What Is Altcoin?
Understanding Altcoins
Types
Pros and Cons
Future of Altcoins
Altcoin FAQs
What Is Altcoin?
An altcoin, short for “alternative coin,” is any cryptocurrency other than Bitcoin. The term “altcoin” is used to describe these alternative cryptocurrencies that were launched after the success of Bitcoin, and it includes well-known cryptos such as Ethereum, Ripple (XRP), Litecoin, and many others.
Understanding Altcoins
Altcoins are called “alternative coins” because they were initially seen as alternatives or competitors to Bitcoin. Most altcoins are variants built on Bitcoin’s open-source protocol, adjusted with unique features or capabilities. Some offer a faster transaction time, some are more privacy-oriented, some allow for more complex smart contracts, and others provide a more democratic mining process.
Types of Altcoins
Stablecoins
Stablecoins aim to reduce the inherent volatility of cryptocurrency trading and usage. They achieve this by pegging their value to a basket of goods, including fiat currencies, precious metals, or other cryptocurrencies. The purpose of this basket is to serve as a reserve that can be used to reimburse holders in case the cryptocurrency faces difficulties or fails. The intention is to keep the price fluctuations of stablecoins within a narrow range.
Prominent examples of stablecoins include Tether’s USDT, MakerDAO’s DAI, and the USD Coin (USDC). In March 2021, Visa Inc., a major payment processing company, announced its decision to settle certain transactions on its network using USDC over the Ethereum blockchain. Visa also planned to expand its capacity for settling transactions with other stablecoins later in 2021.
Security Tokens
Security tokens are assets that have been tokenized and made available for trading on stock markets. Tokenization involves transferring the value of an asset to a token, which can then be accessed by investors. Any asset can be tokenized, such as real estate or stocks. However, for tokenization to be effective, the asset must be properly secured and held. Otherwise, the tokens would have no value as they would not represent anything tangible. Security tokens are subject to regulation by the Securities and Exchange Commission (SEC) because they function as securities.
In 2021, the Bitcoin wallet firm Exodus achieved a successful Reg A+ token offering that was qualified by the Securities and Exchange Commission. This offering allowed for $75 million worth of common stock shares to be converted into tokens on the Algorand blockchain. This event was significant as it marked the first instance of a digital asset security offering equity in a United States-based issuer.
Utility Tokens
Utility tokens are utilized within a network to provide specific services. They can be used for various purposes such as purchasing services, paying network fees, or redeeming rewards. An example of a utility token is Filecoin, which is employed to buy storage space and secure information within a network.
Ether (ETH), the native cryptocurrency of the Ethereum blockchain, also functions as a utility token. It is primarily used within the Ethereum blockchain and virtual machine to facilitate transactions. The stablecoin USTerra utilizes utility tokens to maintain its peg to the US dollar. By minting and burning two utility tokens, USTerra attempts to create downward or upward pressure on its price, aiming to keep it aligned with the dollar. However, it lost its peg on May 11, 2022.
Utility tokens can be purchased on exchanges and held, but their main purpose is to be used within the blockchain network to ensure its smooth operation.
Meme Coins
Meme coins are cryptocurrencies that draw inspiration from jokes or satirical takes on well-known cryptocurrencies. These coins often experience rapid popularity surges within a short period, fueled by online hype generated by influential individuals or investors seeking short-term gains.
The period of April and May 2021 was commonly referred to as “meme coin season” due to the significant rise in the value of these alternative coins. Many meme coins achieved massive percentage gains solely driven by speculative trading.
Governance Tokens
Governance tokens grant holders specific rights within a blockchain network. These rights can include voting on protocol changes or participating in decision-making processes of decentralized autonomous organizations (DAOs). While governance tokens are technically utility tokens, they have come to be recognized as a distinct type due to their specialized purpose. They are typically native to private blockchains and primarily used for blockchain-related activities.
Pros and Cons of Altcoins
Pros:
Enhance the weaknesses of existing cryptocurrencies
Increased likelihood of survival
Wide range of options available with thousands to choose from
Cons:
Lower popularity and smaller market capitalization compared to major cryptocurrencies like Bitcoin
Less liquidity compared to Bitcoin
Challenges in determining clear use cases
Prevalence of scams or altcoins that have lost developer and community interest
Future of Altcoins
The future of altcoins seems promising given the ongoing innovation in blockchain technology. With the rise of decentralized finance (DeFi) and NFTs (Non-Fungible Tokens), many altcoins are at the forefront of these trends. However, given the sheer number of altcoins, it’s likely that not all will survive in the long run. As always, potential investors should conduct extensive research and due diligence.
Altcoin FAQs
Are all altcoins the same? No, altcoins vary significantly in their functionality, use cases, technology, and value.
Are altcoins a good investment? It depends on the altcoin and the risk tolerance of the investor. While some altcoins have shown high returns, they can also be highly volatile.
How can I buy altcoins? Altcoins can be bought on various cryptocurrency exchanges. Some popular ones are Binance, Coinbase, and Kraken.
