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.
Bitcoin established its reputation as the best cryptocurrency long before any other types of coins were minted on the blockchain. Other coins, known as “altcoins,” had to wait in line.
Thousands of new altcoins, or alternative coins, have been created and added to the cryptocurrency ecosystem since then. Altcoin is a combination of two words “alternative” and “coin” to form altcoin. The term “Altcoin” refers to any cryptocurrency that is not Bitcoin.
What Is Altcoin?
Altcoin is a combination of two words: alt and coin, where alt means ‘alternative’ and coin means ‘cryptocurrency.’They denote a type of cryptocurrency that is an alternative to the digital Bitcoin currency.
Following the success of Bitcoin, many other peer-to-peer digital currencies have emerged in an attempt to replicate that success such as Ethereum, XRP, Tether, Cardano, Polkadot, Stellar, USD, Coin, Dogecoin, Uniswap, and so on.
About Altcoins
“Altcoin” is a combination of the two words “alternative” and “coin.” It is generally used to include all cryptocurrencies and tokens that are not Bitcoin. Altcoins belong to the blockchains they were explicitly designed for. Many are forks—a splitting of a blockchain that is not compatible with the original chain—from Bitcoin and Ethereum. These forks generally have more than one reason for occurring. Most of the time, a group of developers disagree with others and leave to make their own coin.
Many altcoins are used within their respective blockchains to accomplish something, such as ether, which is used in Ethereum to pay transaction fees. Some developers have created forks of Bitcoin and re-emerged as an attempt to compete with Bitcoin as a payment method, such as Bitcoin Cash.
Others fork and advertise themselves as a way to raise funds for specific projects. For example, the token Bananacoin forked from Ethereum and emerged in 2017 as a way to raise funds for a banana plantation in Laos that claimed to grow organic bananas.
Dogecoin, the popular meme coin, was apparently created as somewhat of a joke. It forked from Litecoin, which itself 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 upon the perceived limitations of whichever cryptocurrency and blockchain they are forked from or competing 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 es-crypt), which is less energy-intensive and quicker than Bitcoin’s SHA-256 PoW consensus mechanism.
Ether is another altcoin. However, it did not fork from Bitcoin. It was designed by Vitalik Buterin, Dr. Gavin Wood, and a few others to support Ethereum, the world’s largest blockchain-based scalable virtual machine. Ether (ETH) is used to pay network participants for the transaction validation work their machines do.
Types Of Altcoin
These altcoins have a mining process that generates new coins by solving problems to unlock blocks. These coins are more similar to Bitcoin than other altcoins. Ethereum is the most popular mining-based altcoin.
Altcoins come in various flavors and categories. Here’s a brief summary of some of the types of altcoins and what they are intended to be used for.
Payment Token
As the name implies, payment tokens are designed to be used as currency—to exchange value between parties. Bitcoin is the prime example of a payment token.
Stablecoins
Cryptocurrency trading and use have been marked by volatility since launch. Stablecoins aims to reduce this overall volatility by pegging their value to a basket of goods, such as fiat currencies, precious metals, or other cryptocurrencies. The basket is meant to act as a reserve to redeem holders if the cryptocurrency fails or faces problems. Price fluctuations for stablecoins are not meant to exceed a narrow range.
Notable stablecoins include Tether’s USDT, MakerDAO’s DAI, and the USD Coin (USDC). In March 2021, payment processing giant Visa Inc. announced that it would begin settling some transactions on its network in USDC over the Ethereum blockchain, with plans to roll out further stablecoin settlement capacity later in 2021.2
Security Tokens
Security tokens are tokenized assets offered on stock markets. Tokenization is the transfer of value from an asset to a token, which is then made available to investors. Any asset can be tokenized, such as real estate or stocks.
For this to work, the asset must be secured and held otherwise, the tokens are worthless because they wouldn’t represent anything. Security tokens are regulated by the Securities and Exchange Commission because they are designed to act as securities.
In 2021, the Bitcoin wallet firm Exodus successfully completed a Securities and Exchange Commission-qualified Reg A+ token offering, allowing for $75 million shares of common stock to be converted to tokens on the Algorand blockchain.3 This was a historic event because it was the first digital asset security to offer equity in a United States-based issuer.
Utility Tokens
Utility tokens are used to provide services within a network. For example, they might be used to purchase services, pay network fees, or redeem rewards. Filecoin, which is used to buy storage space on a network and secure the information, is an example of a utility token.4
Ether (ETH) is also a utility token. It is designed to be used in the Ethereum blockchain and virtual machine to pay for transactions. The stablecoin USTerra uses 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.5
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 their name suggests, meme coins are inspired by a joke or a silly take on other well-known cryptocurrencies. They typically gain popularity in a short period of time, often hyped online by prominent influencers or investors attempting to exploit short-term gains.
Many refer to the sharp run-up in this type of altcoins during April and May 2021 as “meme coin season,” with hundreds of these cryptocurrencies posting enormous percentage gains based on pure speculation.
Governance Tokens
Governance tokens allow holders certain rights within a blockchain, such as voting for changes to protocols or having a say in decisions of a decentralized autonomous organization (DAO). Because they are generally native to a private blockchain and used for blockchain purposes, they are utility tokens but have come to be accepted as a separate type because of their purpose.
FAQs
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.
What Are the Top 3 Altcoins?
By market capacity, the top three altcoins are Ethereum, USD Coin, Tether (USDT).
Is It Better to Invest in Bitcoin or Altcoins?
Which cryptocurrency is better is a subjective argument based on an investor’s financial circumstances, investing goals, risk tolerance, and beliefs. You should talk to a professional financial advisor about investing in cryptocurrency before buying any.
Conclusion On Altcoins
Many altcoins are built on the fundamental structure provided by Bitcoin. As a result, the majority of altcoins are peer-to-peer, necessitate a mining process in which users solve difficult problems in cracking blocks, and provide secure and inexpensive ways of carrying out web transactions. Even with many overlapping features, altcoins differ greatly from one another.
