What are Altcoins and how do they work?

Bitcoin has been top of the pile when it comes to cryptocurrency. Over a decade after its launch, just one Bitcoin once worth over $63,000 in April 2021. Since the beginning of the year, crypto has been on fire. It’s been minting millionaires left and right this year.

However, there are more cryptocurrency than just Bitcoin in the market which are “alternative” coins. Each of these alternative cryptocurrencies operates under its own rules but also share some characteristics with Bitcoin. One of the most attention grabbing altcoins examples in the past few months will be the meme-inspired cryptocurrency – Dogecoin. The coin remains the talk of the crypto markets, having plunged to $0.29 by the time of writing, after soaring by more than 15,000% from the start of the year to an all-time high of $0.74 on 8 May. The coin’s volatility is often driven by social media, especially tweets by Tesla CEO Elon Musk.

In essence, altcoins are alternative cryptocurrencies to Bitcoin, a decentralized digital currency that could eventually replace fiat money, such as the dollar. 

Cryptocurrencies are decentralized, meaning central banks do not issue them, and their value doesn’t hang on bank policies. Namecoin is widely considered to be the very first altcoin. Since then,  the rate of altcoin launches started to grow at a phenomenal rate.

Like Bitcoin, altcoin use blockchain as a means of securing peer-to-peer transactions. How these altcoins use blockchain can differ greatly from Bitcoins, as different consensus mechanisms are used to validate transactions or create blocks.

Not only that, but altcoins also take the Bitcoin concept further with unique features, such as “smart contracts” that can automatically perform agreements between two parties using blockchain technology.

In addition, altcoins have improved on Bitcoin in many other ways. Processing transactions can be faster or can scale better. Bitcoins are mined every 10 minutes, whereas an altcoin, such as Litecoin, produces coins every 2.5 minutes, speeding up transactions on this coin over Bitcoin.

Altcoin works similarly to Bitcoin. A private key is used to send payment from one digital wallet to another, and a blockchain acts as a recording ledger to permanently record the transaction so it can’t be altered. The blockchain is secured by mathematical proofs, which ratify transactions in blocks.

Some of the main types of altcoins include mining-based cryptocurrencies, stablecoins, security tokens, and utility tokens. There are around 9,000 cryptocurrencies, and altcoins make up over 40% of the market as of April 2021. Some of the most familiar altcoins are Ethereum, Ripple, Tether, Bitcoin Cash, Bitcoin SV, and Litecoin.

Certain altcoins do more than just allow the exchange of money for goods and services. These are usually called utility tokens or security tokens for example. Some altcoins offer better anonymity, while others target specific industries.

Stablecoins are cryptocurrencies pegged to either another cryptocurrency, fiat money (i.e., Dollars), or an exchange-traded commodity (i.e., precious metals), which minimizes price volatility compared to a particular “stable” asset or array of assets.

Stablecoins aren’t subject to turbulent, daily price fluctuations, meaning they’re useful in practical everyday cases, such as payments, investments, and loans.

These altcoins are mined into existence using proof-of-work (PoW), which creates new coins by solving difficult problems, to create blocks. There are several PoW coins, such as Litecoin, Monero, Bitcoin Cash, and Bitcoin SV.

Alternative to mining-based coins are pre-mined coins. These are distributed rather than created through an algorithm. Ripple is an example of this.

This type of coin is used within a platform to receive a service. A common type of utility token is the ERC20 Ethereum standard. These tokens are created to be spent within a certain blockchain ecosystem.

Security tokens operate as investment contracts. The token’s purchaser expects future profits from dividends, revenue share, or market appreciation. These differ from utility tokens in that security tokens follow stringent rules on who can buy and transfer them.

A non-fungible token (NFT) is a cryptographic asset on a blockchain with unique identification codes and metadata that differentiate them from each other and are stored in smart contracts.

Users can’t duplicate or divide NFTs. Some of the use cases for these tokens include collectibles, music, artwork, and video game tokens. 

In contrast, fungible tokens, such as Bitcoin, are identical; they have the same characteristics and value when traded.

Bitcoin is widely regarded as the original cryptocurrency. It was created in 2009 by Satoshi Nakamoto, introducing the world to blockchain technology and the principle of proof of work.

