The altcoin market is a new and unstable one, so potential investors should consider the risks before investing in any one type of altcoin.
Shutterstock; Rachel Mendelson/Insider
Since the emergence of Bitcoin, the concept of a decentralized, trustless peer-to-peer (P2P) payment network has inspired an entire class of digital assets. The crypto markets are a product of Bitcoin's success, and the fast-growing space consists of more than 9,000 altcoins.
Now we have altcoins, which began to emerge in 2011 in an attempt to reinvent Bitcoin, with their own rules and improvements on different features.
Altcoin is a cryptocurrency alternative to Bitcoin - its name is a portmanteau of "alternative" and "coin." Since Bitcoin is widely regarded as the first of its kind, new cryptocurrencies developed after are viewed as alternative coins - or altcoins. The emergence of altcoins began around 2011, with the first generation formed using the same blockchain engine as Bitcoin.
The first altcoin was Namecoin, which is based on Bitcoin's code and was released in April 2011. Namecoin is integral to the history of altcoins in that it showed that there's enough room in the crypto markets for more than one kind of coin.
Blockchains today can run several hundreds of "altcoins," fueling similar currency projects with unique rules and mechanisms. Altcoins like Ethereum can provide developers with a toolkit and programming language to build decentralized applications into the blockchain.
To understand how altcoins work, it's good to first understand how blockchain technology works - which is where all cryptocurrencies operate.
The blockchain network is a distributed ledger that stores data like cryptocurrency transactions, NFT ownership, and decentralized finance (DeFi) smart contracts. This ledger is often referred to as a "chain" comprising "blocks" of data, which are used to verify new data before additional blocks can be added to the ledger.
This network, on which Bitcoin operates, is groundbreaking because it's a decentralized, trustless, P2P payment network that functions without a central authority or entity facilitating transactions. And altcoins function on the exact same premise as Bitcoin: to operate using this blockchain technology.
However, there have been some altcoins that have emerged to instead improve on the flaws of Bitcoin or to achieve some other goal. For example, Litecoin was designed by former Google engineer Charlie Lee as a "lite version of Bitcoin."
A fork refers to an update in network protocol (the open source software blockchains run on). There are two kinds of forks: a hard fork and soft fork. A soft fork is a minor upgrade to the software, and typically means nothing for users. A hard fork is a major change to the network, and requires users/miners to update to the latest software in order to continue mining. If developers decide they do not like the direction a blockchain network is going in, they can do a hard fork and create a new coin. Since 2009, Bitcoin has seen over 400 hard forks.
In the news: In the past year, crypto and celebrity influencers have come under fire for promoting cryptocurrencies. Even social media platforms like TikTok have banned crypto promoters from the platform.
Here are the two key things to know about altcoins.
Altcoins are a highly speculative and volatile investment. Speculation is a powerful driver of the crypto markets so it's important to do your research before investing in any altcoin. Half-baked whims and trading based on rumors are exactly what the experts advise against.
"An emerging technology like crypto is going to attract people of ill-repute who are looking to make a quick buck off of the new investor," says Ben Armstrong, founder of BitBoy Crypto. "So it's important to be cautious and not fall for the hype of a slick new project, or get FOMO when you see a crypto asset making new all-time highs."
The decentralized, intangible, and often misunderstood nature of cryptocurrencies in general makes predicting the long-term, steady success of an altcoin project difficult to predict. Some altcoins, like Ethereum, have maintained their position in the market through constant innovation and the strength of their community. Speculation has a more dramatic effect on newer altcoins. External factors like public perception, Bitcoin price fluctuation, or a meme on Reddit can oftentimes cause drastic price fluctuations.
While the crypto community stands united on its long-term bullish outlook for Bitcoin, the temptation of selling coins for short-term profits is built into the crypto zeitgeist. The crypto community created the term "hodl" in an effort to encourage people to hold on to their crypto assets for the long-term. "Hodl" means "hold on for dear life," and to resist the impulse of selling when the value of their crypto drops or rises.
Quick tip: Smart contracts are programs that are stored on blockchain that execute when certain conditions are met.
Cryptocurrency takes a toll on the environment. Bitcoin's energy consumption is a well-known flaw. As of August 2021, Bitcoin's energy consumption is 151.57 TWh according to Digiconomist's Bitcoin Energy Consumption Index - that's comparable to what the entirety of Malaysia uses in energy.
