Altcoins, at first, primarily sought to address some of the weaknesses of Bitcoin, particularly the Bitcoin blockchain. As a result, many sought to enable faster transactions or require less energy to mine.
However, as the cryptocurrency sphere continued to expand, thousands of altcoins emerged. Anytime someone mints a new cryptocurrency, they’re creating another altcoin. For example, if you developed a simple cryptocurrency designed to facilitate transactions only between students and professors on a specific college campus, that would also fall under the altcoin category.
Every altcoin is a token that has value in the context of the blockchain or blockchain-based solution for which it’s designed. In some ways, altcoins are similar to tokens at an amusement park: Depending on the financial or digital ecosystem they’re built for, they can have tremendous value, while many only have limited value because they’re designed to support a relatively narrow, niche ecosystem.
For example, some altcoins, such as stablecoin Tether (USDT) and Binance Coin (BNB), have significant value because of their widespread use. Ether is, like Bitcoin, widely accepted by vendors and traders alike.
On the other hand, some altcoins are primarily used for staking, which is a mechanism designed to confirm the validity of transactions. Staking also plays a role in the decentralized finance, or DeFi, sphere, enabling investors to commit their crypto to a pool to provide liquidity. When stakers decide to get involved with a DeFi platform, they convert another currency into the platform’s altcoin, and then as they get rewards for staking, those rewards are also issued in the altcoin.
There are also altcoins that people mine through performing specific actions or solving mathematical problems, similar to Bitcoin. For instance, there are cryptos you can mine simply by setting up an Internet of Things device and letting it run. For example, Telokanda, a blockchain running in Western Africa, rewards participants with the Telos (TLOS) altcoin when their device transmits weather data to the Telos blockchain.
Another kind of altcoin is a stablecoin, which is designed to retain the value of the fiat currency to which it’s pegged. A fiat currency is traditional money, such as the U.S. dollar, Japanese yen or Swiss franc.
Many altcoins also function as governance tokens. By owning or staking these altcoins, you get to vote on initiatives designed to improve how the coin’s blockchain functions and what it does for users.
Proof-of-stake refers to a protocol that serves as a consensus mechanism used to ensure that transactions made on blockchains are valid. Validators are chosen based on the number of coins they have staked in the blockchain. In this way, a more limited number of computers has to be involved in figuring out whether a transaction is legitimate.
By way of contrast, Bitcoin uses what’s called a proof-of-work consensus mechanism. While this works just as well as staking – and is its predecessor – it requires an enormous amount of energy, as many high-powered computers work to be the first to solve the mathematical problems that verify transactions on the blockchain.
- XRP (XRP)
- Cardano (ADA)
- Solana (SOL)
- Tether (USDT)
- Uniswap (UNI)
- Polygon (MATIC)
- Decentraland (MANA)
- USD Coin (USDC)
You need to know about altcoins because they play a significant role in the cryptocurrency ecosystem, and many have solutions that make them a preferable alternative to Bitcoin, the most popular crypto. For example, many altcoins enable quick, efficient transactions and can be used to connect financial institutions, individual investors, consumers and others in the international economy.
Altcoins can sometimes present several advantages for investors considering adding them to their portfolios. It’s important to note that, like all investments, altcoins come with significant risk. That being said, here are some of the upsides to altcoins:
- Upside potential. An altcoin that ends up playing a very specific role in a crypto ecosystem can quickly rise in value as more and more people take advantage of its blockchain.
- Cost. Altcoins are often inexpensive, making it easy for investors to purchase them and see how they fit in their portfolios.
- Liquidity. Many altcoins are widely accepted by crypto exchanges, which makes trading them for other cryptos very straightforward.
Altcoins have their drawbacks as well. Here are some of the most significant:
- Volatility. The values of altcoins can drop suddenly due to negative news or shifting economic conditions.
- Market saturation. Anyone can develop an altcoin and advertise it as the next great thing, but there’s no telling whether the general crypto ecosystem will embrace it.
- Complexity. Altcoins require a ton of research before purchasing. For instance, you have to know how many have been and will be minted, the details of its governance system and the general direction its holders want to take the coin before you can make an informed decision.
FAQs
No, altcoins are different than Bitcoin even though they operate using similar blockchain technology.
Yes, some altcoins have a relatively high monetary value, and others play a significant role in the cryptocurrency ecosystem. Many, however, have very little monetary value.
While it’s not considered an altcoin by some, Ethereum is the strongest crypto besides Bitcoin because it’s so widely accepted. This is largely due to its popular blockchain that enables most nonfungible token transactions and a host of decentralized apps, or dApps.