So far, cryptocurrencies have transformed how we perceive and interact with money daily. While Bitcoin is the most famous cryptocurrency since its creation in 2009, it is far from being the only one.
Over the last decade, thousands of other cryptocurrencies (also called alternative coins or alt-coins) have emerged from all over the crypto sector. If you’re new to crypto, it is very easy to get overwhelmed by the sheer number of these altcoins. In this guide, we break down what altcoins are, how they work, everything you should know about investing in them, and why they even matter to begin with.
Table of contents
What Are Altcoins?
This is the million-dollar question. As hinted at earlier, the word “altcoin” refers to any cryptocurrency that isn’t Bitcoin. These digital assets were created to improve on aspects of Bitcoin’s technology that users deemed lacking.
Some of these altcoins are designed to be faster to transact with, while others operate on networks that support the creation of decentralized applications (also called Dapps). Some of these cryptocurrencies are similar to Bitcoin in that they function as digital currencies. Others power the smart contracts that hold defi platforms (like Uniswap and Pump.fun) together.
How Altcoins Differ from Bitcoin
Surely, there must be other differences between the altcoins and Bitcoin aside from name alone. This assumption is correct because while Bitcoin was designed as a decentralized cryptocurrency and as a store of value, it operates on a proof-of-work (PoW) consensus mechanism.
This mechanism relies on miners to validate transactions and secure the network. In many ways this system of running the network works well enough. On the other hand, it has severe limitations, like slow transaction speeds and high energy consumption.
To many users, Bitcoin is highly secure but is very limited. On the other hand, altcoins are created to address the “challenges” that Bitcoin faces. They often use different consensus mechanisms like proof-of-stake (PoS) or delegated proof-of-stake (DPoS) to process transactions more efficiently. Some of these altcoins are focused on privacy, while others are scalable or even interoperable with other blockchains.
Types of Altcoins
Things go even deeper than mere names or purposes. The altcoin ecosystem is divided into several other sub-classes, each of them with their own unique features and use cases.
Some of the most common types include:
1. Stablecoins
Stablecoins are a very special class of altcoins. They are designed to be less volatile than regular cryptocurrencies by pegging their value to that of a stable asset (like the US dollar or gold).
As such, they maintain “stable” prices regardless of how much the market fluctuates. Examples of these assets include Tether (USDT), USD Coin (USDC), and DAI. These assets are mostly used for trading, remittances, and as hedges against market fluctuation.
2. Utility Tokens
Utility tokens function just as their names imply. They offer access to specific services within a blockchain ecosystem. Some of these cryptocurrencies power decentralized applications, exchanges, and even gaming platforms. Great examples of utility tokens include Binance Coin (BNB), which powers the largest centralized exchange in the world by trading volume.
Others include ChainLink (LINK), which powers the oracles that virtually every decentralized application in the blockchain ecosystem runs on.
3. Security Tokens
The naming of these tokens can be confusing to beginners. However, security tokens represent ownership of real-world assets like stocks, real estate, or bonds on a blockchain. These kinds of cryptocurrencies are different from others in that they are subject to financial regulations and are mostly used as a way to digitize traditional assets.
4. Governance Tokens
Governance tokens allow their holders to participate in decision-making within a blockchain project. They grant their owners voting rights on proposals, protocol upgrades and other related matters, and are important for keeping the blockchain space as decentralized as possible.
Examples include Uniswap (UNI) and Aave (AAVE), both of which are utility tokens but also function as governance tokens for their respective DeFi platforms.
5. Privacy Coins
Privacy coins are focused on anonymity in the crypto space, considering how good they are at concealing transaction details. Blockchain transactions are private enough. However, networks like Bitcoin still have transparent ledgers with sender, receiver, and transaction identifiers.
Bitcoin even shows the amount transacted, along with the time and other vital details that many crypto users do not want public. Assets like Monero, on the other hand, hide all of these, including the sender, receiver, and transaction amounts, making transactions as anonymous as possible.
6. Meme Coins
This asset class has become wildly popular over the last few years. They often start as jokes before becoming popular from community-driven hype. The most well-known examples of these include Dogecoin and Shiba Inu, both of which have seen some of the wildest price swings in the crypto space.
Why Altcoins Matter
So why do altcoins matter to investors and the crypto ecosystem? This asset class is important because it drives innovation within the crypto space.
They introduce new technologies and solutions, making things better for everyone. Take Ethereum, for example, and its introduction of smart contracts. This innovation birthed the defi and NFT markets, which have exploded into billion-dollar industries in the last decade.
Altcoins are also great for diversification, where investors seek opportunities to invest in high-growth assets aside from Bitcoin. Other altcoins also aim to address real-world problems, like XRP and its focus on low-cost cross-border payments.
Risks of Investing in Altcoins
While altcoins are highly rewarding, they also come with their fair share of risks. For example, this asset class can be a lot more volatile than Bitcoin, considering their relatively smaller market positions. They can be very prone to speculation and rapid fluctuations, which can catch many investors unaware.
Governments around the world are also more strict when it comes to regulating altcoins, compared to Bitcoin. This is without mentioning how the altcoin market is several times more prone to
Rug pulls, and scams. With all of this being said, investors must always make sure to research assets thoroughly before investing. Before investing in any altcoin, be sure to conduct thorough research and make sure that its development team is reputable and transparent.
How to Buy and Store Altcoins
Buying and storing these assets requires some basic knowledge of exchanges and wallets alike.
To get started, be sure to choose a reputable exchange. Some popular options include centralized exchanges (or CEXs) like Binance or Coinbase and decentralized ones (DEXs) like Uniswap and PancakeSwap. Decentralized exchanges enable peer-to-peer trading between traders, but can be complex to use for beginners.
Centralized exchanges on the other hand, are simpler to use but offer their users less control over how their funds are moved. After choosing an exchange, you will need to select a wallet. You can choose hot wallets, which are connected to the internet, like MetaMask and Trust Wallet.
Or you can choose cold wallets like Ledger and Trezor to store your crypto offline. One key fact to note is that hot wallets are easier to use but are more vulnerable to hacks. Cold wallets, on the other hand, are relatively harder to use but are a lot more secure from hacks and scams.
Overall
Altcoins can be very attractive as alternative investments in the crypto sector. They provide innovation and more unique use cases compared to Bitcoin. However, investors must also recognize that this also comes with risks. If you’re a newcomer, take the time to research your chosen altcoin and stay up to date on market trends. Understanding the fundamentals of the market is key to emerging successful as an investor or even a trader.
