Bybit learn

Explained: What Are Altcoins & Is It a Good Investment?

Join our community & learn for free

No Spams. Only heaps of sweet content and industry updates in the crypto space.

Bitcoin is revolutionary, but it isn’t perfect. While BTC may be the oldest and most known digital asset, there are plenty of cryptocurrencies, particularly altcoins aim to outstrip the domination of Bitcoin. But wait, what are altcoins?

Altcoins refers to alternative cryptocurrencies, are developed to set apart from Bitcoin monopolization. And mainly to address the issue of scalability, decentralization, and security wherein Bitcoin struggles to fit in.

Yes, Bitcoin’s peer-to-peer payment network does pave the way for altcoins. Of course, altcoins may also possess a decentralized nature just like Bitcoin, but they distinguish themselves with better privacy and a more efficient transaction speed.  

Among the thousands, the first introduced altcoin was Namecoin by Andrew Chow back in 2011. But altcoin took off and grew exponentially, thereby resulting in the rise of Dash, Ethereum, EOS, Litecoin, Monero, Ripple, and more. ETH alone are currently accounting for around 30% of the crypto market cap, and there are over 5,000 of them out there. While altcoin might be granted recognition, one can’t stop asking how altcoin works and the prospects it gives? 

How Does Trading Altcoins Work?

The hype of altcoins might have faded due to the attention to Bitcoin’s bullish trend, the altcoin trend might have revived and to continue on the rise.

Typically, altcoins can be bought and sold on various cryptocurrency exchanges. And the two main kinds are centralized and decentralized exchanges. But depending on the crypto exchanges, the types of altcoins each exchange offers are different from one another. However, most exchanges discourage the purchase of altcoins with fiat. That means traders would have to exchange BTC, ETH, or USDT for other altcoins. 

While centralized exchanges (CEXs) often have a more extensive listing process, decentralized exchanges (DEXs) like Uniswap allow traders to purchase altcoins listed by the public. Despite its drawbacks, CEXs are often a safer choice for large-scale traders.

However, the tricky part about trading altcoins is to figure out how to store them in a wallet. Though it’s possible to keep Bitcoin and altcoins on some CEXs, it’s all depending on the altcoins’ nature. Some altcoins support a public CEX wallet, while some only can be stored on a wallet created by the developers. Generally, most crypto exchanges offer reimbursements, but it’s still better to be safe than sorry. Typically, altcoin traders would store their crypto offline on a ‘cold wallet’ to steer away from the prying eyes.

How Altcoins Grown Exponentially?

Altcoins come in all shapes and sizes, and while they all share some similarities, most of them serve a specific purpose that is unique to that cryptocurrency. Bitcoin may be famous, but it was Ethereum that genuinely sparked the growth of the altcoin market.

Not only Ethereum initiated the project by allowing users to deploy applications and create associated tokens on the network; it also means that anyone could make a cryptocurrency. On top of that, the recent boom in Decentralized Finance (DeFi) and DApps, a concept that started on the Ethereum blockchain, also contributes to the rise of more altcoins.

Among the thousands of cryptocurrencies, only a handful have any real utility. The world’s first altcoin, Namecoin, isn’t even in the top 300. However, as people create better and more inventive solutions to the world’s financial problems, altcoins aren’t seen as an inevitable by-product. But rather a necessary part of the process.

Should You Invest in Altcoins?

Cryptocurrencies are a far cry away from ready for mass adoption, and until we can create useful user-facing applications for mainstream audiences, this is unlikely to change. So, of course, investing in altcoins is a better choice to mitigate risks in the volatile crypto space.

With the recent market movement, Altcoins slowing catching the waves. Still, Altcoins offer the opportunity to be a part of this movement – a movement that isn’t just trying to bet on the right horse but improve the sport as a whole.

Recent investments from institutional players have brought an enormous boost to altcoins. In June 2020, international tech conglomerate Google announced the integration of its BigQuery platform with the Chainlink blockchain, a decentralized oracle network for decentralized data sourcing.

On the other note, Grayscale Investments, one of the world’s largest digital currency management firms, has crypto holdings worth nearly $10 billion, of which almost $2 billion are in altcoins. It seems simple to argue that if the big players are doing it, you should too.

The reality is that any investment is risky, and it’s crucial to do enough research before spending any amount of money. A good rule to follow is that if it seems too good to be true, it probably is.