The culprit for the tremendous costs of energy lies with the "proof of work" (PoW) consensus algorithm, which is how transactions are verified. And as Bitcoin mining has become more competitive, the computing power required to profitably mine new bitcoins is represented in factories loaded with servers all working toward solving the network's algorithms.
The PoW consensus mechanism is responsible for driving the competition for faster and more powerful computational processing power. The faster a miner's computer can complete the formula, the higher their odds of winning a block reward. Over time, miners have developed computer hardware with the sole function of processing the PoW consensus algorithm.
This has evolved from a miner running a program in the background of their PC to entire mining farms. Miners (or a pool of miners) will buy factories in countries where electricity is cheap and fill them with thousands of mining rigs. The energy required to keep the rigs running 24/7, combined with the fans and coolant systems to prevent overheating and fires, has made crypto mining an environmental disaster.
Bitcoin's carbon footprint has provided an opportunity for altcoins with greener consensus mechanisms to market themselves as "green coins." While proof of work is the main culprit for the Bitcoin energy crisis, blockchains like Ethereum and Cardano (ADA) operate on proof of stake consensus mechanisms. Compared to the energy-hungry PoW, staking requires no mining in order to participate and earn coins. The success of Ethereum and Cardano prove that people can participate in crypto while being environmentally friendly.
Quick tip: Proof of work is the consensus mechanism used by Bitcoin and many other altcoins to audit transactions on the blockchain and "mine" new crypto. Crypto mining is solving computational formulas to audit transactions on the blockchain. Completing the formula means a chance at receiving a newly minted BTC reward.
Over time, there have been many altcoins that have come along. And now, there are the main types:
Quick tip: One of the main benefits of blockchain technology is transparency. If something is on the blockchain, it means it is visible, permanent, and accessible to the public. On-chain typically refers to a transaction that is performed and recorded on the blockchain. Off-chain is a transaction not directly recorded on the blockchain.
Staking is the passive-investing strategy where an investor holds funds in a cryptocurrency wallet in order to earn rewards over time. When an investor chooses to stake their holdings, the network can use it to forge new blocks on the blockchain. The process of staking supports the process of PoS work because it requires participants to support it. And so stakers are essentially helping to make this happen.
Also, staking is incredibly energy-efficient - unlike mining. According to the Ethereum Foundation, the latest switch to a PoS system will reduce energy costs by 99.95%.
While no altcoin has managed to "dethrone" Bitcoin in value, many projects have proved themselves worthy enough to a global community of investors and developers:
The second-largest blockchain in crypto, Ethereum's evolution has taken it from an asset to an application. Founded by Vitalik Buterin in 2013, Ethereum is a distributed blockchain platform for smart contracts and dApps (decentralized applications). With its native token, ether (ETH), users can interact with the Ethereum platform. Ether can be traded on most crypto exchanges, used to pay transaction fees, or as collateral for ERC-20 tokens, which have DeFi utility.
Ethereum's integration with smart contracts via the Solidity programming language has distinguished the project from Bitcoin. A smart contract is a self-executing code that can run on the blockchain.
Launched officially in 2019 on the Ethereum blockchain, Chainlink is a decentralized oracle network that's meant to expand on smart contracts. In a nutshell, it connects smart contracts with "off-chain" data and services. The network is built around the LINK network and token and has two parts: on-chain and off-chain.
The on-chain component comprises oracle contracts on the Ethereum blockchain, which oversee and process data requests that come in from users. The off-chain component is made up of off-chain oracle nodes that connect to the Ethereum network, which are responsible for processing external requests that are later converted to contracts.
The AAVE is an open-source DeFi lending protocol that allows anyone to loan or borrow crypto without an intermediary. As a lender, you can deposit funds - which are allocated into a smart contract - where you can earn interest based on how Aave is performing in the market. Making a deposit means you can also borrow by using your deposit as collateral.
Rebranded from ETHLend following a successful ICO in 2017, Aave switched from a decentralized P2P lending platform into a liquidity pool model. This means loans are acquired from a pool instead of an individual lender. Since 2020, the Aave Protocol has been an open-source and non-custodial liquidity DeFi protocol for earning interest on deposits and borrowing assets. Holders of AAVE can decide on the direction of the project by voting on and discussing proposals.
Stellar is an open-source payment network that doubles as a distributed intermediary blockchain for global financial systems, designed so all the world's financial systems can work together on a single network. Stellar began in 2014 when Ripple co-founder Jed McCaleb disagreed with the direction of the Ripple project. The ethos behind Stellar's development is to make international money transfers possible for the everyday person.
