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Demystifying altcoins: What are Altcoins?

The logo of Ethereum, the most popular altcoin, printed on an actual coin.

“Altcoin” is a term we see all the time in the crypto community, but you may not know what it is. In this article, we will demystify altcoins by delving deep into what altcoins are, how to invest in them, the risks and benefits, and more.

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What Are Altcoins?

Altcoins are cryptocurrencies other than Bitcoin. The term “altcoin” is short for “alternative coin”. So, basically, altcoins are alternatives to Bitcoin.

Altcoins were created to improve upon the original Bitcoin design or to address specific needs that Bitcoin does not address.

The most popular altcoin is Ethereum or Ether. Other top popular altcoins are Litecoin, Monero, and Dogecoin. Many others are less well-known but still have a loyal following among cryptocurrency enthusiasts.

History Of Altcoins

There are over 4,000 altcoins in existence today, with more being created every day.

The first altcoin was Namecoin, which was created in 2011. It is a decentralized DNS system that uses the Bitcoin protocol.

Since then, thousands of altcoins have been created. Some have been very successful. However, most of them have failed and are no longer active.

How Many Altcoins Survive?

The answer to this question largely depends on how you define “survival”.

If we consider a coin to be “alive” if it is still being traded on exchanges and still has a market capitalization, then the answer is that most altcoins do not survive.

Statistics show that of the 5,569 altcoins created from January 2013 to December 2017, only 817 (or about 15%) are still alive today. Yet, many are still being created; the stats show that from 2016 to 2021, about 10,000 were created.

However, if we consider a coin to be “alive” if it is still being traded on exchanges but does not have a high market capitalization, then the answer is that most altcoins do survive. Statistics show that about 85% of altcoins survive in terms of this definition.

Why Are Some Altcoins More Successful Than Others?

The reasons why some altcoins are more successful than others are due to various factors. These include:

The Team Behind The Altcoin

A solid and experienced team is often essential for the success of an altcoin. The team should have a good track record in the industry and be able to execute their vision. Also, one backed by a well-established organization is more likely to succeed than one that is not.

The Technology Behind The Altcoin

A coin with robust and innovative technology is more likely to succeed than one with inferior technology.

The Marketing Of The Altcoin

A well-marketed coin is more likely to gain adoption and be successful than one not marketed well.

The Community Around The Altcoin

A coin with a strong and supportive community is more likely to be successful than one without a community. This was one reason for the rise of Shiba Inu in 2021.

The Exchanges That List The Altcoin

A coin listed on multiple exchanges, especially the top ones like Coinbase, is more likely to be successful than one only listed on a few exchanges.

The Price Of The Altcoin:

A coin with a low price is more likely to be successful than one with a high price. This doesn’t mean that only low-priced coins are successful, but if it starts at being low, more people may be encouraged to purchase, thus leading to an increase in market cap and acceptance.

The Utility Of The Altcoin

A coin that has real-world applications and use cases is more likely to be successful than one that does not. One of the factors that have contributed to the success of CELO is what it can do for cryptocurrency payments and blockchain use cases.

The Overall Market Conditions

Coins tend to do well when the overall market conditions are favorable and do poorly when the overall market conditions are unfavorable.

Being The First Mover In Their Respective Markets

First-mover advantages often play a significant role in the success of an altcoin, and really most things in any market, especially if marketing is done really well.

These are just some of the main factors that can affect the success of an altcoin. There are many other factors, such as the political climate, the economic climate, and so forth.

Altcoin Classification

There are many different altcoins, and they can be classified in various ways. Here are some of the most common ways that they are classified:

By Purpose Or Use Case:

Some altcoins are created for a specific purpose or to solve a particular problem. For example, Filecoin is an altcoin used to store data on the decentralized file storage network IPFS. Similarly, Siacoin is an altcoin used for data storage on the decentralized cloud storage platform Sia. Another example is Decred (a digital currency with a hybrid proof-of-work/proof-of-stake consensus system).

By Protocol:

Some altcoins are based on different protocols than Bitcoin. For example, Litecoin is based on the Bitcoin protocol but with some changes to make it faster and cheaper to transact. Other examples include Cardano (which is based on a protocol called Ouroboros) and EOS (which is based on a delegated proof-of-stake consensus system).

By Blockchain:

Some altcoins use different blockchains than Bitcoin. For example, Ethereum uses a programmable blockchain, meaning that developers can build applications on top of it. Other examples include Tether (which uses the Omni Layer protocol to issue tokens on the Bitcoin blockchain) and Stellar (which uses its own blockchain).

