What Are Altcoins & Is It a Good Investment?

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Bitcoin is revolutionary, but it isn’t perfect. While BTC may be the oldest and most known digital asset, there are plenty of cryptocurrencies, particularly altcoins, that aim to outstrip the domination of Bitcoin. But wait, what exactly are altcoins?

Altcoins refers to alternative cryptocurrencies, are developed to set apart from Bitcoin monopolization. They are created mainly to address Bitcoin’s scalability and are often a modified or improved version of Bitcoin.

Yes, Bitcoin’s peer-to-peer payment network does pave the way for altcoins. But they distinguish themselves with better privacy and a more efficient transaction speed.  

Among the thousands, the first introduced altcoin was Namecoin by Andrew Chow back in 2011. But altcoin took off and grew exponentially, thereby resulting in the rise of ETH, XRP, DOT, ADA, BNB, and more. Ether alone is currently accounting for around 20% of the total crypto market cap, and there are over 10,000 other altcoins available to date. While altcoin might be granted recognition, one can’t stop asking how altcoin works and the prospects it gives?

How Does Trading Altcoins Work?

Altcoins can usually be bought or sold on various cryptocurrency exchanges, whether on centralized and decentralized exchanges. But depending on the crypto exchanges, the types of altcoins each exchange offers are different from one another. Most exchanges discourage the purchase of altcoins with fiat. That means traders would have to buy BTC, ETH, or USDT and exchange for other altcoins. 

While centralized exchanges (CEXs) often have a more extensive listing process, decentralized exchanges (DEXs) like Uniswap allow traders to purchase altcoins listed by the public. Despite its drawbacks, CEXs are often a safer choice for large-scale traders.

However, the tricky part about trading altcoins is to figure out how to store them in a wallet. Though it’s possible to keep Bitcoin and altcoins on some CEXs, it’s all depending on the altcoins’ nature. Some altcoins support a public CEX wallet, while some only can be stored on a wallet created by the developers. Generally, most crypto exchanges offer reimbursements, but it’s still better to be safe than sorry. Typically, altcoin traders would store their crypto offline on a cold wallet to steer away from the prying eyes.

How Have Altcoins Grown Exponentially?

Most of the altcoins serve a specific purpose that is unique to that cryptocurrency. Bitcoin may be famous, but it was Ethereum that genuinely sparked the growth of the altcoin market.

Ethereum initiated the project by allowing users to deploy applications and create associated tokens on the network; it also means that anyone could make a cryptocurrency. On top of that, the recent boom in Decentralized Finance (DeFi), a concept that started on the Ethereum blockchain, also contributes to the demand for more altcoins.

Among the thousands of cryptocurrencies, only a handful have any real utility. For example, Solana (SOL) uses a unique protocol Proof-of-History believes to be faster than PoW or PoS. It maintains its own cryptographic time stamps for a faster transaction time at a cheaper rate. At the same time, Polkadot’s blockchain technology aims to unite independent blockchains under one roof to facilitate communications and interactions. For example, Polkadot introduces cross-blockchain interoperability to transfer any data or assets from various blockchains in the Polkadot network. 

Besides, social media and celebrity endorsement may essentially be one of the reasons why meme coins like Doge coins or Shiba Inu coins surge in demand. For example, Elon Musk may be one of the biggest influencers in the crypto space that brought Dogecoin back to life since the 2017 downfall. 

Elon Musk's Doge tweet
Elon Musk’s Tweet on Doge. Image credit: Bitcoin.com

Should You Invest in Altcoins?

Cryptocurrencies are a far cry away from ready for mass adoption, and until we can create useful user-facing applications for mainstream audiences, this is unlikely to change. So, of course, investing in altcoins is a better choice to mitigate risks in the volatile crypto space.

With the recent market movement, Altcoins is slowly catching the waves. Still, Altcoins offer the opportunity to be a part of this movement – a movement that isn’t just trying to bet on the right horse but improve the sport as a whole.

Recent investments from institutional players have brought an enormous boost to altcoins. In June 2020, international tech conglomerate Google announced the integration of its BigQuery platform with the Chainlink blockchain, a decentralized oracle network for decentralized data sourcing.

