What does the term altcoin mean? An insightful introduction for those looking into cryptocurrencies outside Bitcoin (2023)

Within blockchain networks, the term altcoin encompasses all cryptocurrencies apart from Bitcoin. The phrase “altcoin” comes from “alternative coin” and generally applies to all digital coins created subsequent to Bitcoin's launch.

A majority of altcoins are essentially forks of Bitcoin, created using its open-source codebase as a foundation, but incorporating some tweaks to their underlying blockchain technology. These adjustments could manifest in numerous ways, such as employing different hashing algorithms, enhancing transaction speeds, or introducing unique economic incentives for miners and stakers. Some well-known altcoins include Ethereum , Litecoin, and Bitcoin Cash.

While there are currently more than 5,000 altcoins actively traded on cryptocurrency exchanges, only a small selection have proven to be viable for long-term investments. When considering an altcoin for investment, it's vital to thoroughly investigate the project team and its roadmap while assessing the use case to verify that it represents a credible project with promising prospects.

What is an altcoin?

The expression 'altcoin' denotes all cryptocurrencies other than Bitcoin (BTC), where 'alt' signifies 'alternative.' Litecoin (LTC) and Ether represent notable examples of second- and third-generation blockchain cryptocurrencies that originated post-Bitcoin. Unlike Bitcoin, which is usually valued against fiat currencies like dollars, yuan, and euros, altcoins are often valued in BTC.

Types of altcoins

Altcoins can be categorized into various types, including stablecoins, decentralized finance (DeFi) altcoins, proof-of-work (PoW), and proof-of-stake (PoS) altcoins, which are distinguished by their consensus mechanisms.

Stablecoins

Stablecoins are cryptocurrencies whose value is pegged to a fiat currency, with the US dollar being the most common reference. The leading stablecoin is Tether (USDT), which maintains its value relative to the US dollar. Other popular stablecoins comprise USD Coin (USDC), Paxos Standard (PAX), and TrueUSD (TUSD). Typically, stablecoins are supported by fiat currency reserves or other assets like gold, and the organizations behind these stablecoins manage their reserves in a manner that is transparent and subject to audits.

DeFi altcoins

DeFi altcoins serve as the backbone for decentralized finance protocols and platforms. A well-known example in this category is Maker (MKR), which is utilized for securing loans on the Maker Protocol. Other significant DeFi altcoins include Basic Attention Token (BAT), 0x (ZRX), and Augur (REP).

Proof-of-Work (PoW) altcoins

PoW altcoins rely on a proof-of-work consensus mechanism, with Bitcoin (BTC) being the most popular among them, employing the SHA-256 hashing algorithm. Other notable PoW altcoins include Ethereum (ETH), Litecoin (LTC), and Monero (XMR).

Proof-of-Stake (PoS) altcoins

On the other hand, PoS altcoins depend on a proof-of-stake consensus mechanism. An example of a leading PoS altcoin is Cosmos (ATOM), which applies the Tendermint consensus algorithm. Additional examples of PoS altcoins consist of Cardano (ADA), EOS (EOS), and Tezos (XTZ).

What are the benefits of altcoins?

One of the main advantages of putting your money into altcoins is the possibility of achieving returns that could surpass those of Bitcoin. This potential arises because altcoins are generally more volatile than Bitcoin and are often traded at more affordable prices, making them particularly appealing to investors who are comfortable with taking risks.

Moreover, altcoins can provide a level of anonymity that Bitcoin does not usually offer. This is largely because many altcoins don’t face the same rigorous KYC (Know Your Customer) and AML (Anti-Money Laundering) regulations that Bitcoin and traditional fiat currencies do.

Which Altcoins are tied to Bitcoin?

Among the most recognized altcoins, ranked by market capitalization, are Ethereum, Ripple, Tether, Bitcoin Cash, Bitcoin SV, and Litecoin. Each of these coins interacts with the Bitcoin blockchain in unique ways—some serve as direct competitors to Bitcoin, like Ethereum and Ripple, while others, such as Bitcoin Cash and Litecoin, function as additional nodes facilitating transactions using Bitcoin to move between wallets.

What challenges might you face when investing in altcoins?

As previously mentioned, altcoins exhibit considerably higher volatility compared to Bitcoin, leading to larger price fluctuations. This reality implies that investors might face substantial losses in a brief duration should the value of an altcoin decrease significantly after their investment.

Another downside of investing in altcoins is the prevalence of scams within this space. Given that the cryptocurrency arena is significantly unregulated, there's no assurance that an altcoin project is legitimate. Therefore, it’s essential to thoroughly examine a project before investing and to focus on those with a reliable team and clear roadmap.

In summary, altcoins refer to all cryptocurrencies excluding Bitcoin, with a vast array of variations, each presenting its own set of pros and cons. The primary attractions of investing in altcoins include the potential for substantial returns and increased anonymity. However, the associated risks involve heightened volatility and the potential for encountering scams.

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Despite their risks, altcoins possess the capacity for generating returns that can outpace those of Bitcoin, primarily due to their volatility. Additionally, they provide a higher degree of anonymity than Bitcoin, catering to those who prioritize privacy. Therefore, while investing in altcoins comes with its share of risks, the promise of potential rewards may make them an appealing option for investors willing to embrace a bit more risk.

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