Memecoins
Differences between Bitcoin, altcoins and meme coins explained
But before considering invest in cryptocurrencyIt is important to understand the difference between meme coins, altcoins, and bitcoin.
Bitcoin is the original cryptocurrency and largest by market capitalization at over $1.3 trillion, according to CoinMarketCap. It was created by Satoshi Nakamoto, a person or group of people whose identity remains a mystery. Nakamoto envisioned bitcoin as an alternative version of virtual money that would not rely on a government or financial institution, such as a bank, to function and facilitate payments.
Like many cryptocurrencies, bitcoin is powered by blockchain technologywhich functions as a decentralized digital ledger that tracks transactions made within the network.
Bitcoin also has a built-in limited supply of 21 million coins. This means that no new bitcoins will be issued after 21 million coins have been mined. The scarcity is intentional; the supply limit ensures that bitcoin remains a scarce resource so that, theoretically, as demand increases and supply remains the same, the value of bitcoin also increases.
Altcoins, also known as alternative coins, refer to any cryptocurrency that is not bitcoin. While some of these digital tokens may function similarly to bitcoin, they are built on different blockchain networks.
There are thousands of altcoins, which are typically created with a specific purpose in mind. Take stablecoins, For example. A stablecoin is a type of altcoin that pegs its value to another asset, such as gold or the US dollar, with the goal of stabilizing its price.
Outside of stablecoins, many altcoins derive their value from market demand and trader preferences. However, that can make them particularly vulnerable to rapid and unexpected price changes, says James Royal, principal investment and wealth management analyst at Bankrate.
“If demand dries up, you’ll just be left with worthless digital assets and a good story,” he tells CNBC Make It.
Additionally, with so many altcoins available, it is important to be on the lookout for potential scams. One of the most common types of cryptocurrency investment scams encourages you to purchase a large amount of a certain coin, then transfer it to the scammer’s wallet.
“Before investing in cryptocurrencies, search online for the name of the company or person and the name of the cryptocurrency, as well as words like ‘review,’ ‘scam,’ or ‘complaint,’” the Federal Trade Commission it says on its website.
Under the umbrella of altcoins are meme coins. These virtual tokens are usually created for fun and are named after internet memes or pop culture references. And while every meme coin is an altcoin, every altcoin is not necessarily a meme coin.
While all cryptocurrencies carry risks, meme coins can be particularly dangerous for traders, Royal says.
“Meme coins are among the riskiest cryptocurrencies because they seem to emerge out of nowhere and information about them can be scarce,” he says. “They are expected to rise and fall as public sentiment shifts from one side to the other. Meme coins could capture the public’s fancy today and disappear tomorrow.”
Aside from stablecoins, most cryptocurrencies are not backed by an underlying asset such as gold, other commodities, or fiat currencies. Many cryptocurrencies are only worth what the next trader is willing to pay for them, which is why they are considered highly volatile and subject to unpredictable price swings.
“While established cryptocurrencies like bitcoin and ethereum may now have trader sentiment in their favor, they are ultimately still driven only by sentiment,” says Royal. “If traders decide that those coins are no longer worth it, there will no longer be any fundamental business supporting the price of the coins, as there is with stocks.”
Ultimately, Royal says to “avoid cryptocurrency altogether.” But if you are interested in “trying your luck” in the cryptocurrency market, he tries to bitcoin exchange traded fundhe says.
An ETF is a type of investment fund that aims to mimic and track the price movement of an asset or basket of assets. You would purchase a bitcoin ETF through your brokerage account instead of purchasing and storing bitcoin yourself on a cryptocurrency exchange or on the bitcoin blockchain network.
“The annual fees are reasonable, cheaper in most cases than actually buying the cryptocurrency yourself, and you’re buying a coin that has interest from institutional investors, so demand could remain strong,” Royal says. “You will also avoid the security, fraud and theft problems that have plagued cryptocurrency exchanges in recent years by paying lower fees.”
Do you want to be a confident and successful communicator? Take CNBC’s new online course Become an effective communicator: Master public speaking. We’ll teach you how to speak clearly and confidently, calm your nerves, what to say and what not to say, and body language techniques to make a great first impression. Pre-register today and use code EARLYBIRD for an introductory 30% discount through July 10, 2024.
More, Sign up for the CNBC Make It’s newsletter to get advice and tips for success in work, money and life.