While Stellar is an open-source network for currencies and payments, Stellar Lumens (XLM) is the circulating native asset on the network. Stellar keeps its ledger in sync using its Stellar Consensus Protocol (SCP). Instead of relying on a miner network, SCP uses the Federated Byzantine Agreement algorithm, enabling faster transactions.
Uniswap is a decentralized exchange ecosystem built on the Ethereum blockchain. Launched in 2018, Uniswap uses an on-chain automated market maker. One of Uniswap's unique features is that anyone can be a market maker by depositing their assets into a pool and earning fees based on trading activity.
Uniswap uses an automated market maker protocol that executes trades according to a series of smart contracts. The smart contracts automate price discovery, allowing users to swap one token for another without an intermediary. In traditional finance, market makers are usually brokerage houses with incentives that can cause a conflict of interest.
PotCoin is a Canadian-based digital currency that was launched in 2014 to allow consumers to buy and sell legal cannabis products. PotCoin was introduced as a solution for cannabis enthusiasts and the industry looking to legally transact at a time where banks were unable to do so.
PotCoin is an open source cryptocurrency forked from the Litecoin core. There are subtle changes to the PotCoin protocol including a shorter block generation time and the increased 420 million max supply of PotCoins. Potcoin switched from a Proof of Work mechanism to Proof of Stake in 2016 to make supporting the network more accessible and less harmful to the environment.
One of the first-generation of altcoins made in 2011, Litecoin is a cryptocurrency based off of Bitcoin. Key things that distinguish Litecoin from Bitcoin include blocktime (four times faster block times than Bitcoin), supply (Litecoin has a max supply of 84 million while Bitcoin max supply of 21 million), its hashing algorithm, and distribution.
Dubbed the "digital silver" to Bitcoin's "digital gold," Litecoin's goal was to optimize the Litecoin asset while preserving the best parts of Bitcoin.
Quick tip: The ERC-20 standard is a set of rules applied to smart-contract tokens on the Ethereum blockchain. The flexibility and fungibility of the ERC-20 token allows dApp developers to create utility tokens, security tokens, or stablecoins.
Altcoins have come a long way since 2011, and continue to prove themselves as more than just an "alternative to Bitcoin." The crypto space is a fast-moving and increasingly popular point of interest for investors. Thanks to the innovation and integration of crypto into mainstream business, people can safely and legally buy altcoins on their phone or computer.
Easy access to the crypto markets doesn't mean it isn't risky. Before investing in an altcoin, ask yourself: have you researched and performed enough due diligence? Would you be able to explain the project to your family or friends at the dinner table? Whether you want to trade altcoins full-time or just "hodl" onto your Bitcoin, the choice is yours. Listening to the experts, evaluating the risks, and assessing your financial goals are keys to investing responsibly.
- 2 Fascinating Altcoins to Add to Your Watch List - The Motley Fool - October 10th, 2021
- Cardano and Five Altcoins Set To Outperform Bitcoin As New Phase of Market Cycle Begins, Predicts Crypto St... - The Daily Hodl - October 10th, 2021
- Analytics Firm Issues Altcoin Warning, Says Crypto Asset Thats Surged 393,000% Year-to-Date Is Likely Ov... - The Daily Hodl - October 10th, 2021
- Top 3 Price Prediction Bitcoin, Ethereum, XRP: Altcoin lag while BTC marches higher - FXStreet - October 10th, 2021
- 5 Altcoins to Buy in the Bull Run, According to Crypto Investor - Business Insider - October 8th, 2021
- Crypto Analyst Says Fast-Rising Altcoin Will 10x Through This Bull Market - The Daily Hodl - October 8th, 2021
- 2 Undervalued Altcoins to Buy, Per 26-Year Wall Street Veteran Trader - Business Insider - October 8th, 2021
- How high are the chances of Bitcoin sustaining its gains and pushing altcoins higher? - FXStreet - October 8th, 2021
