This article was originally published on Gokhshtein Media and appears here with permission.
If you’re new to cryptocurrency, you probably already have a lot of questions. I know I did. At the start of my crypto adventure, I was mostly confused about coin types and their functions, especially altcoins. I also didn’t know where or how to invest my money.
Through research and mentorship, I expanded my knowledge of all things crypto and made it my mission to help others like me. That’s why I’ve created a beginner’s guide to altcoins with background information to help you form an opinion and strategy.
What is an Altcoin and how are they different from Bitcoin?
By definition, altcoins are “alternative” cryptocurrencies to Bitcoin (CRYPTO: BTC) (also, in some cases, coins other than Ether (CRYPTO: ETH)). Altcoins distinguish themselves from Bitcoin by extending their capabilities and bridging the gap of Bitcoin’s perceived shortcomings. BUT, altcoins use Bitcoin as a benchmark since it was the first dominant coin in the market. Although altcoins have the same premise as Bitcoin (using the blockchain as an incorruptible public ledger with legitimate transactions), altcoins have taken this model and shaped it to achieve different goals and dissolve limitations.
How many altcoins are there?
According to Statista, there are almost 6,000 altcoins since last year (2021). This was an extreme increase from a handful of altcoins that existed in 2013. Although there are many altcoins out there, many of these cryptocurrencies are not considered significant due to the creation process very open and accessible of cryptocurrency, which makes it easy to create a coin.
Are there different types of altcoins?
Yes. There are several types of altcoins, such as mining-based crypto, stablecoins, tokens, forks, and native cryptocurrencies, all of which vary in definition, origin, and function. Additionally, not all altcoins are created equal – some cost pennies while others cost hundreds of dollars. As for how it works, some altcoins use a different consensus mechanism to produce blocks or validate transactions. Some differ from Bitcoin by providing new or additional features, such as smart contracts or low price volatility.
Crypto mining is how new units of digital currency are created. You exploit them only on the basis of speculation. For example, you may seek to mine Dogecoin (CRYPTO: DOGE) in the hope that future value will increase. Most mining-based altcoins use proof-of-work (PoW), in which systems generate new coins by solving problems and creating blocks. Litecoin (CRYPTO: LTC), Monero (CRYPTO: XMR), and ZCash (CRYPTO: ZEC) are examples of mining-based Altcoins.
The main use of a stablecoin is to facilitate transactions on exchanges. So, instead of buying Bitcoin directly with fiat (like the US dollar), traders exchange fiat for a stablecoin and then use it for another cryptocurrency like Bitcoin. Stablecoins were developed to provide the benefits of blockchain technology without price volatility. A good example of a stablecoin is Tether, the largest stablecoin by market cap, pegged to the US dollar. One Tether will always equal one US dollar.
These cryptocurrencies were originally created to work on a specific blockchain network. For example, Bitcoin is a native coin because it is the currency used based on the Bitcoin blockchain. Ether, the second largest cryptocurrency, is a native coin of the Etherum network. Binance is also a native coin as it uses the Binance Chain.
As the name suggests, these coins are inspired by a joke or meme or created as a parody of other well-known cryptocurrencies. They usually gain popularity in a short period of time due to internet hype and are short-lived which makes them highly volatile. The main use of meme coins is for crypto influencers and retail investors to exploit short-term gains. The best known example is Elon Musk and Dogecoin.
A token is a unit of value that runs on an existing blockchain and is used for specific purposes. You can think of them like using tokens in an old-fashioned arcade. For example, you exchange US dollars for tokens to operate the games. Chain link (CRYPTO:LINK) is an example of a platform built on top of the Ethereum blockchain and used to convert real-world data into a blockchain-compatible format that can be read by smart contracts.
The LINK token associated with Chainlink is used to pay for Chainlink’s services. So, if an investor thinks the demand for smart contract services will increase, he can buy LINK. Other examples of tokens include security tokens and utility tokens.
Security tokens are wearable devices that authenticate the identity of users using personal information. It sounds daunting, but it’s essentially a traditional digital form of security. Examples of security tokens include USB tokens that connect to ports, Bluetooth tokens, electronic key fobs, etc. A utility token is a special type of token that helps capitalize or fund projects for startups, corporations, or other professional groups. They are generally unregulated and help create an internal economy within the blockchain of a specific task. Examples of utility tokens include the “Basic Attention Token” and the “Golem Token”. In the real world, gift cards and public transport tickets are also examples.
In a crypto blockchain, groups of recorded transactions, also known as the public ledger, are organized into blocks. Each block is connected to the next. For a new block to be added to the chain, all previous transitions in the block must be checked with a consensus that everything is “right” in the chain. Consensus is required for the list of transactions and rules that govern the blockchain network. When a group decides to change the rules, it can validate a split in the chain. This split is known as a fork.
A fork creates a new chain in which transactions are recorded according to the new rules agreed upon by those validating the fork. Meanwhile, the other “tooth” of the fork continues the chain as usual. Forks happen repeatedly, creating new protocols and evolving cryptocurrencies all the time. An example of a fork would be Bitcoin Cash. Bitcoin Cash originated from the original Bitcoin blockchain. Dogecoin is a fork of Luckycoin, a fork of Litecoin, which was a fork of Bitcoin.
What to Consider Before Buying Altcoins
Like any other aspect of investing, take the time to read what the organization is trying to accomplish with this altcoin. Here are some questions you can ask yourself.
Does the altcoin look like a promising way to improve Bitcoin?
If it’s a token, can you apply it to the real world?
If it is a stablecoin, how are you going to use it?
Are you in a stable financial situation to invest right now?
Key points to remember
Altcoin refers to cryptocurrencies other than Bitcoin.
The main goal of Altcoin is to improve Bitcoin’s “limitations” and provide more features.
The basic framework for Bitcoin and Altcoins is similar, but there are several differences. And those differences created a whole different market. This has attracted investors who see potential as alternatives to bitcoin.
There are around 6,000 different altcoins.
Typically, the Altcoin market is driven by speculation. Cryptocurrency markets are not yet mature. Despite several attempts, there are no set investment criteria or metrics for evaluating cryptocurrencies.
Thanks for reading!