Altcoins refer to any cryptocurrency launched after Bitcoin (BTC). Nevertheless, there exists an opinion that altcoins are all digital assets, except for BTC and ETH (Ethereum), as a majority of them diverge into several.
Some altcoins apply various techniques to verify financial operations and create advanced blocks, or certain efforts to differ from BTC and ETH by providing new means and opportunities. Lots of altcoins are elaborated and launched by developers who possess an alternative vision and usage of cryptocurrencies.
Before the advent of alternative currencies, Bitcoin managed to gain a foothold as a revolutionary financial form. Since its inception, it has increased significantly in price.
Modifications of digital currencies issued after Bitcoin, were aimed at providing users with a different digital currency that was lower in price, with advances in algorithms, accelerated mining and transaction procedures, as well as with optimized program code.
At the same time, it was necessary to maintain the principle of a decentralized system, and develop a base, independent from state entities and their structures. Of course, the leading motive was to take a successful idea, create competition, and gain the lead. That’s where altcoins came into play.
Essence of the concept
The term “altcoin” means a collocation of the following words: alternative and coin.
In fact, altcoin is any cryptocurrency launched after bitcoin. In other words, these digital assets act as improved alternatives of bitcoin. They offer users certain solutions that aren’t available in the first cryptocurrency.
Enthusiasts began to copy the idea with minor changes and tried to create a more popular independent digital currency. Nowadays, altcoins vary greatly. The key reason for their growing flow is blockchain technology that sets up an unlimited number of new cryptocurrencies.
Namecoin (NMC) became the first digital asset alternative to bitcoin. Its most promoted competitor was Ethereum (ETH), a project of the Russian-Canadian programmer Vitalik Buterin. Dogecoin, Litecoin, Ripple, Bitcoin Cash, Cardano, XRP and many others can be highlighted as altcoins.
For investors, this type of cryptocurrency looks attractive, i.e. the growth potential of private coins is calculated as hundreds of percent. In terms of manufacturability, altcoins are also not inferior to Bitcoin. Some of them bypass the most famous digital assets in the world.
Division of Altcoins
Altcoins have become extremely popular lately due to the rising price of Bitcoin and its cost intensive mining process. Recently, Bitcoin mining has become almost inaccessible to most users, so crypto activists are eager to choose more economical options.
Cryptocurrency has a multi-level system that is divided into classes and types. The complexity is due to a combination of reasons, including mining, daily use and regulation. The classification of altcoins takes place depending on the target orientation and the degree of activity (liquidity).
Notably, target orientation refers to the creation motives, i.e. financial (investment) or experimental interest; or the currency arose as a result of a technical failure.
This type of cryptocurrency can be divided according to particular criteria. Therefore, there are the following altcoins:
- Payment token. These financial instruments can be used in order to exchange goods and services between participants within certain limits. So that they often act as a unit of account, a store of value, and a means of payment. However, tokens cannot be converted into legal tender, or cryptocurrencies. Their appliance, as a rule, is restricted by a specific platform.
- Stablecoin. This is the general name for cryptocurrencies that are stable. Their value is pegged to physical assets (gold, oil, etc.), or backed by currency reserves (the U.S. dollar). Stablecoins are necessary so as not to withdraw fiat money during trading on the exchange, since markets take a commission and, as a consequence, all profit may go to the stock exchange fee. The most popular solution is USDT, or Tether.
- Security token. It is a blockchain-based “stake” of an underlying asset, for instance, a company, real estate, or gold. An analogy can be buying a share of Tesla, or Amazon, which makes an individual to act like the owner of a small piece of these corporations.
- Utility token. This is a type of digital assets that don’t possess a legal basis. These tokens are issued centrally by the crypto firm, and may be used for the development of the project ecosystem. A case in study is the following situation. There is a project and its token. To pay for a transaction in the network of any blockchain, individuals must have a token of this blockchain on their wallet.
- Meme coin. These digital assets are inspired by Internet memes and current events, actively promoted by influencers. As a result, they quickly gained popularity. It’s common practice that meme-coins have no inherent value.
- Governance token. This is a token that allows its owner to take part in the management of a cryptocurrency project. So, users may propose, discuss, and make changes to a project without having to rely on, or require input from the project team. In addition, token holders are able to use them to delegate voting rights to other parties, experts, and even applications.
Factors that influence Altcoins
Formally, all modern altcoins don’t have dependance on the current state of economic affairs, as well as on the main cryptocurrency value. The final cost of altcoins is regulated by the same law of demand and supply. Anyway, lots of young, not popularized cryptocurrencies that could not withstand the market competition, and, therefore, to occupy a worthy and free niche in the current cyberspace, have a tough response to various fluctuations in the digital gold exchange rate.
Advantages and disadvantages of the term
To reduce the cons of bitcoin to null, digital currencies have been created. Some altcoins have made transactions cheaper and faster. Other altcoins consume less energy for mining and even provide an increased level of secrecy.
Let’s consider the concept in detail. Here are the key advantages of altcoins:
- Low entry threshold. Unlike bitcoin, which is valued at several thousands of dollars, the cost of most altcoins is much lower. To become an investor, it is enough to register on any cryptocurrency exchange, replenish the wallet with the required amount, and buy a coin.
- Quick profits. High returns are always in perfect step with risk. The higher the potential return is, the higher the chances of losing part of capital are. Altcoins can add 50%, or even 500% per day in price. But there is also a possibility of rapid fall. That is why it is worth taking care of portfolio diversification.
Trading altcoins also has its disadvantages. The instability of the cryptocurrency market mentioned above can bring huge losses:
- Pumps risk. There are lots of “conspiracies'' in the altcoins’ ecosystem. Communities of traders can actively buy coins, artificially pumping up their growth. The law of supply and demand states that the higher the demand is, the higher the price would be. The purpose of this event is to quickly earn and exit altcoins with a good profit. But there is a huge risk of ruin for other investors.
- Additional commissions. Many trading platforms don’t allow a withdrawal of fiat money. It implies that any altcoins should be converted into bitcoins, and only after that they can be transformed into other world currencies. And these transactions always require additional commissions.
According to financial analytics, the world is changing, and society understands the urgent need to integrate cryptocurrencies into the global financial ecosystem. As a rule, digital assets follow the development and course of bitcoin. However, investors are more and more interested in altcoins, while experts declare their future bright.
Digital assets industry is expected to endure the tough times. Nevertheless, it will recover sooner or later. Of course, there is a need to establish the regulatory framework, as state bodies won’t allow cryptocurrencies to exist autonomously.