- Bitcoin Pumps Past $55K; Hive, BTCST, Badger Rally Amid Altcoins' Consolidation, Here Are the Predictions! - KryptoMoney - October 8th, 2021
- 15 Altcoins to Buy Based on Developer Interest, Following Ether - BofA - Business Insider - October 6th, 2021
- Altcoin outlook: 6 alternative cryptocurrencies to watch in Q4 - Markets Insider - October 6th, 2021
- Popular Crypto Strategist Predicts Monster Rallies for Solana and Terra, Says One Overlooked Altcoin Ready ... - The Daily Hodl - October 6th, 2021
- Four Emerging Altcoins Surge 101% or More Within Seven Days As Crypto Markets Ignite - The Daily Hodl - October 6th, 2021
- Popular Crypto Trader Compares Bitcoins Chart to Altcoin That Surged 12,000% in a Year - CryptoGlobe - October 6th, 2021
- Top Trader Says Bitcoin Following Price Path of Explosive Altcoin That Rose Over 10,600% in One Year - The Daily Hodl - October 6th, 2021
- Solana, FTT and Two Additional Altcoins Breaking Out of Market Slumps, According to Crypto Analyst Scott Me... - The Daily Hodl - October 6th, 2021
- Altcoin Project Backed by Cardano Rallies 92% in Just Two Weeks, Leaving Crypto Market in the Dust - The Daily Hodl - October 6th, 2021
- Altcoins Surge as Crypto Market Regains Steam - CoinDesk - September 25th, 2021
- Altcoin roundup: Theres more to DeFi than just providing liquidity - Cointelegraph - September 25th, 2021
- Best altcoins to buy: Experts share cryptocurrencies they're buying - Business Insider - September 25th, 2021
- This Magical Altcoin Project Has Soared 116% This Week, Defying Bitcoin and Crypto Markets - The Daily Hodl - September 25th, 2021
- Here Are the Top 5 Altcoins for the Remainder of September, According to Crypto Analyst Michal van de Poppe - The Daily Hodl - September 25th, 2021
- These Five Altcoins Are About To Go Insane, According to Crypto Trader Aaron Arnold - The Daily Hodl - September 25th, 2021
- Analyst Who Called Crypto Crash Updates Bitcoin and Ethereum Outlook, Predicts One Altcoin Likely To Bounce... - The Daily Hodl - September 25th, 2021
- Polkadot, Avalanche, and Two Additional Altcoins Are the Top Crypto Assets To Watch, Says Trader Jason Pizzino - The Daily Hodl - September 25th, 2021
- This Mid-Cap Altcoin Is Surging As Most of the Crypto Market Crashes - The Daily Hodl - September 25th, 2021
- Ethereum, Cardano have 'great use cases,' but this altcoin might lead autumn - AMBCrypto News - September 15th, 2021
- Altcoin Spikes After Fake Press Release That Walmart Is Accepting It Immediately Crashes After Truth Is Discovered - Wonderful Engineering - September 15th, 2021
- Analyst: This Altcoin Has Best Shot at Becoming 2nd Most ... - September 13th, 2021
- This Emerging Altcoin Will Follow the Explosive Price Action of Solana, Predicts Top Crypto Strategist - The Daily Hodl - September 13th, 2021
- Bitcoin Vs Altcoins: How Are They Different? - NDTV Profit - September 13th, 2021
- Its an Altcoin Season: Solana and Others Shoot Up - Yahoo Finance - September 13th, 2021
- This Altcoin Is Skyrocketing Amid the Greater Crypto Market Correction - The Daily Hodl - September 13th, 2021
- These Five Altcoins Are All Up 100% or More in One Week Despite Broad Crypto Correction - The Daily Hodl - September 13th, 2021
- This Altcoin Could Make 1,000x According to Analyst - Somag News - September 13th, 2021
- Altcoin Evolution - Part V: The Closing Recap - NewsBTC - September 4th, 2021
- Trader Who Called Bitcoin Bottom Predicts This Blazing Altcoin Will Overtake Binance Coin - The Daily Hodl - September 4th, 2021
- Time To Be Cautious on Cardano? Analyst Michal Van De Poppe Looks at Whats Next for the Explosive Altcoin - The Daily Hodl - September 4th, 2021
- Is Cardano Correlated With This Altcoin? Analyst Justin Bennett Looks at Under-the-Radar ADA Connection - The Daily Hodl - September 4th, 2021
- This Mid-Cap Altcoin Is Surging After Announcing Massive $318,000,000 Incentive Program - The Daily Hodl - September 4th, 2021
- The altcoin Solana soars 24% in one day and ahead of the Dogecoin in capitalization - Market Research Telecast - September 4th, 2021
- Altcoins 101: Definition, Explanations, Examples - Business Insider - September 3rd, 2021