On the other note, Grayscale Investments, one of the world’s largest digital currency management firms, has over $30 billion in crypto holdings. Almost $10 billion are in altcoins like ETH, LTC, and more. It seems simple to argue that if the big players are doing it, you should too.

The reality is that any investment is risky, and it’s crucial to do enough research jumping into a crypto bandwagon. A good rule to follow is that if it seems too good to be true, it probably is.

Should Anyone Trade Altcoins?

Altcoins should serve as alternatives to Bitcoin investment. Trading cryptocurrency is just like stock trading in a sense whereby a diversified portfolio always wins. That means, even if Bitcoin has a setback, others can balance the risks and rewards.

With over 10,000 altcoins to choose from today (June 2021), the only question you should be asking is which are the best altcoins to trade and what to look after when trading altcoins?

Things to Take Note When Trading Altcoins

If you know what altcoins are and know how to trade cryptocurrency, then great, you’re all set. Otherwise, here are some fundamentals you need to factor in.

Assess the Market Capitalization and Liquidity

The fundamental analysis serves as a good solution to assess the prospects of these alternatives to Bitcoin. Altcoins have a track record of vanishing from sight because the project is squandered either by poor management or lacks liquidity. When the crypto market hits its low, an altcoin with liquidity is more likely to sustain. Plus, when there’s liquidity, it’s much easier for traders to expect an ideal return.

Look out for the asset’s market cap, as it helps you paint a complete story of the asset. It indicates the potential growth of the crypto, thus, telling you whether it is safe to invest.

Considers the Altcoin’s Lifespan

Trading an altcoin at an early stage is indeed profitable as it relies on speculations and whales’ interests. But, hefty profits always come with risks. To avoid these uncertainties, try trading on reliable altcoins like XRP, LTC, ADA where a stable trajectory presents. 

Watch Out for Scams

The creator of altcoins usually holds a large amount of circulating supply. When one entity dominates the power, it’s likely for pump and dumps to happen. To better evaluate an altcoin, try to assess its policies, take a deep dive into the team, and evaluate its long-term projections. Stick with altcoins that possess a reliable portfolio, blockchain, and utilizes smart contracts

Bitcoin vs Altcoin differences.

How Do Altcoins Differ from Bitcoin?

In October 2011, Litecoin became the silver to Bitcoin’s gold. While it wasn’t the first altcoin, it’s one of the oldest cryptocurrencies still used today. Litecoin shares much of its DNA with Bitcoin, with some key differences.

While both networks use a Proof of Work consensus mechanism, Litecoin uses a sequential memory-hard function that requires more memory. Further, Litecoin only takes 2.5 minutes to mine each block, making transactions much faster than on Bitcoin, which takes 10 minutes to add a block to the main blockchain.

Monero is another altcoin focused on making transactions private. It uses ringed signatures and special cryptographic functions to maintain the anonymity of its users. While Bitcoin and most cryptocurrencies are often thought to offer privacy, most transactions are entirely traceable.

Bitcoin is more pseudonymous than anonymous, in that all transactions are public, but it is not known which addresses belong to whom. Other altcoins also offer features like governance, smart contracts, and interoperability.

The Types of Altcoins

As the number of altcoins started to grow, the community split its nomenclature based on utility. From mining-based cryptocurrencies, stablecoins to security tokens, each category of altcoins serves a purpose. 

Mining-based Cryptocurrencies

Mining-based crypto is altcoins that are supplied through a mining process. By using decentralized nodes, the network solves mathematical problems to record data to the blockchain. As an exchange miners will receive a reward in the form of tokens. Bitcoin is one such token, as is any altcoin that uses a Proof of Work consensus algorithm.

Security Tokens

This type of altcoin is associated with a business and more closely resembles traditional stocks like the ICO. In many cases, they offer a form of dividend through a payout or fractional business ownership. The most common payout is with a dividend. 

Utility Tokens

Utility tokens function slightly differently in that they provide a claim on services. Besides, it’s also designed to be exchangeable for prominence decentralized utilities like storage space.

Stablecoins

Stablecoins are cryptocurrencies pegged to the value of a fiat currency like the U.S. Dollar to eliminates the volatility of Bitcoin. The most prominent stablecoin is probably Tether (USDT), whose market capitalization has grown exponentially since its launch in 2016. However, since Circle introduced USD Coin (USDC) as another digital stablecoin that runs on the Ethereum, Stellar, Algorand, and Solana blockchains, it can be seen as a rival to USDT, especially when DeFi is still on the rise.

