, Exodus, a Bitcoin wallet firm, achieved a significant milestone by successfully completing a Reg A+ token offering qualified by the Securities and Exchange Commission. This landmark event involved converting $75 million worth of common stock shares into tokens on the Algorand blockchain. Notably, this marked the first instance of digital asset security offering equity in a United States-based issuer. The event underscored the growing intersection between traditional financial instruments and the world of digital assets.
Utility Tokens
Utility tokens serve as a means to access and utilize services within a specific network. These tokens are often employed to purchase services, cover network fees, or redeem various rewards. For instance, Filecoin functions as a utility token used to acquire storage space on a network and ensure the security of information.
Ether (ETH) is another prominent example of a utility token. It is specifically designed for use within the Ethereum blockchain and virtual machine, serving as a means to pay for transactions conducted on the network. Additionally, the stablecoin USTerra utilizes utility tokens in an attempt to maintain its peg to the US dollar. To achieve this, USTerra mints and burns two utility tokens to create downward or upward pressure on its price.
While utility tokens can be purchased on exchanges and held, their primary purpose is to be actively utilized within the associated blockchain network. By actively participating in the network, users contribute to its continued functionality and enable the realization of its intended services and capabilities.
Meme Coins
Meme coins, as the name implies, draw inspiration from jokes or lighthearted interpretations of established cryptocurrencies. These coins often experience rapid surges in popularity within a short span of time, frequently fueled by the online promotion of influential individuals or investors seeking to capitalize on short-term profits.
The period of April and May 2021 became known as the "meme coin season" due to the significant surge in these types of altcoins. During this time, numerous meme coins witnessed astronomical percentage gains, primarily driven by speculative trading and investor enthusiasm.
It is important to note that meme coins often lack substantial underlying value or a fundamental basis for their valuation. Instead, their appeal predominantly rests on the hype and social media traction they generate. Consequently, investments in meme coins tend to carry a higher degree of risk and volatility, as their prices are largely influenced by speculative market behavior rather than tangible assets or utility.
While meme coins may capture the attention of the cryptocurrency community and generate considerable buzz, it is crucial for investors to exercise caution and conduct thorough research before engaging in such speculative ventures.
Governance Tokens
Pros and Cons of Altcoins
Pros
- Improve upon another cryptocurrency's weaknesses
- Higher survivability
- Thousands to choose from
Cons
- Lower popularity and smaller market cap
- Less liquid than Bitcoin
- Difficult to determine use cases
- Many altcoins are scams or lost developer and community interest
Pros of Altcoins Explained
- Altcoins strive to enhance and refine the original cryptocurrency they originated from by addressing perceived weaknesses and limitations.
- Altcoins with more utility have a better chance of surviving because they have uses, such as Ethereum’s ether.
- Within the realm of the crypto economy, investors are presented with a diverse array of altcoins, each serving unique functions and purposes.
Cons of Altcoin Explained
- In comparison to Bitcoin, altcoins have a relatively smaller investment market. Bitcoin has maintained a steady position, accounting for approximately 40% of the global cryptocurrency market since May 2021.
- The altcoin market, on the other hand, exhibits lower investor participation and reduced activity, resulting in thinner liquidity. This can make it more challenging for investors to navigate and assess the multitude of altcoins available, as distinguishing between their distinct use cases and value propositions can be complex and confusing.
- Furthermore, within the altcoin space, there are instances of "dead" altcoins that have unfortunately failed to deliver on their promises, leaving investors with losses. It serves as a reminder of the risks inherent in the cryptocurrency market, emphasizing the importance of thorough research and due diligence before committing funds to any altcoin investment.
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