What is an Altcoin?

Altcoins are generally defined as all cryptocurrencies other than Bitcoin (Bitcoin). 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. Some altcoins use different consensus mechanisms to validate transactions, open new blocks, or attempt to distinguish themselves from Bitcoin and Ethereum by providing new or additional features or purposes.

Most altcoins are designed and released by developers with different visions or uses for their tokens or cryptocurrencies. Learn more about altcoins and what makes them different from Bitcoin.

Key points

• The term altcoin refers to all cryptocurrencies other than Bitcoin (and, for some people, Ethereum).
• There are tens of thousands of altcoins on the market.
• Altcoins come in different types based on the purpose they were designed for.
• The future of altcoins is impossible to predict, but if the blockchain they were designed for continues to be used and developed, altcoins will continue to exist.

Investopedia / Michela Buttignol

Understanding Altcoins

“Altcoin” is a combination of the two words “alternative” and “coin”. The term generally includes all cryptocurrencies and tokens that are not Bitcoin. Altcoins belong to the blockchains for which they were explicitly designed. Many are forks, or the creation of a blockchain from another chain, from Bitcoin and Ethereum. These forks generally have more than one reason for occurring. Most of the time, one group of developers disagrees with others and goes off to create their own coin.

Many altcoins are used within their respective blockchains to make something, such as ether, which is used in Ethereum to pay transaction fees. Some developers have created forks of Bitcoin and resurfaced as an attempt to compete with it as a payment method, like the fork that created Bitcoin Cash.

Others fork or are developed from scratch, attempting to create a blockchain and token that appeals to a specific industry or group, such as Ripple’s attempt to use the XRP Ledger and XRP to appeal to the banking industry with a faster payment system.

Dogemonetathe popular memetic currency, was apparently created as some kind of joke. It was forked from Litecoinwhich in turn was forked from Bitcoin in 2011. Whatever the intent behind its creation, it was still designed to be a digital payment method.

Altcoins attempt to improve on the perceived limitations of whatever cryptocurrency and blockchain they derive from or compete with. The first altcoin was Litecoin, forked from the Bitcoin blockchain in 2011. Litecoin uses a different proof-of-work (PoW) consensus mechanism than Bitcoin, called Scrypt (pronounced ess-crypt), which requires less power and is faster than that of Bitcoin. SHA-256 PoW consensus mechanism.

Ether it is another altcoin. However, it has not separated from Bitcoin. It was designed by Vitalik Buterin, Dr. Gavin Wood and a few others to be used in Ethereum, the world’s largest blockchain-based virtual machine. Ether (ETH) is used to pay network participants for the transaction validation work performed by their machines. It is also used as collateral (called staking) for the privilege of becoming a block validator and proposer.

Types of Altcoins

Altcoins come in various flavors and categories. Here is a quick summary of some types of altcoins and what they are intended to be used for.

It is possible for an altcoin to fall into more than one category, such as TerraUSD, which was a stablecoin and a utility token.

Payment token

As the name suggests, payment tokens are designed to be used as currency, to exchange value between parties. Bitcoin is the first example of a payment token.

Stablecoins

The trading and use of cryptocurrencies have been marked by volatility since its launch. Stablecoins aim to reduce this overall volatility by pegging value to another asset. This is achieved by holding assets in reserve. Some of the assets held by stablecoin creators are fiat currencies, precious metals or investment goods. Price fluctuations for stablecoins are not expected to exceed a very narrow range.

Noteworthy stablecoins include Tether USDTMakerDAO’s DAI and the Currency in USD (USDC). In March 2021, payment processing giant Visa Inc. (V) announced that it will begin settling some transactions on its network in USDC on Ethereum blockchainwith the intention of introducing further settlement solutions.

Security token

Security token are tokens that represent fundraising efforts or ownership. They could also represent tokenized assets. Tokenization is the transfer of value from an asset to a token. Any asset can be tokenized, such as real estate or stocks. For this to work, the asset must be protected and held transparently. Otherwise the tokens would have no value because they would represent nothing. Security tokens are regulated by the Securities and Exchange Commission because they are designed to act as securities.

In 2021, Bitcoin wallet company Exodus successfully completed a Reg A+ token offering qualified by the Securities and Exchange Commission, enabling the conversion of $75 million of common stock into tokens on the Algorand blockchain. This landmark event was the first digital asset stock to offer equity in a US-based issuer.

