What is Altcoin?
The term ‘altcoin’ is a combination of two words ‘alt’ and ‘coin’, which ‘alt’ means ‘alternative’ and coin means ‘cryptocurrency’, implying a type of alternative crypto to Bitcoin.
Many altcoins are built based on the basic structure provided by Bitcoin. Meanwhile, most altcoins are peer-to-peer, requiring a mining process for users to solve the difficult problems in cracking blocks, providing secure and inexpensive ways of carrying out web transactions. Still, even with many overlapping features, Altcoins are vary widely from one another.
Types of Altcoins
Based on their functionalities and consensus mechanisms, altcoins are divided into 6 main types:
1. Mining-based altcoins
As their name indicates, mining-based altcoins are mined into existence. Most of them employ the PoW method which is used to generate new coins by solving different problems to create blocks. Litecoin, Monero and ZCash are three of most famous mining-based altcoins.
2. Pre-mined altcoins
These are the opposite of mining-based coins. This type is produced not through an algorithm but are distributed before being listed on crypto exchanges. An example of a pre-mined altcoin that you may know is Ripple’s XRP.
3. Security tokens
They are similar to securities that are traded in bourses. These tokens prospect of price appreciation is a big reason leading investors put their money into.
4. Meme coins
Meme coins are inspired by jokes or memes on social media. The first one to be known is Dogecoin which is based on a popular dog meme in Japanese. Following Dogecoin success, many follow-up memecoins also listed on exchanges and received many impressive achievements. Among those is a prominent name, which is considered biggest rival of Dogecoin, called Shiba Inu.
5. Utility tokens
These tokens are utilized to provide services within a network and purchase for services like network fees or gaining rewards. However, utility tokens are not used for paying dividends or part with an ownership stake.
6. Stablecoins
Crypto trading is always marked as a fluctuating market. As the name suggests, stablecoins aim to reduce that volatility by pegging their value to a basket of goods (fiat currencies, precious metals and other cryptocurrencies) which acts as a reserve to redeem holders in case the cryptocurrency fails or faces problems. Standout stablecoins are Tether’s USDT, MakerDAO’s Dai and USD Coin (USDC).
Differences between Altcoins and Bitcoin
The basic framework for Altcoins and Bitcoin is similar. However, there are various differences between these two.
Bitcoin has its own share of drawbacks like its PoW mechanism used for creating blocks is energy-intensive and time-consuming. This coin also confronts constrictions when it comes to creating smart contracts.
Altcoins, on the other hand, work on Bitcoin’s downsides and establish a competitive advantage for investors. This is done through the PoS mechanism which aims at minimizing energy consumption and time for creating blocks and validating new transactions.
Are Altcoins worth investing?
As mentioned, Altcoins are built based on Bitcoin, so of course, these cryptos hold many risks associated with Bitcoin. However, in past years, we have seen the tremendous number of altcoins listed in cryptocurrency markets and attracted hordes of retail investors, feverishly betting on their price movements to amass short-term profits. Moreover, many well-established altcoins, such as Ether and XRP, are even being competitors of Bitcoin.
Cryptocurrency markets are not yet mature, and we still have a long way to go. So, in the case of Altcoins, even if starting as a Bitcoin replacements, but looking at how they rock the market and all great returns they bring, Altcoins are still considerable options for investors, especially for those willing to take on the outsized risk of operating.