Altcoins: A Complete Guide
Altcoin is a popular choice for diversifying your cryptocurrency investments. But what exactly are altcoins, and why should you consider investing in them? In contrast to Bitcoin, the largest cryptocurrency in market capitalization, numerous other coins in circulation are commonly referred to as altcoins. This article will explore the concept of altcoins and examine their viability as a cryptocurrency investment.
Table of Contents
What Are Altcoins?
Altcoin, short for “alternative coins”, refers to cryptocurrencies that aren’t bitcoin. Litecoin was the first-ever altcoin, splintering off from the original Bitcoin blockchain in 2011. Litecoin set itself apart from Bitcoin with its proof-of-work mechanism called Scrypt, which is quicker than Bitcoin’s mechanism. Today, over 17,000 altcoins occupy a 40% market share of all cryptocurrencies.
Altcoins are made for various reasons. Some altcoins are task-based, such as Ether (which is used to pay for transactions) or Bananacoin (which is used to raise funds for a banana plantation in Laos).
Altcoins are a viable investment alternative to bitcoin. Coins with strong, well-defined use cases and purposes will likely grow in the future, making them great choices for crypto diversification. However, it pays to be cautious when investing in altcoins because the market is still relatively young and unpredictable.
Examples And Use Cases Of Popular Altcoins
There are over 17,000 altcoins in circulation today with a variety of purposes. Here are some prominent altcoin use cases and some examples:
Stablecoins
Stablecoins are cryptocurrencies designed to hold a relatively stable value, typically pegged to assets like fiat currencies or precious metals. They’re popular because they can substitute for bank accounts and enable affordable, fast cash transfers.
Here are a few examples of stablecoins:
Security Tokens
Security tokens represent ownership of certain digital assets, acting like a digital version of stocks or bonds. They’re also typically used as investment vehicles.
Some example security tokens are:
- Siafunds
- Blockchain Capital (BCAP)
- Science Blockchain (SCI)
Payment Tokens
Payment tokens are primarily used to replace fiat currencies in transactions.
Payment tokens include:
- Bitcoin (BTC)
- Litecoin (LTC)
- Bitcoin Cash (BCH)
Utility Tokens
Utility tokens perform a specific service within its network, like purchasing services, redeeming rewards, or buying storage space.
Some examples of utility tokens are:
Meme Coins
Meme coins are usually made as jokes or parodies of other cryptocurrencies. However, these digital assets may have value beyond their initial humor, as evidenced by the “meme coin season” of 2021 when Dogecoin considerably jumped in value.
Some prominent meme coins are:
Governance Tokens
Governance tokens are used to give voting rights in a decentralized autonomous organization (DAO). Token holders have the power to vote on or create initiatives that influence how the DAO is run.
Some prominent governance tokens are:
- Maker (MKR)
- Aave (AAVE)
- Uniswap (UNI)
Should You Invest In Altcoins?
You should invest in altcoins if you want to diversify your cryptocurrency portfolio. Many digital currencies are ambitious projects with practical use cases and may see major price increases if they become popular among crypto investors.
However, there are many altcoins, and picking the best isn’t easy. Do your research and choose crypto assets you believe will catch on in the future.
Investing in altcoins also bears more risk since there’s always a chance of your altcoins plummeting in value or turning out to be scams. If you’re risk-averse, we recommend sticking to major cryptocurrencies.
Pros And Cons Of Investing In Altcoins
Thinking about investing in alternative cryptocurrencies? Here are some pros and cons you should consider before taking the plunge:
Pros Of Investing In Altcoins
Investing in altcoins is a great way to diversify your investments and potentially gain more profits. Other advantages of investing in altcoins include:
- Altcoins typically improve on the perceived or real flaws of Bitcoin, making them technically superior.
- Altcoins tend to rise in value, increasing your potential profits.
- There are many altcoins to choose from, giving you many investment options.
- Some altcoins, like stablecoins, experience less price volatility than bitcoin.
Cons Of Investing In Altcoins
However, there are some cons of investing in altcoins you need to keep in mind. Here are some of them:
- Alternative crypto coins don’t have the market share advantage of bitcoin. While altcoins occupy 40% of the crypto market share, this is divided among thousands of currencies.
- Some altcoins are only available in certain cryptocurrency markets, making them harder to buy.
- Altcoins are riskier because they have fewer investors, which makes them less liquid than bitcoins.
- Some altcoins don’t have viable use cases or could be outright scams.
How Do You Evaluate Altcoins?
You evaluate altcoins similarly to bitcoin – by doing your own research. Here are five tips to follow before buying into an altcoin project:
Read The Whitepaper
A token’s whitepaper explains its purpose and value to potential buyers. Reading a whitepaper gives you a good overview of why you should buy the coin and helps you make the right purchase decision.
Look Into The Development Team
A good crypto project should have a trustworthy team behind it. Look at each key team member’s track record to know their credentials and trustworthiness.
Check Its Market Capitalization
A cryptocurrency’s market capitalization or market cap measures its total value. Large market caps mean the coin has a lot of value but may have less room to grow. That said, coins with larger market caps are more stable and less likely to see considerable price upswings and downswings.
Examine Its Social Presence And Community Support
One of the best ways to measure a crypto project’s transparency is to check its social media presence and community. A crypto project with frequently updated social media pages shows the team is willing to share news on each development. Sharing frequent updates also demonstrates they’re willing to take accountability if something goes wrong with the project, making it less likely to be a scam.
Conclusion
Investing in altcoins is a good way to diversify your crypto portfolio. But while they have good profit potential, their smaller market caps mean their value fluctuates more than bitcoin.
Before buying an altcoin, evaluate and research it to know what to expect. Make sure you read the coin’s whitepaper, look into the project team, and check its market cap.