By Algorithm:

Some altcoins use different algorithms than Bitcoin. For example, Litecoin uses the Scrypt algorithm, which is designed to be ASIC-resistant. Other examples include Monero (which uses the CryptoNight algorithm) and Dash (which uses the X11 algorithm).

Types Of Altcoin

There are several types of altcoins, and they include the following:

Stablecoins

Stablecoins are a type of altcoin designed to maintain a stable value. The most popular stablecoin is Tether, which is pegged to the US dollar. Other examples include USD Coin, Paxos Standard, and TrueUSD.

Governance Tokens

Governance tokens are a type of altcoin that gives holders voting rights on the project’s direction. The most popular governance token is Ethereum, which allows holders to vote on proposed changes to the Ethereum protocol. Other examples include Decred, Aragon, and Dash.

Memecoins

Memecoins are a type of altcoin based on memes or popular culture. The most popular memecoin is Dogecoin, which was based on the Doge meme. Other examples include Pepecash, Shiba Inu, and Garlicoin.

Utility Tokens

Utility tokens are a type of altcoin that gives holders access to a specific product or service. The most popular utility token is Filecoin, which allows holders to access the decentralized file storage network IPFS.

Other examples include Siacoin (which gives holders access to the decentralized cloud storage platform Sia), SOURCE (which allow holders to pay for transactions on the ReSource network to approve buying/selling goods or obtaining credit), and Golem (which enables holders to rent out their unused computing power).

Forked Coins

Forked coins are a type of altcoin created when a cryptocurrency is made by making changes to the protocol or basic rules of an existing blockchain. When this happens, the existing blockchain splits to create another blockchain that shares the history of the first but now moves in a new direction. The most popular forked coin is Bitcoin Cash, which was created when Bitcoin was forked in August 2017. Other examples include Bitcoin Gold, Ethereum Classic, and Litecoin.

What Drives The Price of Altcoins?

A variety of factors drive the price of altcoins. Regardless of the factors discussed below, understand that altcoins, like Bitcoin, work most on speculation. In fact, almost no one knows why prices go up or down, but the points below are our guesses.

Supply And Demand

The price of altcoins is largely driven by supply and demand. If there is more demand for an altcoin than the available supply, the price will increase. Conversely, if there is more available supply than demand, the price will decrease.

Media Coverage

The price of altcoins is also influenced by media coverage. If an altcoin receives positive media attention, it can attract new investors and drive up the price. Similarly, if an altcoin gets negative media attention, it can discourage investment and drive down the price.

Innovation

The price of altcoins is also influenced by innovation. If an altcoin is the first to offer a new innovative feature, it can attract new investors and drive up the price.

Market Conditions

Coins tend to do well when the overall market conditions are favorable and do poorly when the overall market conditions are unfavorable.

Market Capitalization

The market capitalization of a coin is a measure of its value. The higher the market capitalization, the more valuable the coin is.

Trading Volume

The trading volume of a coin is a measure of how much is being traded. The higher the trading volume, the more liquid the coin is.

How to Buy Altcoins

The process for buying altcoins is similar to the process of buying Bitcoin. The first step is to set up a wallet to store your coins. However, working with a centralized crypto exchange may be best for a beginner due to the technicalities of dealing with wallets.

Many different cryptocurrency exchanges allow you to buy and sell altcoins. Some of the most popular exchanges include Coinbase and Binance.

Some exchanges allow you to buy altcoins and any crypto with fiat money like US dollars. However, some will only allow you to buy by exchanging one another cryptocurrency for the altcoin you want.

How To Buy Altcoins With Fiat

If you want to buy altcoins with US dollars or any other fiat money, you can use an exchange like Coinbase or Transak. The exchange you choose will determine how the process will go, but it is typically the following:

  1. Sign in to the platform or wallet
  2. Go to the section where coin purchase happens
  3. Select the asset/altcoin you’d like to purchase
  4. Enter the amount you’d like to buy in crypto value or fiat value
  5. Select how you’d like to pay (card, bank transfer, etc.)
  6. Approve the transaction to complete the purchase

How To Buy Altcoins With Other Cryptocurrencies?

If you want to buy altcoins with other cryptocurrencies, it is best to do it through a cryptocurrency exchange that supports crypto-to-crypto trading. The most popular exchanges that support crypto-to-crypto trading are Binance, Huobi, and OKEx.

