What Is an altcoin?
In the crypto world, altcoin stands for alternative coins and is simply a term used for any cryptocurrency other than bitcoin. So, that makes Ethereum, the cryptocurrency with the second largest market cap an altcoin as much as the 3,000 ranked cryptocurrency.
Altcoins are not required to be different from bitcoin as each altcoin will have its preferred consensus mechanisms, such as proof-of-stake or proof-of-work. For example, bitcoin is the oldest cryptocurrency and uses the original validator method of proof-of-work, which is used by many altcoins today. Proof of work is resource-intensive and time-consuming, pushing more investors towards proof of stake coins, allowing them to contribute to the blockchain.
However, altcoins do try to differentiate themselves from bitcoin through new technology like smart contracts, PoS, or different tokenomics. Some aspects between altcoins and bitcoin will always stay the same, such as peer-to-peer systems, which are embedded into the philosophy of cryptocurrency.
Relationship between Bitcoin and Altcoins
Since the beginning of cryptocurrency, with bitcoin as the spearhead, the market has generally revolved around the price of bitcoin, with altcoins following its pumps and dips. Altcoins often come from bitcoin, tending to follow bitcoins' overall trends. Some of this matching can be put down to investors using bitcoin as a major market indicator, but some altcoin graphs are similar to bitcoins that it becomes hard to ignore.
However, as bitcoin dominance steadily decreases and more of the crypto market cap is eaten up by bitcoin, we start to see more independently priced altcoins, not exactly following bitcoins trajectory. We can put this phenomenon down to two major factors:
- Investors are slowly plowing more capital into new projects with huge potential. Often large ecosystems such as DOT.
- The overall amount of cryptocurrencies being created is ever increasing.
Are All Altcoins Made Equal?
Simply put, no. The term altcoin encompasses a massive group of coins, all providing different utility to the crypto sphere, the term is used to differentiate them from bitcoin.
Cryptocurrency is still a very new asset class, so each cryptocurrency project has its own coin which investors buy into and often use inside of the ecosystem. For example, HIVE is used to navigate the platform. Later down the line, we should expect major altcoins to take over as the main coin used over multiple projects, as there is simply too much volatility for so many different altcoins to be viably used in the future.
The Different Types of Altcoins
Remember: Altcoins can be part of several categories at once.
Stable Coins
Stablecoins have come into existence to try and counteract the extreme volatility that the crypto market faces. Investors can hold some value in stable cryptocurrency, without having to convert it into fiat, while waiting for the next investment opportunity, or the perfect entry.
Examples of altcoins would be USDT (Tethered to the US dollar, or USDC). Stablecoins are pegged to the value of a fiat currency or other more stable commodities such as gold to help hold their value.
Also, stable coins help investors get money into exchanges, without having to instantly buy a more traditional cryptocurrency.
Utility Tokens
Utility tokens act as a way of payment for services or to participate in an ecosystem. Each ecosystem will usually have its own unique utility token that is not mineable.
A well-known example of a utility token is Filecoin, used to provide storage to other blockchains. The most famous example is Ethereum.
Meme Coins
A type of stable coin fresh in the mind of most crypto investors, meme coins are described by the name, memes. Examples would be dodge coin or the recent speculation on SHIB, based on Elon Musk’s dog.
Typical attributes of a meme coin include a rapid surge in price over a short period of time, lack of utility, and often shilled and advertised by crypto influencers or celebrities on platforms such as Twitter.
Meme coins have become rife with scams once people saw the massive potential that comes from playing with investors' FOMO.
Security Tokens
Security tokens are the closest cryptocurrency comes to traditional stocks and shares. Those buying security tokens will have ‘shares’ in a company that participates or does business on a blockchain.
Security tokens help to validate ownership of a certain asset, providing greater security than before to owners and their assets. However, when a user owns their own ‘keys’ they are at risk of permanently losing access to the asset, as no centralized body can help them regain it.
Mining-Based vs Pre-mined
Altcoins which are mining based use PoW (Proof of Work) as a way to generate new coins, the method that bitcoin uses. As mentioned before this is resource-intensive and many altcoins are moving over to a PoS model, allowing users to participate in the blockchain themselves.