- Crypto Analyst Says Surging Altcoin Is Easy Set and Forget Play, Flips Bullish on Ethereum, A... - The Daily Hodl - September 3rd, 2021
- It's Time to Plug Into the Altcoin Arrival - InvestorPlace - September 3rd, 2021
- These 2 altcoins are leaving Bitcoin in the dust this week - The Motley Fool Australia - September 3rd, 2021
- What Are Altcoins? - Motley Fool - September 1st, 2021
- 3 reasons why Polkadot could be the next altcoin to hit a new all-time high - Cointelegraph - September 1st, 2021
- These 7 Altcoins Are About To Pop, According to Altcoin Daily - The Daily Hodl - September 1st, 2021
- Cardano Price Predictions: How High Can Altcoin Season Take the ADA Crypto? - Investorplace.com - September 1st, 2021
- XRP Price Predictions: How High Can the New Altcoin Season Take the XRP Crypto? - Investorplace.com - September 1st, 2021
- The Altcoin Evolution - Part IV: The Challenges - The Sales Pitch - NewsBTC - September 1st, 2021
- This service is declaring that it's crypto altseason again - Cointelegraph - September 1st, 2021
- Five Red-Hot Altcoins Record Gains of 138% or More Within One Week - The Daily Hodl - August 26th, 2021
- How to Turn Bitcoin Into Altcoins - The African Exponent - August 26th, 2021
- This Surging Altcoin Is Primed to Ascend Higher, Says Crypto Trader Lark Davis - The Daily Hodl - August 26th, 2021
- The next Bitcoin? Why investors are bullish on fast-rising altcoin Cardano - The Motley Fool Australia - August 26th, 2021
- Fetch.ai, Bancor and Two More Altcoins Headline Assets With Heavy Whale Accumulation: Santiment - The Daily Hodl - August 26th, 2021
- Hedera Hashgraph Price: HBAR Could be the Next Hot Altcoin - InvestingCube - August 26th, 2021
- MobilityGuru launches a new altcoin to make blockchain technology more inclusive for people with disabilities - TechBullion - August 26th, 2021
- Coinbase to Invest $500 Million in Bitcoin And Speculative Altcoins - Bitcoin Magazine - August 26th, 2021
- Selecting the best Altcoins, the Gulzar way! - Moneycontrol.com - August 20th, 2021
- Top 5 Altcoins That Will Blow Up in 2021 By CoinQuora - Investing.com - August 20th, 2021
- Here Are the Top 5 Altcoins To Watch Right Now, According to Crypto Analyst Michal van de Poppe - The Daily Hodl - August 20th, 2021
- Heres what Solanas liquidity black hole means for the altcoin market - AMBCrypto News - August 20th, 2021
- Dogecoin, Solana and One More Altcoin Could Ignite Big Rallies While Bitcoin and Ethereum Cool Off: Top Cry... - The Daily Hodl - August 20th, 2021
- Recent Cardano, Solana, DOT rallies mean this for the prospect of an altseason - AMBCrypto News - August 20th, 2021
- Should you stay away from this altcoin that rallied by 326% - AMBCrypto News - August 20th, 2021
- Why Another Wave Up For Altcoins Is Probable According To BTC Dominance - NewsBTC - August 16th, 2021
- Why A Shocking Altcoin Season Could Be On The Horizon - NewsBTC - August 14th, 2021
- Altcoins soar while Bitcoin bulls gather strength to attack $48,000 - Cointelegraph - August 14th, 2021
- These Four Ethereum Competitors Are Set To Explode This Year, According to Altcoin Daily - The Daily Hodl - August 14th, 2021
- These Five Altcoins Have Solid Potential for Q3, According to Coin Bureau - The Daily Hodl - August 14th, 2021
- Top Analyst Predicts Parabolic Rally for One Emerging Altcoin, Says Dogecoin Will Outperform Bitcoin - The Daily Hodl - August 14th, 2021
- Here Are the Top Three Altcoins To Watch This Month, According to Crypto Analyst Jason Pizzino - The Daily Hodl - August 14th, 2021
- Does Cardano (ADA) look stronger than the other altcoins? - FXStreet - August 14th, 2021
- Cardano, Litecoin and Polkadot: What traders need to know - AMBCrypto News - August 14th, 2021
- Every dog has its day: Dogecoin and Shiba Inu fetch 50% gains as altcoins rally - Cointelegraph - August 14th, 2021
- Axie Infinity Hits $62 As The Altcoin Market cap Crosses $1 Trillion - Coinfomania - August 14th, 2021
- Bitcoin, Ethereum and These Three Altcoins Have Huge Potential As Crypto Markets Heat Up: Altcoin Daily - The Daily Hodl - August 8th, 2021
- This Low-Cap Altcoin Is Up an Incredible 5,900% in Just Seven Days - The Daily Hodl - August 8th, 2021