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A Beginner Guide to Everything Blockchain, Crypto and NFT Related

What are Altcoins?

We will be talking all about altcoins in this article today as it is a very popular topic online. We aim to make this article very clear and simple for you to understand so you will know how to navigate your way in the crypto space.

First up, what are altcoins?

Altcoins are any other cryptocurrencies besides bitcoin.
However, you are not here just for a 1 liner. So stick to the end as we cover more in-depth information about altcoins.
Altcoin is the combination of the words alternate and cryptocurrency coin. They are launched following the success of Bitcoin, trying to improve on existing problems Bitcoin has.

Ethereum is the most popular altcoin and there are over 17 thousand types of cryptocurrencies according to Coin Market Cap Bitcoin makes up 40% of the total crypto market cap, Ethereum makes up around 25% while the other altcoins make up the rest of the market.

How do Altcoins work?

Since altcoins make up 35% of the market, everyone wanting to learn about crypto should understand how they work.

Like Bitcoins, 99% of altcoins use blockchain technology. Blockchain is a distributed ledger technology, DLT for short. This DLT can work without a central authority. Blockchain uses a distributed network of users to store and update the digital ledger on users’ computing software.

New transactions are verified and recorded on the blockchain as blocks of transactions. Transactions can not be reversed after they’re broadcast to a blockchain.

Though many altcoins are built based on the example of Bitcoin, some developers provide unique features to set their coins apart from Bitcoin and other cryptocurrencies.

The Cardano blockchain, for example, uses the proof of stake consensus mechanism as compared to Proof of work consensus mechanism which is used by Bitcoin. This means Cardano can provide fast and inexpensive transaction processing.

If you are confused about the consensus mechanisms, you can check out our videos where we explain both Proof of Work and Proof of Stake.

Before we proceed on, altcoins do not mean just coins, altcoins can also mean tokens so do keep that in mind. Also, if you want to know the difference between a coin and a token. Please read our article on the Difference Between Crypto Coins and Tokens.

You should know by now that new coins are developed with the purpose of trying to be better than bitcoin or the next better coin. They hope to be more scalable, quicker, more secure and more decentralized.

As such there is a whole ecosystem of altcoins and we can best group them into a few main categories. It is good to note that some coins can fall into more than 1 category.

  1. Native cryptocurrencies:
    The first on our list is the native cryptocurrencies. These coins are created to run on their own blockchain. A good example is bitcoin, BTC. which runs on its bitcoin blockchain, Ether, ETH by the ethereum blockchain and binance coin BNB on the Binance Smart chain.
  2. Stablecoin
    This type of crypto is pegged to less volatile assets like a fiat currency or precious metals. For example, the most popular stablecoin is Tether, USDT. And Tether is pegged to the US dollar. Other popular ones are MakerDao’s DAI and USD coin (USDC). Stablecoins are very useful as they allow users to earn, borrow or trade in the DeFi space without the need of an intermediary like a bank.
  3. Tokens.
    These tokens do not have their own blockchain and they are used within a platform for payment of services. These tokens are built on top of an existing blockchain like the Ethereum blockchain. A good way to think of these tokens is like the old-school arcade. You exchange your US dollar for tokens to play video games in the arcade.

    1. Governance Tokens. As the name suggests, governance tokens give the holders voting rights to developing the direction of the project. There is no central authority to dictate the future of the project. An example of this token is Uni, the token of Uniswap exchange.
    2. Utility tokens. These tokens are used within the network for services like paying for network fees, buying NFTs, trading and minting. For example, Kucoin is used to pay for trading fees on the Kucoin exchange.
    3. Security Tokens. These tokens are digital contracts representing fractions of a real asset with value, like real estate or a business, similar to our regular financial security in the centralized financial ecosystem. As transactions are immutable, which means, they cannot be removed or altered. Security tokens are a great way to show ownership in something.
  4. Meme coins.
    These coins are hyped cryptocurrencies that are popular for only a short while. Their value comes from the community buying them. There is no utility in these coins other than Elon or social media influencers shilling these coins. Investing in these coins is all about the timing as they hardly stand the test of time. The famous meme coin is the Dogecoin.
  5. Forks.
    As we are humans, we will always have different opinions and forks happen when a group of people decides to make a significant change to the protocol of the original blockchain.

A new chain will emerge as a result of a fork and this new chain will start recording transactions based on the new rules agreed upon by the community.

A good example is Bitcoin cash, a fork of Bitcoin. Bitcoin cash was created when a large enough number of Bitcoin stakeholders agree that a different version of Bitcoin is needed for everyday payments.

A fork can also occur on an existing fork if there is a significant change in the protocol of the original fork. For example, Dogecoin is the fork of Luckycoin, while Luckycoin itself was a fork of Litecoin, which was the fork of Bitcoin.

Pros and Cons of Altcoins.

There are a few advantages to altcoins and they are.
firstly. Altcoins are built to improve the existing problems of bitcoin.
second. They offer high potential rewards if you are early in the game
finally, There is a large collection of altcoins, each with their own unique purposes and competitive advantages. For example, some token holders can help in governing the future of the crypto project.

The cons of altcoins are that the market share is not as big as bitcoin, given bitcoin is the 1st cryptocurrency.
There are a lot of risks like volatility. These coins can be easily manipulated by insignificant news.
There are also a lot of scams surrounding altcoins. Since blockchain is public, any scammer can easily create a new cryptocurrency just by copying the code of other existing ones.

Are you going to jump on the altcoin bandwagon?

Here are a few factors to consider before you buy altcoins.
Can the altcoin reasonably improve upon Bitcoin?
Does the coin or token have real-world applications?
If it’s a cryptocurrency from a fork, why was it created? Do you agree with that decision?

As with all investments, altcoins carry risks. Though altcoins are worth checking out, make sure you research before investing in them.