Understanding Altcoins: Purpose, Types, Pros & Cons Explained

The term altcoin refers to all cryptocurrencies that are different from Bitcoin (BTC), and that are also different from Ether (ETH) of Ethereum, according to some sources. This is because most altcoins are forked from either BTC or ETH.

what are altcoins

Although altcoins are different from BTC and ETH, they work in similar ways and their system are modified to cover the loopholes of the bitcoin design.

Do you want to know about altcoins? Proceed on this guide to under the purpose, types of altcoins available in the cryptocurrency world.

What is an Altcoin?

Bitcoin alternatives

In simpler terms, it refers to alternative coins, an altcoin is a cryptocurrency alternative to Bitcoin. Some school of thoughts also argued that Ethereum is also in the BTC class.

Most altcoins are generated through the process known as “mining” and use technology similar to Bitcoin, such as its blockchain-based transaction system.

However, altcoins usually have unique features, such as different mining algorithms, block sizes or supply limits, and may be designed to improve some of Bitcoin's limitations or to meet specific needs of an industry or community. Some examples of altcoins are Litecoin, Ripple, among others.

Most altcoins are conceived and launched by developers who have a different vision of their tokens or cryptocurrencies, or use them differently.

What is the purpose of Altcoins?

Many altcoins, as stated earlier are forks of Bitcoin or Ethereum. A fork is a split of a blockchain that is not compatible with the original chain.

These forks can be generated for various reasons. The most common is that a group of developers disagrees with others and decides to create their own cryptocurrency.

Many altcoins are used in conjunction with their blockchain to achieve a goal. For example, Ether (if we consider it as an altcoin) is the cryptocurrency with which transactions are paid on the Ethereum platform. This digital space makes use of blockchain technology for different actions such as application development.

Other altcoins aim to raise funds for specific projects. Even, the purpose can be just to make a joke, as in the case of Dogecoin, which was conceived as a mockery of Bitcoin and used a very well-known meme on the Internet.

Primarily, altcoins, in principle, should seek to improve some of the limitations presented by the cryptocurrencies from which they were created. For example, they can employ a more efficient mining system.

Types of Altcoins

Are altcoins a good investment?

There are several types of altcoins, they exist in different forms and categories, some of which are:

Proof of Work (PoW) based altcoins

These altcoins use a mining algorithm based on proof of work, similar to Bitcoin. This system requires miners to perform complex calculations to validate transactions and add them to the blockchain. Some examples of PoW-based altcoins are Litecoin, Dogecoin, and Dash.

Proof of Stake (PoS) based altcoins

These use a mining algorithm based on proof of stake, where miners receive rewards proportional to their proportion of coins in possession. This makes it unnecessary to use large amounts of energy as in PoW. Some examples of PoS-based altcoins are Peercoin, NXT, and Blackcoin.

Stablecoins

Over the years, cryptocurrency is notorious for marked volatility of the trading market, therefore to reduce overall volatility, stablecoins were developed. Stablecoins peg their value to a basket of goods such as fiat currencies, commodities, precious metals, oil, etc.

The basket of goods is meant to retain the value of the holder's portfolio in case the cryptocurrency fails. Some of these coins include the Tether's USDT and the USD Coin (USDC)

Privacy altcoins

These altcoins seek to ensure the privacy of their users through techniques such as transaction anonymity, coin mixing, or the use of change addresses. Some examples of privacy altcoins are Monero, Zcash, and Dash.

Payment token altcoins

As the name implies, these altcoins are designed to be used as currency. They are used to exchange value between parties. Any cryptocurrency used for payment falls in this category.

Smart contract altcoins

These altcoins allow users to create and execute automated contracts on the blockchain, like smart contracts, which are programs that automatically run when certain conditions are met. Some examples of smart contract altcoins are EOS and TRON. In this regard, it is important to remember that Ethereum is the platform that stands out in the crypto world for the use of smart contracts.

Infinite supply altcoins

Some altcoins do not have a supply limit, that is, there is no maximum amount of coins that can be mined. An example of these altcoins is Ripple.

Advantages and disadvantages of Altcoins

Some of the advantages of altcoins are:

  • Innovation: Many altcoins seek to improve some of Bitcoin's limitations or add unique features, such as smart contracts or transaction privacy. This can lead to greater potential for use and adoption.
  • Diversification: Investing in altcoins can be a way to diversify your portfolio and reduce the risk of relying too much on Bitcoin.
  • Profit opportunities: As altcoins have a lower value and smaller market capitalization than Bitcoin, they may have greater short-term profit opportunities.

However, the following drawbacks may occur:

  • Higher risk: As altcoins are less stable and less known than Bitcoin, they may be more prone to price fluctuations and to fall in value.
  • Greater uncertainty: Many altcoins are developing projects and their future is uncertain. This can make it more difficult to predict their long-term performance.
  • Lack of regulation: Many altcoins are not regulated, and this can increase the risk of fraud and scams.
  • Lack of value stability: Unlike Bitcoin, altcoins are more vulnerable to speculation, which can generate large fluctuations in their value.

Taking into account these disadvantages, it is important to emphasize that it is important to research the characteristics of an altcoin before investing in it.

For example, who are part of the development team, the project roadmap (where the objectives are defined) or what use can be given to this cryptocurrency. Dogecoin has very limited uses compared to other cryptocurrencies. Thus, although it can be used to tip other users on the web, we must ask ourselves what is its value beyond the popularity based on a meme.

In contrast, Litecoin was conceived from Bitcoin to improve its mining system. Thus, transactions are confirmed faster and that is where its value lies.

Main cryptocurrencies by market capitalization

As of November 14, 2023, the top 10 cryptocurrencies by market capitalization are:

S/NCryptocurrencyCapitalization in millions of dollars
1BitcoinBTC$694.692
2EthereumETH$238.909
3Tether USDtUSDT$87.347
4BNBBNB$37.091
5XRPXRP$33.722
6SolanaSOL$24.255
7USDCUSDC$23.866
8CardanoADA$12.685
9DogecoinDOGE$10.321
10TRONTRX$9.098

More about crypto

FAQs about Altcoins

Is BTC an altcoin?

Altcoins are generally defined as all cryptocurrencies other than Bitcoin (BTC). However, some people consider altcoins to be all cryptocurrencies other than Bitcoin and Ethereum (ETH) because most cryptocurrencies are forked from one of the two.

What is the best Altcoin to invest in?

The best altcoin to invest in depends on your financial situation, goals, risk tolerance, and the market's circumstances. It's best to speak to a financial advisor to help you decide which one is best for you.

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