Again, the exact process differs from one platform to another, but it typically goes like this:

  1. Sign in to the platform or wallet
  2. Go to the section where crypto trading happens
  3. Select the trading pair, which is usually the coin you’d like to purchase and the one you want to exchange for it
  4. Enter the amount you’d like to exchange from one crypto to another
  5. Select how you want the trading to go (market order, limit order, etc.)
  6. Approve the transaction to complete the purchase

Market Order Vs. Limit Order Vs. Stop Limit Order

A market order is an order to buy or sell an asset at the best available price. A limit order is an order to buy or sell crypto at a specified price. A stop limit order is an order to buy or sell crypto at a specified price or better after the price has reached a specified stop price.

Best Crypto Wallets and Exchanges for Altcoins

There are several top crypto wallets and exchanges, and on most of them, you can buy Altcoins. We have discussed those wallets already. We will specifically discuss only a few: MetaMask, Coinbase, Crypto.com, and Binance.

Metamask

MetaMask is a browser extension that allows you to store and manage certain tokens, including Ethereum-based, CELO-based, and Binance Smart Chain-based coins. It also allows you to buy and sell cryptocurrencies and browse decentralized applications (DApps).

Coinbase

Coinbase is a cryptocurrency wallet and exchange that allows you to store, buy, and sell cryptocurrencies. The exchange allows you to connect your bank account or credit card to purchase cryptocurrencies, trade cryptocurrencies for each other, and do peer-to-peer trading. This is a centralized exchange.

Coinbase also has a decentralized wallet that allows you to completely control your funds and access your crypto on the blockchain by storing only your private keys.

Crypto.Com

Crypto.com is a cryptocurrency wallet that allows you to store, buy, sell, and earn interest on your cryptocurrencies. It also has a built-in exchange that allows you to exchange one cryptocurrency for another.

Binance

Binance is a cryptocurrency exchange that allows you to buy, sell, and trade cryptocurrencies. It does more than enable you to acquire cryptocurrencies; on Binance, you can obtain crypto loans and grow your crypto with one of the investment strategies on offer.

Choosing a Wallet

The above list is not exhaustive, as many other crypto wallets are out there.

When choosing a wallet for your altcoins, make sure to consider the following:

  1. How easy is it to use?
  2. Does it support all the coins you want to hold?
  3. Is it secure?

The Benefits of Investing in Altcoins

When it comes to altcoins, there are several benefits to investing in them. These include:

Lower Price Entry Point

Unlike purchasing bitcoin right now, buying several altcoins have a lower price barrier to entry. One Ethereum currently costs less than 25% of the cost of one bitcoin. Yet Ethereum is the second most valuable coin. This means you can buy several coins for only a few dollars or cents.

Smaller Market Cap = More Room To Grow

Many altcoins have a relatively small market capitalization. This leaves a lot of upside potential as the coin could potentially grow a lot in value if it becomes more popular, leading to good returns for you.

The Possibility Of High Returns

While some investors are happy to HODL their coins and see them appreciate over time, others are more interested in day trading or even swing trading to make profits in the short term. And with the volatile nature of cryptocurrencies, this is certainly possible.

Participation In A New Technology Or Project

For some investors, the possibility of being part of new and innovative technology or project is reason enough to invest. With most altcoins being based on blockchain technology, there is undoubtedly a lot of potential here.

Crypto-Specific Uses Cases

Some altcoins have very specific use cases that make them more attractive to certain investors. For example, Filecoin is a decentralized storage coin that allows users to buy and sell storage space on the network. This could be appealing to someone interested in investing in new storage technologies.

Risks Of Investing In Altcoins

As with any investment, there are risks associated with investing in altcoins. They  include:

High Volatility

One of the biggest risks when it comes to cryptocurrencies is their high volatility. Prices can fluctuate a lot in a short time, which can lead to losses whether you are careful or not.

Crypto investors over the last few years have seen Bitcoin rise to more than $60,000 per coin and then fall by more than 50%, rise and fall again, and again, and again. The same has happened to Altcoins, rising a bit and falling and repeating the same process for months.

It can be scary but also profitable. The same volatility that can lead to losses can also lead to gains.

Smaller Market Cap = More Volatile

Another risk associated with altcoins is that they tend to be more volatile than coins with a larger market capitalization. This is because there is less liquidity in the market, so prices can fluctuate a lot.

This can be good or bad, depending on how you trade. If you are looking to buy and hold for the long term, the volatility might not be an issue. But if you are looking to day trade or even swing trade, then the volatility could lead to some losses.

Lesser-Known = More Risk

Another risk associated with most altcoins is that they are often lesser-known than coins like Bitcoin and Ethereum. This means that there is less information available about them, and so it is harder to make an informed decision about whether or not to invest.

