The market for altcoins is nascent. It is an unequal pairing. The number of altcoins listed in cryptocurrency markets has rapidly multiplied in the past decade and attracted hordes of retail investors, feverishly betting on their price movements to amass short-term profits. But such investors do not have the capital necessary to generate sufficient market liquidity. Thin markets and an absence of regulation produces quicksilver volatility in altcoin valuations.
Consider the case of Ethereum's ether, which reached its prior peak of $1,299.95 on Jan. 12, 2018. Less than a month later, it was down to $597.36, and by the year's end, ether's price had crashed to $89.52. Yet, the altcoin reached record prices of above $4,000 two years later.1 Timed trades can provide a wealth of profits for traders.
But there is a problem. Cryptocurrency markets are not yet mature. Despite several attempts, there are no defined investment criteria or metrics to evaluate cryptocurrencies. For the most part, the altcoin market is driven by speculation. Several cases of dead cryptocurrencies, those that failed to gain enough traction or simply vanished after collecting investors' money, exist.
Therefore, the altcoin market is for investors willing to take on the outsized risk of operating in an unregulated and emerging market that is prone to volatility. They should also be able to handle stress resulting from wild price swings. For such investors, cryptocurrency markets can offer great returns.
Pros:
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1) Altcoins are "better versions" of Bitcoin because they aim to plug the cryptocurrency's shortcomings.
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2) Altcoins like stablecoins can potentially fulfill Bitcoin's original promise of a medium for daily transactions.
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3) Certain altcoins, such as Ethereum's ether and Ripple's XRP, have already gained traction among mainstream institutions, resulting in high valuations.
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4)Investors can choose from a wide variety of altcoins that perform different functions in the crypto economy.
Cons:
1) Altcoins have a smaller investment market as compared to Bitcoin. As of October 2021, Bitcoin has a 42.5% share of the overall cryptocurrency market.
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2) The absence of regulation and defined criteria for investment means that the altcoin market is characterized by fewer investors and thin liquidity. As a result, their prices are more volatile as compared to Bitcoin.
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3) It is not always easy to distinguish between different altcoins and their respective use cases, making investing decisions even more difficult and confusing.
- 4) There are several "dead" altcoins that ended up sinking investor dollars
Early Examples of Altcoins
The earliest notable altcoin, Namecoin, was based on the Bitcoin code and used the same proof-of-work algorithm. Like Bitcoin, Namecoin is limited to 21 million coins. Introduced in April 2011, Namecoin primarily diverged from Bitcoin by making user domains less visible. Namecoin allowed users to register and mine using their own .bit domains, which was intended to increase anonymity and censorship resistance.
Introduced in October 2011, Litecoin was branded as the "silver to Bitcoin's gold." While fundamentally similar in code and functionality to Bitcoin, Litecoin differs from Bitcoin in several essential ways. It allows mining transactions to be approved more frequently. It also provides for a total of 84 million coins to be created—exactly four times Bitcoin's 21 million coin limit. Some think Litecoin could be a better investment than bitcoin itself.
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