Should Anyone Trade Altcoins?

Trading cryptocurrency is just like stock trading in a sense whereby a diversified portfolio always wins. So, even if one cryptocurrency has a setback, others can balance the risks and rewards.

With about 5,396 altcoins to choose from today, the only question you should be asking is which are the best altcoins to trade and what to look after when trading altcoins?

Things to Take Note When Trading Altcoins

If you know what are altcoins and know how to trade cryptocurrency, then great, you’re all set. Otherwise, here are some essentials you need to factor in.

Check the Altcoin’s Market Cap and Liquidity

Most of the time, an altcoin vanishes from sight because the project is squandered either by poor management or lacks liquidity. When the crypto market hits its low, an altcoin with liquidity tends to sustain. Plus, when there’s liquidity, it’s much easier for traders to expect an ideal return.

Considers the Altcoin’s Lifespan

Trading an altcoin at an early stage is indeed profitable as it relies on speculations and whales’ interests. But, hefty profits always come with risks. To avoid these uncertainties, try trading on reliable altcoins like Ripple (XRP) or Litecoin, where a stable trajectory presents. 

Watch Out for Scams

The creator of altcoins typically holds a large amount of circulating supply. When one entity dominates the power, it’s likely for pump and dumps to happen. To better evaluate an altcoin, try to assess its policies and its projections. Stick with altcoins that possess a reliable portfolio, reliable blockchain, and utilizes smart contracts

Bitcoin vs Altcoin differences.

How do Altcoins Differ from Bitcoin?

In October 2011, Litecoin became the silver to Bitcoin’s gold. While it wasn’t the first altcoin, it’s one of the oldest cryptocurrencies still used today. Litecoin shares much of its DNA with Bitcoin, with some key differences.

While both networks use a Proof of Work consensus mechanism, Litecoin uses a sequential memory-hard function that requires more memory. Further, Litecoin only takes 2.5 minutes to mine each block, making transactions much faster than on Bitcoin, which takes 10 minutes to add a block to the main blockchain.

Monero is another altcoin focused on making transactions private. It uses ringed signatures and special cryptographic functions to maintain the anonymity of its users. While Bitcoin and most cryptocurrencies are often thought to offer privacy, most transactions are entirely traceable.

Bitcoin is more pseudonymous than anonymous, in that all transactions are public, but it is not known which addresses belong to whom. Other altcoins also offer features like governance, smart contracts, and interoperability.

The Types of Altcoins

As the number of altcoins started to grow, the community split their nomenclature based on utility. From mining-based cryptocurrency, stablecoins to security tokens, each category of altcoins serves a purpose. 

Mining-based Cryptocurrencies

Mining-based crypto is altcoins that are supplied through a mining process. By using decentralized nodes, the network solves mathematical problems to record data to the blockchain. As an exchange miners will receive a reward in the form of tokens. Bitcoin is one such token, as is any altcoin that uses a Proof of Work consensus algorithm.

Security Tokens

This type of altcoin is associated with a business and more closely resemble traditional stocks like the ICO. In many cases, they offer a form of dividend through a payout or fractional business ownership. The most common payout is with a dividend. 

Utility Tokens

Utility tokens function slightly differently in that they provide a claim on services. Besides, it’s also designed to be exchangeable for prominence decentralized utilities like storage space.

Stablecoins

Stablecoins are cryptocurrencies pegged to the value of a fiat currency like the U.S. Dollar. Hence, eradicating the volatility like Bitcoin. While the most prominent stablecoin is Tether (USDT), whose market capitalization has grown exponentially since its launch in 2016. Unlike other altcoins like ETH or LINK, its value is fluctuating around $1. Whereas, Facebook’s Libra is highly anticipated by the public since its announcement to launch in 2020. But will only roll-out as soon as Libra meets the appropriate regulatory approval.

What Are the Best Altcoins?

Choosing an altcoin to trade or invest in can be difficult, especially with are over 5,000 coins available today. Traders alike need to understand what to look for when parting with the capital. On top of that, ensuring the project’s validity is crucial when assessing the difference between incredible gains and crippling losses. A report from 2019 shows that 95% of altcoins listed on Coinmarketcap were illiquid, making them practically worthless.

