What to know about altcoins

In the proverbial Wild West of cryptocurrency, Bitcoin established its reputation at the top long before any other type of coin was minted on The blockchain. This left other pieces, called "the altcoins », to queue. Since then, thousands of new altcoins, or alternative coins, have been created and added to the crypto ecosystem.

“Altcoins” refers to any type of cryptocurrency other than Bitcoin. Ethereum is the most popular altcoin, and people use the full name (Ethereum) when talking about the larger blockchain network, but Ether (ETH) when discussing the currency itself.

Since altcoins make up such a large share of the market, every crypto investor should understand how they work. Keep reading to learn what these altcoins are for, their pros, cons, and more.

But before you begin, you will need to know that there is a difference between coin and token. Let's go!!

🥀 What is an Altcoin?

Altcoins are cryptocurrencies other than Bitcoin (BTCUSD). They share characteristics with Bitcoin but are also different in other ways. For example, some altcoins use a different consensus mechanism to produce blocks or validate transactions.

Or they differentiate themselves from Bitcoin by providing new or additional features, such as smart contracts or low price volatility. As of November 2021, there are over 14 cryptocurrencies. According to CoinMarketCap, Bitcoin and Ether alone accounted for almost 60% of the total cryptocurrency market in November 2021.

So-called “altcoins” made up the rest. Because they are often derived from Bitcoin, the price movements of these coins tend to mimic the trajectory of Bitcoin. However, analysts say that the maturity of cryptocurrency investment ecosystems and the development of new markets for these coins will make altcoin price movements independent of Bitcoin trading signals.

🥀 What are the types of altcoins?

There are several different types of altcoins. One can have stablecoins, mining-based coins, staking-based coins and governance tokens. The type of altcoin depends on how it works and its purpose.

Here are the main types of cryptocurrencies you will find when researching altcoins.

Stablecoins or stable coins

The stablecoins are cryptocurrencies designed to track the price of another asset. Most of the largest stablecoins are pegged to the US dollar and attempt to mimic its value. If the price fluctuates, the coin issuer will take steps to correct it.

Since stablecoins are intended to retain the same value, they are not normally chosen as a cryptocurrency investment. Instead, people use stablecoins to save or to send money. It is also possible to earn interest on stablecoins by lending them or through certain savings protocols.

Mining-based coins

This type of cryptocurrency uses a process called mining to verify transactions and add more coins to supply. Miners use devices to solve mathematical equations. Typically, the first miner to solve the equation verifies a block of transactions. In return, miners who verify blocks receive crypto rewards.

Since Bitcoin is a mining-based cryptocurrency, mining was the first method used to process crypto transactions. One of the disadvantages of mining is that it requires a significant amount of energy. If you want to know more about cryptocurrency mining, click here.

Corners based on stacking

Altcoins use a process called stacking to verify transactions and add more coins to the supply. Its holders can choose to stake their coins, which means they pledge to use these coins for processing transactions.

The cryptocurrency blockchain protocol chooses a participant to verify a block of transactions. In return, participants receive crypto rewards.

A first altcoin called Peercoin was the first to introduce the concept of staking. Although Peercoin has not become a household name, staking has become popular because it is more energy efficient than mining.

Governance Corners

Governance tokens are cryptocurrencies that give holders voting rights to help shape the future of the project. In most cases, these tokens allow you to create and vote on cryptocurrency-related proposals.

This helps make cryptocurrency a decentralized project since all holders have a say and decisions are not made by a single central authority.

🥀 How to understand how altcoins work

To understand how altcoins work, it is good to first understand how blockchain technology – this is where all cryptocurrencies work.

The blockchain network is a distributed ledger that stores data such as cryptocurrency transactions, NFT (Non-fungible token) ownership, and decentralized finance (DeFi) smart contracts.

This great book is often called a “chain"including"blocks” of data, which are used to verify new data before additional blocks can be added to the ledger.

This network, on which Bitcoin operates, is revolutionary because it is a network of P2P payment decentralized and trustless that operates without a central authority or entity facilitating transactions. And altcoins operate on exactly the same principle as Bitcoin: operate using this blockchain technology.

However, some altcoins have emerged to ameliorate Bitcoin's flaws or to achieve another goal. For example, Litecoin was designed by former Google engineer Charlie Lee as a “lite version of Bitcoin”.

🥀 The Top 5 Altcoins of 2022

While no altercoin has managed to “dethrone”Bitcoin in value, many projects have proven themselves worthy enough for a global community of investors and developers:

Ethereum (ETH)

The second largest blockchain in crypto, Ethereum's evolution has taken it from an asset to an application. Founded by Vitalik Buterin in 2013, Ethereum is a distributed blockchain platform for smart contracts and dApps (decentralized applications). With its native token, ether (ETH), users can interact with the Ethereum platform.

