AltcoinGuideNews

What are Altcoins? A Beginner’s Guide

The crypto market is a vast financial market, and at the moment, it offers investors access to certain products, including cryptocurrencies, non-fungible tokens, and exchange-traded funds, along with other possible technologies associated with decentralization. But that was not the case all along because in 2009 crypto market only consisted of Bitcoin, the flagship cryptocurrency

Today you can get your hands on all types of cryptocurrencies out there, such as Ether, Dogecoin, Litecoin, XRP, and many other tokens that are readily available for investment opportunities to any and all investors out there. All cryptocurrencies that accept Bitcoin are known as altcoins because these were alternatives of Bitcoin having a vast sense of mechanics that are different from Bitcoin, and or it could be a difference of the characteristics that these share with the Bitcoin. 

Key Difference Between Bitcoin and Altcoins

Every altcoin out there is different from Bitcoin in either a few aspects or a diverse range of these. That is why these are known as the alternative cryptocurrencies to Bitcoin. Some of them could have a difference in terms of the consensus mechanism that is used for the production of blocks and validation of transactions on the individual blockchain of these different cryptocurrencies. 

There could also be a difference between them in terms of having additional capabilities to one and the other, and some of these either originate or differentiate from Bitcoin in terms of smart contracts or low price transactions.

With the recent data collected from CoinMarketCap, there are about 14,000 different cryptocurrencies out there, and out of these, Bitcoin and Ether comprise about 60% of the total market capitalization for the crypto market. As for the rest of 40%, these altcoins made up the rest. Most of the altcoins are derived directly from Bitcoin, either copying the infrastructure of the blockchain cryptocurrency or some of the characteristics that it stands for. 

But the common denominator is always decentralization, no matter what type or form of cryptocurrency is being developed or go to trade out there. Many altcoin price movements are pretty decently tied with the bitcoin’s trajectory, but according to many crypto analysts out there, the introduction of new markets for these so-called altcoins will help them to isolate their price movement from Bitcoin in the future.

Do Altcoins have the Edge over Bitcoin?

Bitcoin, without any doubt, is the first of cryptocurrencies and the digital asset which provided the world with the idea of decentralization and a peer-to-peer financial system. All the transactions taking place on bitcoin’s network are recorded in real-time in the form of blocks so that every transaction is efficient and secure to the best of its ability. As for other altcoins, they either employ the same or slightly different use of technology to either process transactions or take on huge instances of raw data on their blockchains. Any altcoin out there could become the next Bitcoin if they are able to provide an inexpensive method for performing digital transactions.

One major difference between Bitcoin and other altcoins is that Bitcoin uses a completely different consensus algorithm that is known as ‘proof of work’, which is extremely intensive in terms of energy consumption and is also very time-consuming. That is the reason why Elon Musk had to back out from supporting Bitcoin because its mining imposes so many negative ailments on our environment, and Musk is not to support this kind of behavior. 

On top of that, the smart contract capabilities of Bitcoin are also next to nothing, which makes it an extremely dwindling opportunity for modern investors who are basically looking for smart contracts and a deployable blockchain to help them with all the transitions involved in this, Bitcoin doesn’t shine strongly here at all. 

It can be said that other altcoins ran into massive luck because Bitcoin was already using the ‘proof of work,’ consensus mechanism and it was not solid in any approachable way, so to make their own blockchain more advantageous many altcoins went with ‘proof of stake’ consensus algorithm. Now, this minimizes the use of energy and, at the same time, is not a very lengthy process for the sake of validating new transactions and developing blocks on the blockchain.

Many cryptocurrencies out there, including Ether, has a competitive advantage over Bitcoin because, before any crypto, there was only Bitcoin, and every altcoin that came after Bitcoin studied it briefly and thoroughly to understand the problems associated with scalability and sustainability. 

These were smart enough to implement the changes in their own blockchain so the same wouldn’t be repeated. Therefore by creating a unique edge for themselves, these altcoins have become successful in developing a separate market for themselves and corner some institutional investors who see value in their action and what these stand for. 

