What Are Altcoins? What Investors Need to Know – Finance Magnates

WhatIs an altcoin?

Inthe crypto world, altcoin stands for alternative coins and is simply a termused for any cryptocurrency other than bitcoin. So, that makes Ethereum, thecryptocurrency with the second largest market cap an altcoin as much as the3,000 ranked cryptocurrency.

Altcoinsare not required to be different from bitcoin as each altcoin will have itspreferred consensus mechanisms, such as proof-of-stake or proof-of-work. Forexample, bitcoin is the oldest cryptocurrency and uses the original validatormethod of proof-of-work, which is used by many altcoins today. Proof of work isresource-intensive and time-consuming, pushing more investors towards proof ofstake coins, allowing them to contribute to the blockchain.

However,altcoins do try to differentiate themselves from bitcoin through new technologylike smart contracts, PoS, or different tokenomics. Some aspects betweenaltcoins and bitcoin will always stay the same, such as peer-to-peer systems,which are embedded into the philosophy of cryptocurrency.

Sincethe beginning of cryptocurrency, with bitcoin as the spearhead, the market hasgenerally revolved around the price of bitcoin, with altcoins following itspumps and dips. Altcoins often come from bitcoin, tending to follow bitcoins'overall trends. Some of this matching can be put down to investors usingbitcoin as a major market indicator, but some altcoin graphs are similar tobitcoins that it becomes hard to ignore.

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However,as bitcoin dominance steadily decreases and more of the crypto market cap iseaten up by bitcoin, we start to see more independently priced altcoins, notexactly following bitcoins trajectory. We can put this phenomenon down to twomajor factors:

Simplyput, no. The term altcoin encompasses a massive group of coins, all providingdifferent utility to the crypto sphere, the term is used to differentiate themfrom bitcoin.

Cryptocurrencyis still a very new asset class, so each cryptocurrency project has its owncoin which investors buy into and often use inside of the ecosystem. Forexample, HIVE is used to navigate the platform. Later down the line, we shouldexpect major altcoins to take over as the main coin used over multipleprojects, as there is simply too much volatility for so many different altcoinsto be viably used in the future.

Remember: Altcoins can be part ofseveral categories at once.

Stablecoinshave come into existence to try and counteract the extreme volatility that thecrypto market faces. Investors can hold some value in stable cryptocurrency,without having to convert it into fiat, while waiting for the next investmentopportunity, or the perfect entry.

Examplesof altcoins would be USDT (Tethered to the US dollar, or USDC). Stablecoins arepegged to the value of a fiat currency or other more stable commodities such asgold to help hold their value.

Also,stable coins help investors get money into exchanges, without having toinstantly buy a more traditional cryptocurrency.

Utilitytokens act as a way of payment for services or to participate in an ecosystem.Each ecosystem will usually have its own unique utility token that is notmineable.

Awell-known example of a utility token is Filecoin, used to provide storage toother blockchains. The most famous example is Ethereum.

Atype of stable coin fresh in the mind of most crypto investors, meme coins aredescribed by the name, memes. Examples would be dodge coin or the recentspeculation on SHIB, based on Elon Musks dog.

Typicalattributes of a meme coin include a rapid surge in price over a short period oftime, lack of utility, and often shilled and advertised by crypto influencersor celebrities on platforms such as Twitter.

Memecoins have become rife with scams once people saw the massive potential thatcomes from playing with investors' FOMO.

Securitytokens are the closest cryptocurrency comes to traditional stocks and shares.Those buying security tokens will have shares in a company that participatesor does business on a blockchain.

Securitytokens help to validate ownership of a certain asset, providing greatersecurity than before to owners and their assets. However, when a user ownstheir own keys they are at risk of permanently losing access to the asset, asno centralized body can help them regain it.

Altcoinswhich are mining based use PoW (Proof of Work) as a way to generate new coins,the method that bitcoin uses. As mentioned before this is resource-intensiveand many altcoins are moving over to a PoS model, allowing users to participatein the blockchain themselves.

Thealternative is to have a project with pre-mined coins, which requires initialcapital to get off the ground. Coins are usually distributed during an ICO, orinitial coin offering, where investors pay Bitcoin, Ethereum, or fiat for apre-arranged amount of the essentially worthless coin. ICOs are naturally riskyas there is no guarantee these coins will ever be worth anything, having neverbeen traded before.

XPRis a massive example of a successful pre-mined coin, firmly sitting in the top10 coins by market cap.

Currently,bitcoin has a market dominance hovering around 40%, with Ethereum second justunder 20%. For an altcoin to ever flip bitcoin, we would need to see an alreadyprominent coin such as Ethereum really explode in the coming years.

Bitcoinwas the first cryptocurrency and will always be in the hearts of cryptoinvestors as the unbreakable, decentralized, permissionless blockchain, anexample for all future altcoins to follow.

Manyexperts suggest that Ethereum is capable of flipping bitcoin, but will rely ona successful Ethereum 2.0 release, executing the promises that were made aboutfaster transactions and cheaper transaction fees (Gas Fees).

However,to successfully flip Bitcoin or even Ethereum, the coin must defeat the problemof scalability, making it accessible to billions, such as Cardano.

Bitcoinhas had an early bird advantage over all other cryptocurrencies, so only timewill tell if an altcoin topples the Satoshi Tower.

Obviously,Bitcoin does not provide a solution to every problem trying to be solved bycryptocurrencies, so Altcoins are a necessity to solve the shortcomings ofBitcoin and provide actual utility across thousands of different sectors andmarkets. A task that no singular coin could finish.

Altcoinsare absolutely essential for this stage in the cryptocurrency ecosystem,providing investors with a massive choice of projects to invest in and allowingdifferent projects to show off their potential utility and use-cases while wegrow in the adoption phase.

Timewill slowly weed out useless altcoins as cryptocurrency becomes more heavilyadopted and the strongest altcoins will emerge and most likely become staplesas utility tokens across many ecosystems.

Altcoinsencompass almost all cryptocurrencies in the market, meaning as much as theyare a necessity, many come with their flaws, or are suffering from a volatilemarket. Here are the main dangers presented by altcoin investing and what youshould look out for:

Market sentiment is arguably the mostpowerful indicator in the cryptocurrency markets as massive bearish or bullishswings are common. Volatile cryptocurrencies are the most dangerous to holdduring a bearish sentiment, as there are zero guarantees they will even recover50% of their original price, especially if real-world utility is low, such asmeme coins.

Just because an altcoin has utility, does notmean the price will reflect it. We are still too early for mass adoption,meaning most utility speak is around the potential utility, making thecryptocurrency vulnerable to a massive drop in value.

Many altcoins operate on extremely low marketcaps, possibly trapping an investor's liquidity forever as trades are rare.

Do not get fooled by the term altcoin, anycoin that is not Bitcoin is an altcoin, even meme coins made by anyone withabsolutely zero value.

Thehonest truth that most altcoin investors do not want to hear is: that most, almostall altcoins, will not survive the next ten years. To see this as evidence, weonly must look back a few years at the top 100 cryptocurrencies by market capand see which ones are still there. Many projects have simply vanished out ofexistence, which will happen for our current set of altcoins now, only thestrongest will survive.

Mostanalysts predict a consolidation around the top ten, fifty, or whatever theoptimal amount of strong altcoins are needed for their utility and real-worlduse cases.

Altcoinswill always be around and only time will tell which ones survive. The mostpractical advice one can give on altcoins is to simply look for projects which yousee surviving past the adoption phase, based purely on speculation, and assessthe future utility that is possible, and what real-world problems they aretrying to solve.