Most altcoins are a variation (fork) of Bitcoin and are created using Bitcoin’s open-sourced, original protocol and then changed to create a new cryptocurrency with new features, although tokens come in all shapes and sizes today.

Every altcoin has a unique way of being created, the number of coins available, and how difficult it is to create them. While Bitcoin now takes hefty computing power to mine — it’s said Bitcoin consumes ‘more electricity than Argentina’ — many altcoins still only need the power of a desktop computer and some specialized software to mine a coin.

One of the main advantages of altcoin is it’s an alternative to Bitcoin. Should Bitcoin’s value plummet, altcoins are generally good as a fallback option, although you might find that larger shifts that affect Bitcoin also hit everything else on the market. In a sense, they provide competition to Bitcoin.

Altcoins generally offer improvements to Bitcoin’s problems, such as the speed and cost of mining. There are also lower transaction costs with altcoins.

However, one major disadvantage of each altcoin is its lack of public acceptance and exposure relative to Bitcoin. As altcoins are newer than Bitcoin, their value can change dramatically, so they’re not for the faint-hearted or the risk-averse investor.

Another major issue with altcoins is that they’re often used in scams to fleece unsuspecting victims, such as pump and dump schemes.

Lastly, many altcoin trading sites don’t provide customers with the means to convert to Bitcoin before converting it yet again to USD.

As per the explanation above, there are a lot of altcoin to choose from. However, there is also a lot of junk which has little to no trading volume. And lots of them will fail to make any sort of impact before fading into oblivion. A month after hitting $60K, Bitcoin has taken a major beating as it dropped below $35K. Meantime, here are some altcoins that the market put into a watch list that are going up.

Ether, based on the Ethereum blockchain, is slowly but steadily catching up to Bitcoin’s now reduced market cap. It has soared over four times this year, with its market cap once rising to $505 billion. Its popularity soared as other crypto lending platforms started using its blockchain. Its use in decentralised finance or DeFi (blockchain-based financial services that aim to bypass banks/brokerages) doesn’t hurt investor optimism either.

Though Dogecoin began as a joke, it has surged over 10,000 percent this year. And as the data from CoinMarketCap tells us, it has once become the fifth-biggest cryptocurrency, with its market cap being as high as $60 billion. Its growth, however, is not backed by growth in mainstream use for payments, or any other fundamental reason. Rather, Tesla boss Elon Musk has time and again given it wings to fly. During mid of May, the coin surged 25 percent after Musk said he was working with Doge developers to boost its efficiency.

Shiba Inu, Dogecoin’s spinoff, has surged over 2,000 percent in the four days (till May 11). While it is barely worth a fraction of a cent and it doesn’t have any practical value, the coin is surging, and that eventually translates into profits. The coin has a market cap of well over $3 billion, according to CoinMarketCap.

Ethereum’s co-founder Charles Hoskinson created Cardano and like Ether, it gained momentum this year. Its value has skyrocketed 10 times YTD and during 16th of May, it touched an all-time high of $2.46. Its supporter base seems to have swelled after Elon Musk’s energy efficiency tweet. The cryptocurrency also claims to solve a number of issues with its proof-of-work consensus algorithms. It is the third most valuable cryptocurrency right now, according to the data from CoinMarketCap, with its market cap nearly over $50 billion.

After three days of launch, Internet Computer had clocked a market value of about $35.8 billion. It was launched in mid of May and its market value skyrocketed to over $90 billion at a price of nearly $731. However, within minutes, investors rushed to book profits, taking its market cap down. The coin is not a joke though – it uses smart contracts, like Ethereum blockchain, that can be used to power a number of platforms and applications. It aspires high and its founders aim to make it a decentralised version of the internet. IT claims to run faster than Ethereum and is way less costly.

Altcoins have proven to be an amazing way to invest your money this year. And naturally, there have been some hiccups along the way. The roller coaster rides that cryptos offer is part of their charm to some. But that’s also part of the reason some investors remain skeptical. So, to paraphrase the old adage, never invest more than you can afford to lose. However, if you stick with it long enough riding out the volatility will become second nature. Even the best altcoins will continue to see dips in value. But over time, the highs are proving to get higher. And the lows have been nowhere near as low as they have been in the past.