This also leads to another risk: there is a higher chance that the project could fail, and you can’t make a well-informed guess because there is often less information available about the team, the technology, and the roadmap.

However, this also means that there is a higher chance of success since you are investing in a coin with more upside potential.

Seemingly Slow Growth

Looking at the value of Bitcoin now, it may seem that altcoins are growing much slowing. Namecoin, the first altcoin, is only worth about $2 now.

One problem with altcoins is that investors seem to herd around the most popular ones. Since growth is likely driven mainly by market sentiment, if investors move only to the most popular coins, most altcoins will stay at low prices forever, never leaving the doghouse.

That is not to say Bitcoin grew fast; it took some years, and you should expect the same for any altcoin. Nevertheless, most altcoins never really grow much.

Examples of Well-known Altcoins

Ethereum

Ethereum is a decentralized platform that runs smart contracts. These are applications that run exactly as programmed without any possibility of fraud or third-party interference. Ethereum is the second-largest cryptocurrency by market capitalization after Bitcoin.

Bitcoin Cash

Bitcoin Cash is a fork of Bitcoin that was created in August 2017. The main difference between Bitcoin and Bitcoin Cash is the block size. Bitcoin has a 2 MB block size, while Bitcoin Cash has an 8 MB block size. This allows more transactions to be processed per second on the Bitcoin Cash network.

Cardano

Cardano is a decentralized public blockchain and cryptocurrency project and is fully open source. Cardano is developing a smart contract platform that seeks to deliver more advanced features than any protocol previously developed. Cardano is currently the seventh-largest cryptocurrency by market capitalization.

Altcoins Vs. Bitcoin

It is important to note that altcoins are not just clones of Bitcoin. While some are forks, and others are simply copies, many have their own unique features and technologies.

Some coins, like Litecoin, have faster transaction times than Bitcoin. Others, like CELO, focus on facilitating international payments. And others, like Cardano, are working on developing smart contract platforms.

Tips For Storing Your Altcoins Safely

Just like with any other cryptocurrency, you need to be careful about where you store your altcoins. This is because there is always the risk of hacking and theft. Here are some tips.

Use The Right Wallet

One way to store your altcoins safely is by using a hardware wallet. These devices allow you to store the private keys for your coins offline in what is known as cold storage. This means that even if your computer is hacked, the coins will still be safe. Some popular hardware wallets include the Ledger Nano S and the Trezor Model T.

Another way to store your coins safely is by using a paper wallet. This simply involves printing out your wallet’s private and public keys on a piece of paper. You can then store this paper wallet in a safe place, such as a safe.

Don’t Store All Your Crypto/Private Keys In One Place

Never store all of your coins in one place. If you do and that one wallet or exchange is compromised, you could lose all your coins. Instead, you should spread them out across different wallets and exchanges.

Use Secure Internet Connection

When storing your altcoins online, it is vital to use a secure internet connection. This means using a VPN or other security measures to protect your identity and keep your data safe.

Use Only Well Known Exchanges And Wallets

When choosing an exchange or wallet to store your altcoins, it is important only to use well-known and trusted ones. This is because there have been many cases of exchanges and wallets being hacked in the past.

Some well-known exchanges include Coinbase, Binance, and Kraken. Some well-known wallets include Exodus, MetaMask, Ledger, and Trezor.

Secure Your Device And Wallet

Another important thing to do is to secure your device and wallet. This means installing security software, keeping your device’s OS up to date, and using strong passwords and possibly two-factor authentication for the exchange.

The Future Of Altcoins

The future of altcoins is uncertain as many factors can affect their price. However, the general consensus is that altcoins will continue to exist and be traded on exchanges for the foreseeable future.

Understand that some cryptos have fleeting value, so the fact that it is worth a lot today doesn’t mean it will be worth that much in a year or even a few weeks. So, it is hard to say which altcoin will have a lasting value. Nevertheless, following up on the altcoins that seem to have potential or projects with real-life use-cases and needs like CELO may work well for you.

Before deciding on what to invest in, do your research, learn more about crypto and DeFi, and most importantly, never invest more than you are willing to lose.

Sure, crypto portfolio growth can be active, but it may be best to treat it as a passive income stream if you are still just a beginner in the crypto world.

What Altcoins Are You Investing In?

Based on what you now know, what altcoins come to mind for you? Which seems to have more potential? Let us know in the comments.

We will also look into different altcoins, their potential, and how to invest in them in the coming articles.

To ensure you get the updates once we have published them, use the form below to subscribe to our blog.

If you need help deciding which coins to invest in right now, book a one-hour session with our crypto consultants.

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