Ether can be traded on most crypto exchanges, used to pay transaction fees or as collateral for ERC-20 tokens, which have the DeFi utility.

Ethereum's integration with smart contracts through the Solidity programming language set the project apart from Bitcoin. A smart contract is self-executing code that can run on the blockchain.

Stellar Lumens (XLM)

Stellar is an open source payments network that doubles as a distributed intermediary blockchain for global financial systems. It is designed so that all the world's financial systems can work together on a single network.

Stellar began in 2014 when Ripple co-founder Jed McCaleb disagreed with the direction of the Ripple project. The ethos behind the development of Stellar is to make international money transfers possible for the common person.

While Stellar is an open source network for currencies and payments, Stellar Lumens (XLM) is the native asset in circulation on the network. Stellar synchronizes its ledger using its Stellar Consensus Protocol (SCP). Instead of relying on a network of miners, SCP uses the Federated Byzantine Agreement algorithm, allowing for faster transactions.

Uni swap (UNI)

Uniswap is a decentralized exchange ecosystem built on the Ethereum blockchain. Launched in 2018, Uniswap uses an automated on-chain market maker. One of the unique features of Uniswap is that anyone can be a market maker by depositing their assets into a pool and earning fees based on trading activity.

Uniswap uses an automated market maker protocol that executes transactions according to a series of smart contracts. Smart contracts automate price discovery, allowing users to exchange one token for another without an intermediary.

In traditional finance, market makers are typically brokerage firms with incentives that could cause a conflict of interest.

Litecoin (LTC)

One of the first generation altcoins made in 2011, Litecoin is a Bitcoin-based cryptocurrency. Key elements that distinguish Litecoin from Bitcoin include blocking time (four times faster than Bitcoin), supply (Litecoin has a maximum supply of 84 million while Bitcoin's maximum supply is 21 million), its algorithm hash and its distribution.

Nicknamed “digital money" through "digital gold” of Bitcoin, the goal of Litecoin was to optimize the Litecoin asset while preserving the best parts of Bitcoin.

PotCoin ($POT)

Potcoin is a Canadian-based digital currency that was launched in 2014 to allow consumers to buy and sell legal cannabis products. It was presented as a solution for cannabis enthusiasts and the industry looking to transact legally at a time when banks were unable to do so.

PotCoin is an open source cryptocurrency derived from the Litecoin core. There are subtle changes to the PotCoin protocol, including a shorter block generation time and increasing the maximum supply of 420 million PotCoins.

Potcoin moved from a proof-of-work mechanism to proof-of-stake in 2016 to make network support more accessible and less harmful to the environment.

🥀 Advantages and disadvantages of altcoins

Benefits

Altcoins offer greater flexibility and speed to innovate compared to bitcoin. Many altcoins are experimenting with new technical features like smart contracts, better scalability, faster transactions, and different consensus algorithms. Some succeed in improving certain aspects of cryptocurrencies.

Altcoins may have a more great decentralization than bitcoin, dominated by a few large mining companies. Some altcoins use more egalitarian mining algorithms so that more individuals can participate.

Some investors consider that altcoins have greater long-term growth potential than bitcoin, which is already very developed. Altcoins have a lower market capitalization and can see their value rise sharply.

Drawbacks

Most altcoins have good liquidity and user base weaker than bitcoin. It can be risky to invest in it, especially in the long term.

Many altcoins are scams or fail to stand out against the competition. It is difficult for them to achieve a stable value and inspire confidence as a credible means of payment in the long term.

The altcoin market is much more volatile than that of bitcoin. Their prices can fluctuate greatly even during short periods, adding significant risk for those who invest or use them as a means of payment.

The security and transparency of altcoins are often less than those of bitcoin. Some have suffered hacks and their technology is sometimes poorly audited and tested, with potential flaws or backdoors.

🥀 Should you consider investing in altcoins?

You should consider investing in altcoins if you plan to incorporate crypto into your portfolio and have the time to research them. Some altcoins are ambitious projects which offer more use cases than Bitcoin, which is primarily used as a store of value. Since altcoins are not as well-known, they could see larger price increases if they spread.

There are notable downsides to buying altcoins. Due to their number, it is difficult to choose the best altcoins to invest in. Altcoins pose a higher risk, and many of the smaller altcoins are dubious investments or scams.

to summarize, altcoins are worth checking out for cryptocurrency investors willing to do their homework. If you're looking for a lower-risk or less time-consuming investment, cryptocurrency stocks are a better solution.

Remember that taking too much risk is not recommended, so even if you decide to buy altcoins, they should only make up a small part of your portfolio.