Types of Altcoins

There are many types of altcoins out there, and these can also differentiate with each other, let alone only differentiate with bitcoin in terms of the functionalities these have and actions these can carry out. 

First of all, you have cryptocurrencies that act as simple monetary tokens and can be traded in real-time just like Bitcoin; there are others that can only be mined, some are stablecoins, i.e., tokens released by the state, and some are even security tokens which means these can only be traded as securities such as on the stock market. There are different attributes and flavors of cryptocurrencies out there and if you want to understand more deeply about these, then have a look at these thrilling types.

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Mining Based

As suggested, the name of these tokens can only be mined into existence, and these are not primarily made available to the people, such as in the form of an ICO or initial coin offering. XRP is a perfect example of a pre-mined coin which means that these types of tokens are already made available and distributed among people even before they are listed in the crypto market. 

On the other hand, the tokens which only reside on mining still use the ‘proof of work’ consensus algorithm in which a range of difficult mathematical equations are solved to develop blocks, and in turn, minting of new tokens takes place. To list a few tokens that are functional in this category, there is Litecoin, Monero, and ZCash as well.

Stablecoins

The stable coins are introduced mainly by various states who want to have a controlled edge over the use case of decentralization which every cryptocurrency out there represents. Crypto trading is a very risky business because it involves volatility in it which is not good for the end investors. Stable coins, on the other hand, provide an imminent fix for that by getting their values pegged against other assets such as Fiat currencies, precious metals, and even other cryptocurrencies out there. 

This doesn’t remove volatility from the equation, but it does help to reduce it consistently. These assets are supposed to work as a reserve for the investors if the main crypto or stablecoins that they have invested in fails or is having problems. To list some of the most incredible Stablecoins out there is the Tether’s USDT, DAI, and USDC. Ether is becoming a real contender for hosting these stablecoins on its blockchains in the future by introducing a certain range of technical capabilities to its blockchain.

Security Tokens

The security tokens are also similar to the common securities that are often traded in the stock market, but there is a small difference, and that is the fact that these are digital in nature. Security tokens are just like conventional stocks, and there is often the promise of equity in the form of ownership, which is given to the holder, and in some cases, they are even eligible for a dividend payout. These security tokens offer reduced volatility which is why these are the choice of many investors out there to put their money into. 

The trend for security tokens and their trading is on the rise because there are conventional investors out there who would just not go into business with cryptocurrencies because of the overall volatility that these possess. These security tokens would provide a really immersive window for these investors to have their hands on tokens that are directly tied with some of the most esteemed cryptocurrencies out there.

Meme Coins

As the name suggests, these meme coins are inspired as a joke or a silly take on some of the most acknowledged cryptocurrencies out there. Some of these meme coins have risen to popularity in a very small period of time on account of how well they were taken by people and the part played by many crypto influencers and retail investors in making them calibrated choices for people out there. Elon Musk is also among these crypto influencers, always trying his best to bring the attention of investors towards Dogecoin

He has not only previously talked about but has influenced the meme coin that is Dogecoin and the Shiba Inu token as well. Because of his tweets, both these tokens have seen a huge surge in their prices, and even now, when he puts out a tweet in support of any of these tokens, people just go crazy for them, and a bullish run usually accompanies the token in question.

Utility Tokens

Now, these are the tokens that are used to provide services to the users within a network, thus the name ‘utility token’. A user might be able to use them for the sake of paying for network fees, purchasing other services, or redeeming their rewards. 

These are slightly different from the security tokens because there is no dividend that is paid to the user, and also there is no ownership stake whatsoever. Filecoin is an esteemed utility token that is used to acquire storage space on a potential network, and it is the perfect example of what a utility token is or how does it work.

Should you Consider Altcoins as a Serious Investment?