What Are the Best Altcoins?

Choosing an altcoin to trade or invest in can be difficult, especially with are over 5,000 coins available today. Traders alike need to understand what to look for when parting with the capital. On top of that, ensuring the project’s validity is crucial when assessing the difference between incredible gains and crippling losses. A report from 2019 shows that 95% of altcoins listed on Coinmarketcap were illiquid, making them practically worthless.

Ethereum (ETH)

Ethereum has been second to Bitcoin consecutively for years on the list of cryptocurrencies ranked by market cap. And some would even consider Ethereum to be the father of altcoins. Its ERC-20 standard for tokens gives rise to a large fraction of cryptocurrencies on the market today. Plus, the Ethereum 2.0 upgrade will only strengthen the future of Ethereum in general.

Ripple (XRP)

XRP token represents the value transferring across the Ripple Network. While Ripple is still battling the SEC lawsuit, but the tokens have recently seen 40% of growth after the court ruling favoring Ripple executives. The tokens are a cheap cross-border remittance and are famous for their fast transaction speeds.

Tether (USDT)

Tether is a stablecoin relying on the Bitcoin Cash network (a fork of Bitcoin that offers faster transactions). With over a $62 billion market cap on the first day of July 2021, USDT is still in demand, and it doesn’t seem to go away anytime soon.

Chainlink (LINK)

Chainlink specializes in real-world data and supplies data across blockchain via smart contracts as a decentralized oracle network. At the same time, LINK is the digital asset to pay for the services on the network. Chainlink’s future development may slow for some time, but it unlocks its new growth, hitting its all-time high of $52.88 on May 10. That proves that evolution is probably on its way.

The Pros and Cons of Altcoins

In the world of blockchain, a meteoric rise in value is just as likely as a colossal crash. Small projects appreciate hundreds of times of what they were initially worth, only to crumble once abandoned after the hype dies. And Altcoins are no exception. Here’s what we need to highlight: 

Pros

  • Accessible: Getting into altcoins trading is easy. The entry barrier is low, and anyone with a computer can start trading cryptocurrencies within minutes.
  • Wide options: The options are near-endless with altcoins. However, altcoins offer more than just opportunities for speculative investment. In fact, they are what drives innovation in the blockchain space.
  • Unique functions: Altcoins are more than just a token. It’s built with functionalities, unlike Bitcoin.
  • Room for evolution: Offering a broader scope of evolvement in the future as the system and processes are unique.

Cons

  • Pump and dump schemes: Treacherous plots are circulating in the altcoins ecosystem. Many traders pump capital to altcoins purely for its price to appreciate. When the monopolization ends, the price crashes and the project dissipates into the air. 
  • The fraudulent listings: Wild claims of revolutionary features on any altcoins can also easily derail even the most astute investor.
  • Vulnerable: Altcoins relatively lack exposure and acceptance from the public. There is an insufficient number of outlets to utilize altcoins when in comparison to Bitcoin fully. 
  • Oversupply: There are simply too many altcoins circulating the crypto market. It’s hard to diversify your portfolio, relying on other altcoins besides XRP, ETH, LINK, and more, as there is insufficient information to evaluate a new project’s prospect. 

The Bottomline

The internet is filled with many a Bitcoin maximalist who believe altcoins are merely a noise surrounding the future. Some people think altcoins are a good investment that will dethrone Bitcoin in the upcoming years.

As with most things, the truth probably lies somewhere in the middle. Altcoins offer so many use-cases that they’re hard to ignore. Stablecoins have made trading faster, improving the liquidity of cryptocurrency markets and promoting more economic activity. Utility coins have inspired a plethora of smart contract applications, including all of DeFi.

Every altcoin may not be entirely unique, but it does bring new ideas to the table. A decentralized economy relies on decentralized product design. And just like how the overall open-source development community works together to create better software.

The crypto space is small, and it will take years of trial and error as the community wrestles with itself to figure things out. Altcoins offer us a way to support certain developments over others, and in our own small way, contribute to building a decentralized financial system. 

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