What are Altcoins, Comprehensive Guide For Beginners

Altcoins serve purposes within blockchains, like Ether in Ethereum

When the first altcoins were launched in 2011, they were aimed at improving some aspects of Bitcoin, such as transaction speeds or energy efficiency. Today, however, it has evolved to serve a variety of purposes, depending on the goals of the developers, and has very much garnered the attention of every crypto investor.

What are Altcoins?

In simpler terms, all cryptocurrencies other than Bitcoin are defined as Altcoins. There are some people, however, who consider altcoins to be all cryptocurrencies other than not just Bitcoin but also Ethereum, since most cryptocurrencies are forked from one of the two.

What usually happens is that most developers who have a different vision for the use of their tokens or cryptocurrency go on to develop them further or design them into something else. These all unique and further developed cryptocurrencies or tokens become Altcoins, which are then released in the crypto world.

Understanding Altcoins

Altcoins is derived from the two words ‘alternative’ and ‘coin,’ which are generally used to comprise all cryptocurrencies and tokens that are not Bitcoin. They belong to the blockchains that they were explicitly designed for. Best Altcoins are a ‘fork’ or splitting of a blockchain that is not compatible with the original chain—Bitcoin and Ethereum.

As explained earlier, these forks usually occur when a group of developers have a different vision for their coins and leave to make their coins. Aside from this, there are several other reasons too.

Generally, altcoins are used within their respective blockchains to achieve something. For example, ether, which is used in Ethereum to pay transaction fees, Another example would be ‘Bitcoin Cash’ that some developers developed by creating forks of Bitcoin, which bounced back as an attempt to compete with Bitcoin.

Aside from these, others fork and advertise themselves in order to raise funds for specific projects. Take, for example, Bananacoin, which forked from Ethereum and popped up in 2017 as a way to raise funds for a banana plantation in Laos.

Types of Altcoins

Now that we have defined and understood what Altcoins are, let us look into some of their types:

1. Payment Token

Perhaps the ideal example of a payment token is Bitcoin. Payment tokens—well, the name says it all—are designed to be used as currency, that is, to exchange value between parties.

2. Stablecoins

Since its launch, the trading of cryptocurrency and its use have been marked by volatility. Therefore, in order to reduce this overall volatility, stablecoins peg their value to a basket of goods, such as precious metals, fiat currency, and other cryptocurrencies. This basket is aimed at acting as a reserve to redeem holders if the cryptocurrency fails or stumbles into problems. Also, price fluctuations for stablecoins are not supposed to exceed a narrow range. Famous examples of stablecoins include Tether's USDT and MakerDAO's DAI.\

3. Security Tokens

Basically, security tokens are tokenized assets that are offered on stock markets. The transfer of value from an asset to a token is called tokenization. After it is tokenized, the tokens are then made available to investors. Any asset, from real estate to stocks, can be tokenized, but for this to work, the asset should be secured and held. Otherwise, the tokens will be worthless, as they wouldn't amount to anything. The Securities and Exchange Commission regulates security tokens as they are designed to act as securities. Some examples of security tokens include Polymath and tZero.

4. Meme Coins

One of the most famous and unique currencies in the crypto world is meme coins. Developed as a parody of other well-known cryptocurrencies, they are not intended to be used as a serious form of currency.

Often hyped online by prominent influencers or investors, they typically gain popularity in a short period of time. They are not backed by any revenue-generating businesses, and their value is purely based on their demands, which can be influenced by factors such as social media buzz and celebrity approvals. Some famous examples of meme coins include Dogecoin and Shiba Inu.

Pros of Altcoins

1. Altcoins evolve or improve upon another cryptocurrency's weaknesses 

2. Altcoins have higher survivability.

3. Since new developers are always emerging and developing new coins, there are now varieties and thousands to choose from foruserss.

Cons of Altcoins

1. Altcoins may tend to have lower popularity and a smaller market cap compared to cryptocurrency giants such as Bitcoin.

2. Altcoins are less liquid than Bitcoin.

3. There are always difficulties in determining use cases for Altcoins. 

4. There are also cases where many altcoins turn out to be scams or lose community interest.

Conclusion

If one is looking to diversify within the cryptocurrency market, altcoins can turn out to be less expensive than Bitcoin. This may seem very tempting at first; however, one should still do their research properly before deciding on any of these coins, lest they fall victim to scams. 

Also read: Bitcoin's Journey and Impactful Rise Over 15 Years