What Are Altcoins?

Altcoins are cryptocurrencies like Bitcoin (BTC) but different. Like Bitcoin, altcoins share characteristics however; they differ in their own ways. Some altcoins use a different consensus mechanism to produce blocks or validate transactions. Or they distinguish themselves from Bitcoin by providing new or additional functionality, such as smart contracts or low price volatility. Some solve problems such as cross border payment transfers (XRP), supply chain tracking (VET), bringing real world data to the blockchain (LINK), or helping other programs function better, faster, cheaper, or more environmentally friendly.

As of March 2022, there are over 18,000 cryptocurrencies. According to CoinMarketCap, Bitcoin alone accounts for approximately 40% of the total cryptocurrency market in March 2022. Altcoins made up the rest. Because they are often derived from Bitcoin, altcoin price movements tend to mimic Bitcoin’s trajectory. However, analysts say the maturity of cryptocurrency investing ecosystems and the development of new markets for these coins will make price movements for altcoins independent of Bitcoin’s trading signals.

The term altcoins refers to all cryptocurrencies other than Bitcoin.

As of March 2022, there are over 18,000 cryptocurrencies. According to CoinMarketCap, altcoins account for approximately 60% of the total cryptocurrency market in March 2022.

Some of the types of altcoins include mining-based cryptocurrencies, stablecoins, security tokens, and utility tokens.

Altcoins may only be based on mining-based cryptocurrencies other than Bitcoin in the future as usage continues to develop with technology.

With the exception of Tether (USDT) and USDC stablecoins, Ethereum (ETH), Binance (BNB), and the XRP Coins were the largest altcoins by market capitalization as of March 2022.

Understanding Altcoins

“Altcoin” is a combination of the words “alternative” and “coin” and include all alternatives to Bitcoin within the blockchain other than Bitcoin. The basic technical framework for Bitcoin and altcoins are similar. They both share code and function like peer-to-peer systems or like computers capable of processing data and transactions at the same time. In many instances, altcoins also have their sights set on attempting to become the next Bitcoin by becoming an inexpensive method for digital transactions.

But there are also several differences between Bitcoin and altcoins. Bitcoin is among the first iterations of a cryptocurrency, and its purpose and design set the benchmark for the development of other coins. However, Bitcoin’s execution has several shortcomings. For example, proof of work (PoW)—the mechanism used to create blocks—is energy-intensive and time-consuming. Smart contract capabilities of Bitcoin are also limited.

Shortly after Bitcoin’s introduction in 2009, Bitcoin became the first widely adopted blockchain application of proof of work (PoW). PoW is the secure, decentralized consensus that forms the basis of many other cryptocurrencies allowing Altcoins to improve upon Bitcoin’s perceived limitations to establish a competitive advantage. Some altcoins use the proof of stake (PoS) consensus method to minimize energy consumption and the time required to create blocks and validate new transactions.

 The world’s second-largest cryptocurrency by market cap, Ethereum is used as gas (or payment for transaction costs) in smart contracts on the native Ethereum blockchain. Ethereum 2.0, soon to be launched, has demonstrated impressive advancements for this as altcoins generally address the traditional critiques of Bitcoin, like scalability and sustainability.

Altcoins have created a market for themselves by distinguishing themselves from Bitcoin in order to advance the blockchain. In turn, this has attracted many investors that believe the possible potential in them. Many investors expect to profit as altcoins can adopt more traction and users and increase the price as a result.

Types of Altcoins

Altcoins come in various types, functionality, and categories depending on their consensus mechanisms. Below is a brief list and summary of some of the more important use cases:

These are just examples and do not include all the possible coins per category.

Mining-based

Mining-based altcoins are mined into existence and this is why they are referred to as Mining-based. Many mining-based altcoins use PoW, the system by which new coins are generated by solving difficult problems to create blocks. Here are a few examples: Litecoin (LTC), Monero (XMR), and Cardano (ADA). The alternative to mining-based altcoins is premined and often part of an initial coin offering (ICO). Such coins are not produced through an algorithm but are distributed before they are listed in cryptocurrency markets. One example of a premined coin is Ripple (XRP).

Stablecoins

Cryptocurrency trading has been marked by volatility since launch. Stablecoins are designed to help reduce this volatility by being pegging to an assortment of assets such as fiat currencies, precious metals, or other cryptocurrencies. Stablecoins are meant to act as a reserve to redeem holders for adverse cryptocurrency volatility. Therefore, minimal price fluctuations occur with stablecoins and are designed to remain stable and not fluctuate during crypto market volatility.

Notable stablecoins include Terra Luna’s UST, Tether’s (USDT), MakerDAO’s (DAI), and the USD Coin (USDC). In March 2021, payment processing giant Visa Inc. announced that it would start settling some transactions on its network in USDC over the Ethereum blockchain, with plans to roll out further stablecoin settlement capacity later in 2021.

Security Tokens

Security tokens are very much like securities traded in major stock markets except they have a digital provenance. Security tokens function much like traditional stocks, and they usually promise equity in the form of ownership or a dividend payout to holders. The possibilities of price appreciation for such tokens are a major draw for investors to invest in.

In 2021, the wallet firm Exodus completed a successful Securities and Exchange Commission-qualified Reg A+ token offering and sold $75 million shares of common stock to be converted to tokens on the Algorand (ALGO) blockchain. This was a historical event because this is the first digital asset security to offer equity in a United States-based issuing company.

Meme Coins

While providing no real utility or purpose other than being a meme, these coins are inspired by a joke or a silly take on other well-known cryptocurrencies. They only gain popularity for short periods of time and only when being made public by hyped online promotions by more prominent influencers and retail investors attempting to exploit short-term gains. I.e.: Pump and Dump theory.

A great example was Tesla when CEO and crypto enthusiast Elon Musk regularly posts cryptic tweets about leading meme coins Dogecoin (DOGE) and Sheba Inu (SHIB), which often substantially moves their prices. In October 2021, Shiba surged 91% in a 24-hour period after Musk tweeted a picture of his pet Floki, the Shiba Inu puppy, on a Tesla. Sheba also has since dropped approximately 96% since then. Many refer to the sharp run-up in these particular altcoins during April and May 2021 as “meme coin season,” with hundreds of these cryptocurrencies posting enormous percentage gains based on pure speculation. Extreme caution is to be put in such hyper speculative non-utility based meme coins.

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

Utility Tokens

Utility tokens are used to provide services within a network. They can solve problems and are used to do just that. They can cure supply chain issues, cross border payment issues, bring off chain information to the blockchain, purchase services, pay network fees, or redeem rewards. Unlike security tokens, utility tokens do not pay out dividends or part with an ownership stake. Some of the more common utility coins are: (XRP), (VET), (LINK), and Filecoin (FIL), which are used to provide a certain function or utility for the blockchain networks.