Utility tokens

Utility tokens are used to provide services within a network. For example, they could be used to purchase services, pay network fees or redeem rewards. Filecoin, used to purchase storage space on a network and protect information, is an example of a utility token.

Ether (ETH) is also a utility token. It is designed to be used in Ethereum Blockchain and virtual machine to pay transactions. The former stablecoin USTerra used utility tokens to attempt to maintain its peg to the dollar, which it lost on May 11, 2022, by minting and burning two utility tokens to create downward or upward pressure on its price.

Utility tokens can be purchased on exchanges and held, but they are meant to be used in the blockchain network to keep it functioning.

Meme coins

As the name suggests, meme coins are inspired by a joke or silly interpretation of other well-known cryptocurrencies. They typically gain popularity quickly, often advertised online by major influencers or investors attempting to capitalize on short-term gains.

Many are referring to the sharp surge in these types of altcoins in April and May 2021 as “meme coin season,” with hundreds of these cryptocurrencies posting huge percentage gains based on sheer speculation.

An initial coin offering (ICO) is the equivalent of a cryptocurrency offering initial public offering (IPO). A company looking to raise money to create a new coin, app, or service launches an ICO to raise money.

Governance tokens

Governance tokens allow holders certain rights within a blockchain, such as voting for changes to protocols or having a say in the decisions of a decentralized autonomous organization (DAO). Since they are generally native to a private blockchain and used for blockchain purposes, they are utility tokens but have been accepted as a separate type due to their purpose.

Pros and cons of Altcoins

Against

• Lower popularity and lower market capitalization

• Less liquid than Bitcoin

• Difficult to determine use cases

• Many altcoins are scams or have lost the interest of developers and the community

The professionals explained

• Altcoins are “enhanced versions” of the cryptocurrency they are derived from because they aim to address perceived shortcomings.
• Altcoins with greater utility have a better chance of surviving because they have uses, like Ethereum’s ether.
• Investors can choose from a wide variety of altcoins that perform different functions in the cryptocurrency economy.

Cons explained

• Altcoins have a smaller investment market than Bitcoin. Since 2016, Bitcoin has generally remained above 40% of the global cryptocurrency market.
• The altcoin market is characterized by fewer investors and less activity, resulting in low liquidity.
• It is not always easy to distinguish between different altcoins and their use cases, making investment decisions even more complicated and confusing.
• Several “dead” altcoins have ended up sinking investor dollars.

The future of Altcoins

Discussions about the future of altcoins and cryptocurrencies have a precedent in the circumstances that led to the issuance of a federal dollar in the 19th century. Various forms of local currencies circulated in the United States. Each had unique features and was supported by a different tool.

Local banks also issued currency, sometimes backed by fictitious reserves. This diversity of currencies and financial instruments parallels the current situation in altcoin markets. There are thousands of altcoins available on the markets today, each claiming to serve a different purpose and market.

The current situation in the altcoin market indicates that it is unlikely to consolidate into a single cryptocurrency. However, it is likely that most of the thousands of altcoins listed in cryptocurrency markets will not survive. The altcoin market will likely coalesce around a few altcoins, those with strong utility, use cases, and a solid blockchain purpose, which will dominate the markets.

If you are looking to diversify into the cryptocurrency market, altcoins can be less expensive than Bitcoin. However, the cryptocurrency market, regardless of the type of coin, is young and volatile. Cryptocurrency is still finding its role in the global economy, so it is best to approach all cryptocurrencies with caution.

What is considered an Altcoin?

An altcoin is any cryptocurrency other than Bitcoin (and, for some people, Ethereum).

What are the 5 best Altcoins?

By market capitalization, the top five altcoins are ETH, USDT, BNB, SOL, and USDC.

Which Altcoin Will Explode in 2024?

No one knows which altcoin will take off in 2024. There may be no change in the market, or a new one could be introduced that would attract a flurry of investors.

The bottom line

Altcoins are any cryptocurrency that is not Bitcoin (or Ethereum). There are thousands of altcoins on the market, so it’s hard to say which ones might be legitimate and which ones aren’t. It’s best to read all the documentation behind whatever cryptocurrency piques your interest.

If there is a purpose for the blockchain and token, it might be worth keeping an eye on, otherwise consider other coins or investments. If you’re unsure, talk to a financial advisor who is familiar with cryptocurrencies to help you decide if they’re right for your portfolio.

The comments, opinions and analyzes expressed on Investopedia are for informational purposes only. Read ours warranty and exclusion of liability for more information.

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