Ethereum (ETH)

On the list of cryptocurrencies ranked by market cap, Ethereum has been second to Bitcoin consecutively for years. And some would even consider Ethereum to be the father of altcoins. With its ERC-20 standard for tokens, it gives rise to a large fraction of cryptocurrencies on the market today. Plus, the Ethereum 2.0 upgrade will only strengthen the future of Ethereum in general.

Ripple (XRP)

XRP token represents the value transferring across the Ripple Network. With 100 billion XRP coins in circulation, XRP is one of today’s most used altcoins. The tokens are a cheap cross-border remittance and are famous for their fast transaction speeds.

Tether (USDT)

Tether is a stablecoin relying on the Bitcoin Cash network (a fork of Bitcoin that offers faster transactions). With over $20 billion market cap in November 2020, USDT is receiving a surge of interest, and it doesn’t seem to go away anytime soon.

Chainlink (LINK)

As a decentralized oracle network, Chainlink specializes in real-world data and supply data all across blockchain via smart contracts. While LINK is the digital asset to pay for the services on the network. Chainlink’s future development may slow for some time, but it unlocks its new growth, hitting its all-time high of $19.85 in Aug. 2020. That proves that evolution is probably on its way.

The Pros and Cons of Altcoins

In the world of blockchain, a meteoric rise in value is just as likely as a colossal crash. Small projects appreciate hundreds of times of what they were initially worth, only to crumble once abandoned after the hype dies. And Altcoins are no exception. Here’s what we need to highlight: 

Pros

  • Accessible: Getting into altcoins trading is easy. The entry barrier is low, and anyone with a computer can start trading cryptocurrencies within minutes.
  • Wide options: The options are near-endless with altcoins. However, the altcoins offer more than just opportunities for speculative investment. In fact, they are what drives innovation in the blockchain space.
  • Unique functions: Altcoins are more than just a token. It’s built with functionalities, unlike Bitcoin.
  • Room for evolution: Offering a broader scope of evolvement in the future as the system and processes are unique.

Cons

  • Pump and dump schemes: Treacherous plots are circulating in the altcoins ecosystem. Many traders pump capital to altcoins purely for its price to appreciate. When the monopolization ends, the price crashes and the project dissipates into the air. 
  • The fraudulent listings: Wild claims of revolutionary features on any altcoins can also easily derail even the most astute investor.
  • Vulnerable: Altcoins relatively lack exposure and acceptance from the public. There is an insufficient number of outlets to utilize altcoins when in comparison to Bitcoin fully. 
  • Oversupply: There are simply too many altcoins circulating the crypto market. It’s hard to diversify your portfolio, relying on other altcoins besides XRP, ETH, LINK, and more, as there is insufficient information to evaluate a new project’s prospect. 

The Bottomline

The internet is filled with many a Bitcoin maximalist who believe altcoins are merely a noise surrounding the future. Some people think altcoins is a good investment that will dethrone Bitcoin in the upcoming years.

As with most things, the truth probably lies somewhere in the middle. Altcoins offer so many use-cases that they’re hard to ignore. Stablecoins have made trading faster, improving the liquidity of cryptocurrency markets and promoting more economic activity. Utility coins have inspired a plethora of smart contract applications, including all of DeFi.

Every altcoin may not be entirely unique, but it does bring new ideas to the table. A decentralized economy relies on decentralized product design. And just like how the overall open-source development community works together to create better software.

The crypto space is small, and it will take years of trial and error as the community wrestles with itself to figure things out. Altcoins offer us a way to support certain developments over others, and in our own small way, contribute to building a decentralized financial system. 

REGISTER NOW for up to $100 in bonuses and coupons. 

Stay alert with Bybit’s Updates:

Visit our exchange

Social Media – TwitterFacebookInstagramYouTube, and LinkedIn

Join us on Telegram and Reddit

Have any questions? Visit our Help Center

Disclaimer

This article is intended for and only to be used for reference purposes only. No such information provided through Bybit constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific person. These forecasts are based on industry trends, circumstances involving clients, and other factors, and they involve risks, variables, and uncertainties. There is no guarantee presented or implied as to the accuracy of specific forecasts, projections, or predictive statements contained herein. Users of this article agree that Bybit does not take responsibility for any of your investment decisions. Please seek professional advice before trading.

Join our community & learn for free

No Spams. Only heaps of sweet content and industry updates in the crypto space.

Related Articles