Altcoins are still very fresh and new because all of these were introduced after Bitcoin, which happens to be the flagship cryptocurrency in the crypto market. So you can imagine that Bitcoin has a more rich history than any of the altcoins in existence because it is almost 10 to 12 years older and was the very basis of decentralization. 

Altcoins, on the other hand, are being listed gradually into the crypto market, and their presence has multiplied during the past decades, and some of them were even able to attract multiple retail investors to invest in them. But these are only the retail investors and not the institutional ones, and therefore, their ability to inject the capital into the altcoin market for generating enough liquidity is questionable. 

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Extremely thin investment and a serious lack of regulation are not playing very good for the altcoins out there, but still, there is hope as their performance has increased consistently as compared to Bitcoin, which was not able to hold on to its price and performance within the crypto market in the aftermath of COVID 19 pandemic and the inflation that followed.

Another problem that becomes rather intrinsic for why investors shouldn’t consider altcoins yet is because of the fact that the crypto market is not mature yet. Several attempts have been made in the past to bring out a definitive regulatory framework to propose investment criteria for cryptocurrencies and the metrics for their evaluation, but this thing couldn’t be put into action even yet. 

There are multiple cases of cryptocurrencies that were extremely popular when they first started trading but eventually, they were claimed dead because these failed to gain enough traction from the institutional investors and therefore couldn’t be allowed to trade anymore.

The only likable investing bodies in the altcoin market would be the investors who are willing to put their money into an extremely recent market that is still evolving and coming to terms with itself, and they also shouldn’t have any problem with the emerging volatility that the crypto market possesses.

So, in a way to list the strengths of altcoins, these are better alternatives to Bitcoin because they have studied the shortcomings of the flagship cryptocurrency and were able to refine their blockchain and the overall mechanism of action. Many altcoins out there are gaining extreme traction among institutional investors and, in doing so, have secured themselves a future seat on the high table of the crypto market. 

There is a wide array of altcoins present out there, which provide investors a chance to grab any one of these and use them for either investing or other definitive functions for which these cryptocurrencies are designed. 

The obvious weakness of these altcoins is having a smaller market cap as compared to Bitcoin and therefore having less overall impression into the crypto market. There is also this crude absence of regulation and a decent framework for how investors should tackle or gain exposure with these cryptocurrencies, and the thin liquidity is also a steady problem for these altcoins. Their prices, as a result, could be more volatile as compared to Bitcoin, and these also propose a greater chance of loss as compared to the flagship cryptocurrency. 

There are multiple altcoin tokens out there, and each and every one of them has a different use, but at times it becomes extremely difficult to distinguish these altcoins on the basis of their use cases which in turn makes the investment decisions harder and tiring. Not to mention there are various altcoins that are now dead, but these were extremely popular at the time when they started trading, yet their end was not a playful sight.

Future of Altcoins

The future of the altcoin market could be streamlined from the 19th-century monetary practices that took place in the United States. At that time, there were multiple currencies in circulation, some were backed by the deposits of gold at the treasury, such as gold certificates, and the US notes were used to finance the civil war, which the government at that time was backing. Local banks at that time were printing their own currency. 

The whole situation was kind of jumbled with a lot of financial instruments being played before the people. It gave rise to confusion and made it harder for people to make a final decision about going into business with a specific asset. Therefore the whole thing unified in the form of US dollars, and to this date, the U.S. dollar remains an active fiat currency in the United States.  The situation of altcoins is not different from the availability of financial instruments in the 19th century. But it is likely that out of those many altcoins that are currently listed and are trading within the crypto market, only a few will survive, and these are likely to be those that have a strong use case and are approached more by investors and people on a consistent basis. For investors and traders who are looking forward to diversifying their portfolio within the crypto market, the altcoins provide them with an inexpensive and colossal way to do so.


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Hassan Mehmood (Saudi Arabia)

Hassan is currently working as a news reporter for Tokenhell. He is a professional content writer with 2 years of experience. He has a degree in journalism.

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