Altcoins are cryptocurrencies other than Bitcoin (BTCUSD). They share characteristics with Bitcoin but are also different in other ways. For example, some altcoins use a different consensus mechanism to produce blocks or validate transactions. Or they distinguish themselves from Bitcoin by providing new or additional capabilities, such as smart contracts or low price volatility.
As of October 2021, there are over 12,000 cryptocurrencies. According to CoinMarketCap, altcoins accounted for nearly 60% of the total cryptocurrency market in October 2021.1 Because they are derived from Bitcoin, altcoin price movements tend to mimic Bitcoin's trajectory. However, analysts say the maturity of cryptocurrency investing ecosystems and the development of new markets for these coins will make price movements for altcoins independent of Bitcoin's trading signals.
key points:
- The term "altcoins" refers to all cryptocurrencies other than Bitcoin.
- As of October 2021, altcoins accounted for nearly 60% of the total cryptocurrency market, with more than 12,000 cryptocurrencies and counting.
- Some of the main types of altcoins include mining-based cryptocurrencies, stablecoins, security tokens, and utility tokens.
- Altcoins might include only mining-based cryptocurrencies other than Bitcoin in the future as usage continues to develop with technology.
- Ethereum and Binance Coin were the largest altcoins by market capitalization as of October 2021.
Understanding Altcoins
"Altcoin" is a combination of the two words "alternative" and "coin" and includes all alternatives to Bitcoin. The basic framework for Bitcoin and altcoins is similar. Thus, they share code and function as peer-to-peer systems or as a giant computer capable of processing large amounts of data and transactions at the same time. In some instances, altcoins also aspire to become the next Bitcoin by becoming an inexpensive method for digital transactions.
But there are also several differences between Bitcoin and altcoins. Bitcoin is among the first iterations of a cryptocurrency, and its philosophy and design set the benchmark for the development of other coins. However, its implementation has several shortcomings. For example, Proof-of-Work (PoW)—the consensus mechanism used to create blocks—is energy-intensive and time-consuming. Bitcoin's smart contract capabilities are also limited.
Altcoins improve upon Bitcoin's perceived limitations to establish a competitive advantage. Several altcoins use the Proof-of-Stake (PoS) consensus method to minimize energy consumption and the time required to create blocks and validate new transactions.
Another example is that of ether (ETHUSD), the world's second-biggest cryptocurrency by market capitalization, which is used as gas (or payment for transaction costs) in smart contracts on Ethereum. Altcoins also address traditional critiques against Bitcoin. For example, stablecoins do not exhibit Bitcoin's price volatility, making them ideal vehicles for daily transactions.
By distinguishing themselves from Bitcoin in this manner, altcoins have created a market for themselves. In turn, this has attracted investors who see potential in them as alternatives to Bitcoin. The investors expect to profit as altcoins garner more traction and users and appreciate in price.
Following its introduction in 2009, Bitcoin became the first widely adopted application of Proof of Work (PoW). PoW forms the basis of many other cryptocurrencies as well, allowing for secure, decentralized consensus.
The Bottom Line
Altcoins are good alternatives to cryptocurrency market investors interested in diversifying their portfolio. While some, like Ethereum's ether, are recognizable by name, a majority of the almost 9,000 altcoins are still to make a mark. Altcoins are representative of the potential for cryptocurrencies to reshape modern finance. But investors should do their research before investing in them. The risks associated with altcoins are similar or, in some cases, greater than those for Bitcoin investing.
You must be logged in to post a comment.