What are altcoins and how do they work?

• Avinandan Banerjee
• October 13, 2021

Those who are interested in the world of cryptocurrencies and are willing to invest in them, it is almost imperative that one must gather some knowledge about Altcoins. 

The term Altcoins or Alternative Coins as they are called, is used to define those cryptocurrencies other than the globally popular Bitcoin or CRYPTO:BTC. Their very name is derived from the simple truth that these coins exist as an alternative to the biggest cryptocurrency in the world and also general fiat currencies. 

The first of the altcoins were launched back in the year 2011 and eventually till date, there are thousands of Altcoins swarming across the crypto market. Previously during the early days, altcoins were used to improve several aspects of Bitcoin, such as energy efficiency and transaction speeds. Nowadays these altcoins serve a variety of different purposes which again depends on the developers.

There is no denying that altcoins are a huge part of the crypto market as of now and it is exactly why every crypto investor should have a clear understanding of how they function. This article will further seek to explore the pros and the cons of altcoins and a lot more.

Types of Altcoins

There are several varieties of Altcoins existing in the market that include mining-based coins, stablecoins, governance coins and staking-based coins. The way in which an altcoin functions and the purpose for which it has been built will eventually result in the type of altcoin it would become. While researching altcoins, these are the main categories of altcoins that are prominent :

• Mining-based- These are a type of cryptocurrency that uses a process known as mining and in doing so they can use it for verification processes for transactions and also in due course of mining, it helps to add more coins to the existing supply. The miners possess certain devices, which they use in order to solve certain mathematical equations. What generally happens is that the first miner who gets to unravel an equation will be able to verify a block of transactions. In return for their services the miners are presented with rewards in crypto.

For example, Bitcoin is a cryptocurrency which is based on mining principles as it was the first method to be employed in order to process the crypto transactions.

• Stablecoins- Stablecoins are those cryptocurrencies which are specially designed to track the price of another such asset. Some of the biggest cryptocurrencies are pegged to the American dollar and they mimic the dollar value on their coin. If these prices seem to be fluctuating, then the one who actually issued the coins will be able to take necessary steps about it.

 Stablecoins are not always considered to be an investment worth crypto asset. This is because these coins are intended to maintain the same value as that of the USD. People mostly use these coins for the purpose of savings or for lending money to friends and family. Interestingly, it is also possible to earn interest on these coins through certain savings protocols.

 

• Governance- These are tokens that provide the users with the right to vote in order to help reshape the future of the project if they wish to. Generally in most of the cases, it can be seen that these tokens allow the users to create and participate in voting on certain proposals that are directly related to the cryptocurrency. This enables the cryptocurrency to become a truly decentralized project where there are no central authority controlling the decisions and everyone has an equal say.

 

• Staking-based-  Just like mining, these cryptocurrencies use the process of staking for verification purposes and also to add more coins on the network. The ones who are holding their coins can actually choose to stake their coins, which would imply that they are pledging those coins for the purpose of transaction processing. The blockchain protocol of the cryptocurrency would choose a participant and allocate that individual to carry out the task of verifying a block of transactions.

Now let us evaluate the different pros and cons of Altcoins!

 

Pros

• Improve on Bitcoin related aspects.
• Altcoins can offer extremely high potential in rewards.
• There is a huge selection of Altcoins in the market and they have their own unique competitive advantages and purposes in the crypto space.

 

Cons

• Altcoins do not really have the first mover advantage as that of the Bitcoin or even if we look at the market cap, they are nowhere near.
• There are potential and significant risks related to altcoins as many altcoins turn out to be scams at the end of the day and there is a great many number of altcoins that just end up failing.
• There are some altcoins which are not easy to purchase as they are only available on specific altcoin exchanges.

So by now, it should be pretty much evident that there is a huge difference between cryptocurrencies such as Bitcoin and other altcoins. However, in order to provide a little more clarity on this issue, certain clear distinctions between Bitcoin and altcoins are in order. 

The main areas of difference between Bitcoin and Altcoins

• Bitcoin is much older as it was released back in the year 2009. The first of the altcoins were launched in the market by the year 2011 and nowadays, new altcoins are released almost every single day.

 

• A key factor to note is that altcoins are far more advanced in their composition and orientation than Bitcoin, which is actually their predecessor. Bitcoin came out much before and hence its technology is outdated in terms of transaction speed and even costs. Altcoins in that respect are far more superior than Bitcoin.

 

• Altcoins provide a much higher risk or reward scenario when it comes to investing in cryptocurrencies. Even though it is true that Bitcoin is quite volatile, it is also true that the cryptocurrency is a market leader and has recorded substantial growth. However, altcoins in comparison have more room for maximizing and achieving growth in the future.

Some of the prominent examples of altcoin are:

• Ethereum (ETH) : Ethereum was launched back in the year 2015, and it was the first altcoin that provided programmable blockchain for the developers to make use of. Gradually it has gained the position of the second largest cryptocurrency in the world positioned right next to Bitcoin.

• Namecoin (NMC) : Namecoin was released back in the year 2011, and possibly this was the first notable altcoin to be launched in the market. Namecoin shares a lot of similarity with Bitcoin, owing to the fact that it was built on the same code that was used by Bitcoin, and much like Bitcoin, Namecoin also has a supply of 21 million tokens. 
• USD Coin (USDC) : USD Coin was launched in the year 2018, and it is a stablecoin whose value is pegged to the American dollar. It is under the governance of a consortium which goes by the name of Centre, and it includes Coinbase, Global, Inc.

Is it a good and a viable option to invest in altcoins?

One should always invest in the altcoins market, if they have a penchant for making crypto a part of their investments and also if they have the necessary time and the drive to study and research the crypto market on a daily basis. A blockchain certification or a cryptocurrency course provides the foundational knowledge for understanding the world of crypto a lot better. There are some altcoins in the market that are highly ambitious projects which have the power to provide a lot more use cases than Bitcoin, which is primarily seen as a store of value. It is also true that since altcoins are not very well known, there is a possibility that they could gather a lot of increase in their value if the coin can stick around and head through the market.

 

A notable downside to investing in altcoin is that since there are so many of them in the market, it becomes a daunting task to choose from the list of altcoins and find out the really potential ones to invest in. So if someone is willing to buy altcoin, it should be noted that there is definitely a level of risk added to that and moreover there are many small altcoins which are mostly a scam. So while investing thorough research is important.

Conclusion

So to conclude things, it must be remembered that altcoins are an excellent investment option for crypto enthusiasts, provided that they are willing to do their homework before investing. If someone is looking for an investment option that bears lesser risks or lesser time-intensive investments, then cryptocurrency stocks are a viable option for them. However, if one decides to invest in altcoins, it must be remembered that altcoins should be a small fraction of the entire portfolio so that the probability of risk is minimized by staking only the minimum.

As I mentioned earlier, in order to invest in crypto and dabble in the world of blockchain. It is always better to be prepared and gain knowledge about it first, and in order to learn the fundamentals of blockchain and crypto, there is no better alternative than the courses and certifications provided by the Blockchain Council. The Cryptocurrency Trading, Cryptocurrency Expert, courses and certifications on Blockchain Development and analysis will not only provide you with the in-depth knowledge but also empower you with practical skills that you can leverage in the highly competitive job market.