The alternative is to have a project with pre-mined coins, which requires initial capital to get off the ground. Coins are usually distributed during an ICO, or initial coin offering, where investors pay Bitcoin, Ethereum, or fiat for a pre-arranged amount of the essentially worthless coin. ICOs are naturally risky as there is no guarantee these coins will ever be worth anything, having never been traded before.
XPR is a massive example of a successful pre-mined coin, firmly sitting in the top 10 coins by market cap.
Do Any Altcoins Stack Up to Bitcoin
Currently, bitcoin has a market dominance hovering around 40%, with Ethereum second just under 20%. For an altcoin to ever flip bitcoin, we would need to see an already prominent coin such as Ethereum really explode in the coming years.
Bitcoin was the first cryptocurrency and will always be in the hearts of crypto investors as the unbreakable, decentralized, permissionless blockchain, an example for all future altcoins to follow.
Will Any Altcoin Ever Flip Bitcoin?
Many experts suggest that Ethereum is capable of flipping bitcoin, but will rely on a successful Ethereum 2.0 release, executing the promises that were made about faster transactions and cheaper transaction fees (Gas Fees).
However, to successfully flip Bitcoin or even Ethereum, the coin must defeat the problem of scalability, making it accessible to billions, such as Cardano.
Bitcoin has had an early bird advantage over all other cryptocurrencies, so only time will tell if an altcoin topples the Satoshi Tower.
Why Altcoins Are Important
Obviously, Bitcoin does not provide a solution to every problem trying to be solved by cryptocurrencies, so Altcoins are a necessity to solve the shortcomings of Bitcoin and provide actual utility across thousands of different sectors and markets. A task that no singular coin could finish.
Altcoins are absolutely essential for this stage in the cryptocurrency ecosystem, providing investors with a massive choice of projects to invest in and allowing different projects to show off their potential utility and use-cases while we grow in the adoption phase.
Time will slowly weed out useless altcoins as cryptocurrency becomes more heavily adopted and the strongest altcoins will emerge and most likely become staples as utility tokens across many ecosystems.
The Dangers of Altcoins
Altcoins encompass almost all cryptocurrencies in the market, meaning as much as they are a necessity, many come with their flaws, or are suffering from a volatile market. Here are the main dangers presented by altcoin investing and what you should look out for:
- The cryptocurrency market is driven around sentiment:
Market sentiment is arguably the most powerful indicator in the cryptocurrency markets as massive bearish or bullish swings are common. Volatile cryptocurrencies are the most dangerous to hold during a bearish sentiment, as there are zero guarantees they will even recover 50% of their original price, especially if real-world utility is low, such as meme coins.
- The Crypto Market Does Not Follow Economic Principles
Just because an altcoin has utility, does not mean the price will reflect it. We are still too early for mass adoption, meaning most utility speak is around the potential utility, making the cryptocurrency vulnerable to a massive drop in value.
- Low Market-cap altcoins are even more volatile
Many altcoins operate on extremely low market caps, possibly trapping an investor's liquidity forever as trades are rare.
- Anyone can make an altcoin
Do not get fooled by the term altcoin, any coin that is not Bitcoin is an altcoin, even meme coins made by anyone with absolutely zero value.
What Does the Future Hold for Altcoins
The honest truth that most altcoin investors do not want to hear is: that most, almost all altcoins, will not survive the next ten years. To see this as evidence, we only must look back a few years at the top 100 cryptocurrencies by market cap and see which ones are still there. Many projects have simply vanished out of existence, which will happen for our current set of altcoins now, only the strongest will survive.
Most analysts predict a consolidation around the top ten, fifty, or whatever the optimal amount of strong altcoins are needed for their utility and real-world use cases.
Conclusion
Altcoins will always be around and only time will tell which ones survive. The most practical advice one can give on altcoins is to simply look for projects which you see surviving past the adoption phase, based purely on speculation, and assess the future utility that is possible, and what real-world problems they are trying to solve.
