Altcoins, put simply, are alternative cryptocurrencies to Bitcoin and emerged after Bitcoin launched. Many of them have been on the up ever since, some more than others. Altcoins have a market cap of around 58% as of August 2021, more than double the 28% at the end of last year.
Although there are over 6,000 cryptocurrencies, some might not achieve long-term growth. The good thing about altcoins is that they offer additional benefits, unlike Bitcoin. You can use some altcoins like Ethereum (ETH) to do more than just payments. The second-largest crypto after Bitcoin, ETH is used as a digital asset or as a decentralized computing platform where users can build or create secure platforms, applications or NFTs (non-fungible tokens).
NFTs are digital art, music or collectables that are each unique and non-replaceable. You can buy an NFT using altcoins, while Ethereum supports the protocol it operates on.
TLDR (Too Long; Didn’t Read)
- There are over 6,000 cryptocurrencies; some might not achieve long-term growth.
- Uncertainty and volatility are part of crypto investing; high returns or deep losses are fair game.
- Sending payment from one wallet to another requires a private key.
- Altcoins are diverse and categorized as mining-based, utility tokens, non-fungible tokens, stablecoins, or security tokens.
- Whether to invest is an individual decision. But if you decide to invest, always do your research and use a trusted crypto exchange platform.
Why Invest in Altcoins?
Cryptocurrencies are a form of decentralized finance, so by nature, no government regulates them directly or on a large scale. Altcoins give investors the opportunity to have a diverse portfolio. You can invest in as many altcoins as you wish or can afford.
It’s important and precautionary to remind traders that the crypto market is very unpredictable and market prices fluctuate frequently, often drastically, and sometimes easily. For example, billionaire Elon Musk caused Dogecoin (DOGE) prices to surge by 25% on December 20, 2020, after he tweeted, “One word: DOGE.”
Sure, there is uncertainty in any type of investment. But it’s far more pronounced with cryptocurrencies, where the only constant is the possibility of both sky-high returns and steep losses. So investing in altcoins requires a basic understanding of the following;
- Follow market trends closely
- The benefits and disadvantages of altcoins
- How do altcoins work?
- Why are you investing? Is it short-term or long-term? Are you comfortable holding the crypto (HODL) for months or a couple of years?
- Do you know how to trade in crypto?
How Do Altcoins Work?
Before you start investing in altcoins, understanding how they work is essential. As stated earlier, altcoins can be used as either digital money or a decentralized computing platform since they have more than one functionality, unlike Bitcoin.
However, just like Bitcoin, they need a private key for a transaction to be completed. Sending payment from one wallet to another requires a private key. The transaction is secure, cannot be altered, and a blockchain ledger will permanently keep the records.
Types of Altcoins
Altcoins are diverse and categorized as follows:
Altcoins are mined through complex mathematical formulas or proof-of-work (PoW) to create blocks by verifying transactions while mining new coins simultaneously. They include coins like Dash (DASH), Litecoin (LTC), Ethereum Classic (ETC), and Monero (XMR). The process involves consuming a lot of electric power and requires time.
There are also pre-mined altcoins, like Ripple, that are rolled out in the market directly requiring no algorithm to generate them.
2. Utility Tokens
These altcoins cannot be used for investment but as payment for services. Some platforms use them to redeem awards. They are created for specific purposes and are mostly used within a particular blockchain platform. Siacoin (SC), for example, offers decentralized peer-to-peer cloud storage solutions. Other examples include Chainlink (LINK), Solana (SOL), Monero (XMR), VeChain (VET), Polkadot (DOT), Cardano (ADA), and Aave (AAVE).
3. Non-Fungible Tokens
NFTs are unique digital items like digital art, music, memes, videos, games, or practically anything that can be created or captured. Several social media influencers call them “the future of art”. They were created to be one of a kind and not to be duplicated; however, some are finding ways to copy NFTs.
A stablecoin is pegged to another fiat currency like USD, cryptocurrencies like Bitcoin, or a precious metal like gold. Since they are not subject to price fluctuations, they are used to address crypto market fluctuations.
Stablecoins are versatile for everyday use, such as making payments, taking loans, or investing. Good examples of stablecoins include Tether (USDT), TrueUSD (TUSD) and USD Coin (USDC). Even Facebook is looking to launch its stablecoin, Diem — previously called Libra, and following some regulatory bumps in its development — as a global payment digital currency.
5. Security Tokens
Security tokens are a digital form of traditional securities, or tradable financial assets including equities, debt, and derivatives. They operate as an investment where a purchaser expects future revenue share, profits, dividends, or market appreciation.
Security token holders can benefit from the performance of their tokens and earn profits from dividends in the form of additional tokens. Some often get other benefits such as voting power similar to holding stocks and other securities. Notable security tokens include altcoins like Exodus, Swarm, INX, and Blockchain Capital (BCap).
Advantages of Altcoins
Other than diversification, other advantages of investing in altcoins include:
- You can hold them (HODL) with a longer-term view, expecting the market price to rise over time.
- Altcoins are diverse and typically have more than one function. It makes it easy for them to grow and still offer unique services.
- At least relative to Bitcoin, altcoins typically do not experience high price fluctuations. For example, with $1,000, you invest $500 in Bitcoin and $500 in ADA. After a few days or weeks, you might see a clear contrast in percentage value change between your BTC and ADA portfolios.
- It is fairly straightforward to invest in Altcoins, and the transaction fees also tend to be lower than those of Bitcoin.
Disadvantages of Altcoins
- Lower return on investment (ROI). Investing in Bitcoin tends to have a higher ceiling for profitability than investing in altcoins. With narrower fluctuations, the opportunity to earn far higher ROI is usually less assured.
- Altcoins’ availability in large numbers leaves investors more susceptible to scams. Also, while altcoins contribute to a diverse portfolio, establishing a healthy and strong diversification may require more research and management since many altcoins of varying “quality” are circulating in the market.
- Bitcoin dominance in the market poses a challenge for many people trying to get to know various altcoins. A substantial proportion of retail traders tend to explore a specific coin by relying more on social media chatter (whether fake or true) than on genuine research in fundamentals and/or analysis.
All things considered, should you invest in altcoins? That’s a personal question, ultimately. But if you do, you should be prepared to either make high returns or lose all your money or anywhere in between.
The fact that a particular group of people can hype up a specific coin — Dogecoin comes to mind — to profit from it shows that if your timing is right, you can make a robust sum investing in altcoins. But then the chances of making a notable loss may be as likely.
Achieving the former rather than the latter would rely on doing diligent research, selecting a trusted and progressive exchange, and active management of your assets — all of which can even go a long way towards creating a bit of luck.
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