The first altcoins launched in 2011 and by now, there are thousands of them. Early altcoins aimed at improving aspects of Bitcoin such as transaction speeds or energy efficiency. More recent altcoins serve a variety of purposes depending on the goals of the developers.
Since altcoins are such a big part of the market, every crypto investor should understand how they work. Continue reading to learn about altcoin meaning, the different types that exist, and what to consider before purchasing one.
Altcoin Meaning
Altcoin is the term given to describe alternative digital assets, such as a coin or token that is not Bitcoin. This nomenclature comes from the idea that Bitcoin is the original cryptocurrency and that all others are then considered “alternate” or “alternative” coins.
The term “altcoin” is also used quite broadly to refer to digital assets that would also technically be referred to as “tokens” rather than coins. The best-known examples are the ERC-20 tokens that exist on top of the ETHereum blockchain.
While some users deem the term “altcoin” to be derogatory or deprecating, it is broadly held to be neutral in its usage. The term is not supposed to convey any positive or negative sentiment about the asset that is being referred to. On the other hand, the term “shitcoin” for example, brings a negative sentiment and is usually deemed as pejorative.
Altcoins Vs Bitcoin
Altcoins are generally very different from Bitcoin. While Bitcoin is mainly used as a form of payment, altcoins can be used as governance tokens (AAVE, UNI) or stable assets pegged to the U.S. dollar (USDT, USDC). These tokens serve very different functions than Bitcoin.
One major way altcoins differ from Bitcoin is the use of decentralized finance (DeFi). DeFi is a way for financial and economic operations to be conducted in new ways and projects in this sector can range from decentralized exchanges (DEXes) to NFTs. These projects are pushing the limits of the internet, beyond just a payment system.
Almost all DeFi projects and uses are not conducted on Bitcoin’s chain. In this way, Bitcoin is very limited in new projects it can produce, where altcoins have unlimited potential. Bitcoin is also very driven by institutional investors. Institutions buy billions of dollars of BTC as both an investment and hedge against inflation.
Conversely, altcoins can be largely driven by retail investors and small firms. One example is Floki Inu, an altcoin whose price went up almost 2,000% due to a large community of small investors. Altcoins support a larger variety of tokens, contribute more to DeFi technology and token prices can often be influenced by retail investors.
Types Of Altcoins
Altcoins have emerged as a promise to be even faster, more decentralized, more scalable, more secure or a combination of all these core cryptocurrency tenets. The result is a dizzying ecosystem of altcoins that’s hard to categorize, but can be roughly broken down into the following four buckets.
Native Cryptocurrencies
Native cryptocurrencies are the coins that were originally created to run on a specific blockchain network. Bitcoin is a native coin (you’ll see native coin, currency, cryptocurrency and token used interchangeably; it’s the “native” part that’s important here) because it is the currency that’s used on the Bitcoin blockchain.
ETHer, the second-largest cryptocurrency by market cap, is the native coin of the Ethereum network. To run applications like smart contracts on the Ethereum network, you’ll need to pay a transaction fee in ether.
Binance coin (BNB), currently the fourth-largest cryptocurrency by market cap, is yet another native coin, as it’s the currency used on the Binance Chain.
Tokens
A token is a unit of value that operates on an existing blockchain and can be used for specific purposes within that environment. Using tokens is similar to going to an old-school arcade: You exchange your U.S. dollars for tokens that are only accepted by those video games.
Chainlink, for example, is built on top of the ETHereum blockchain, and developers can use it to convert real-world data into a blockchain-friendly format that can be read by smart contracts and vice versa. LINK is the token that’s used to pay for Chainlink’s services. So, if an investor believes demand for smart contract-based services is going to rise, they might buy LINK; the more Chainlink technology is used, the thinking goes, the higher the demand for LINK, which could send its value higher.
Another example is the Uniswap platform, a decentralized exchange built on top of the ETHereum system. Centralized exchanges (such as the stock market or Binance.US) require deposits into an account or wallet that’s connected to the exchange. However, a decentralized exchange enables direct peer-to-peer trading from one personal wallet to another. UNI is the token of the Uniswap exchange, and it’s what’s known as a “governance” token – holders of UNI can vote on proposals that determine how Uniswap will operate, similar to the way traditional shareholders have a say in corporate governance.
Stablecoins
Stablecoins were developed to offer the advantages of cryptocurrencies and tokens without the price volatility. They accomplish this by tying their value to an existing currency, one for one. TETHer, the largest stablecoin by market cap, is tied to the U.S. dollar; one tether will always equal one U.S. dollar.
You won’t earn any profit through price appreciation with stablecoins, but there are plenty of applications for a coin whose value doesn’t rise and fall by the minute. For some, stablecoins offer a way to hold funds in a crypto exchange and easily convert them into another cryptocurrency, rather than converting from U.S. dollars. Others may use stablecoins to easily send and receive funds globally.
But perhaps the most popular use for them today is in decentralized finance, or DeFi. Essentially, DeFi platforms let users lend stablecoins to others and earn interest in return, all without the need for an intermediary like a bank. What’s more, some platforms incentivize users by offering tokens, such as the governance tokens outlined above, on top of the interest they receive.
Forks
In a cryptocurrency blockchain, groups of recorded transactions (the public ledger) are organized into blocks, and each block is connected to the next via complex cryptography. For a new block to be appended to the existing chain, all the previous transactions in all the previous blocks must also be verified, and there must be a consensus that all's right with the chain.
This consensus is required for the list of transactions as well as the rules that govern the blockchain network. And when a group decides it wants to change the rules, it can validate a split in the chain; this is a fork. A new chain emerges, ready to start logging transactions under the new rules agreed upon by those who chose to validate the fork. Meanwhile, the other prong of the fork keeps going on as normal.
Forks can happen over and over again, creating new protocols and cryptocurrencies all the while. Bitcoin cash is a fork of the original Bitcoin blockchain, while ETHereum Classic is a fork of the Ethereum system. Dogecoin is a fork of Luckycoin, which was a fork of Litecoin, which was a fork of Bitcoin.
So as an investor, if you like the ideas, rules and changes found in a fork of an existing blockchain, you could buy that fork’s currency in the hope that it rises in value.
Pros And Cons of Altcoins
Pros Of Altcoins
- Altcoins are "improved versions" of the cryptocurrency they derived from because they aim to plug perceived shortcomings.
- Altcoins with more utility have a better chance of surviving because they have uses, such as ETHereum’s ether.
- Investors can choose from a wide variety of altcoins that perform different functions in the crypto economy.
Cons of Altcoins
- Altcoins have a smaller investment market compared to Bitcoin. Bitcoin has generally hovered around 40% of the global cryptocurrency market since May of 2021.
- The altcoin market is characterized by fewer investors and less activity, resulting in thin liquidity.
- It is not always easy to distinguish between different altcoins and their respective use cases, making investment decisions even more complicated and confusing.
- There are several "dead" altcoins that ended up sinking investor dollars.
Considerations Before Buying Altcoins
Before purchasing any altcoin, take the time to read through what the organization behind it is trying to accomplish. Ask yourself questions like:
- Does the altcoin seem like a plausible way to improve upon Bitcoin?
- If it’s a token, does it have real-world application?
- If it’s a stablecoin, how are you going to use it?
- If it’s a fork, why was it created and do you agree with that decision?
Additionally, be warned that this is a nascent market where shakeout is inevitable. Some of these projects will fail – there’s already a crowded graveyard of dead altcoins – and some will succeed.
That’s why financial pros often put altcoins in the “alternative investments” column: somETHing you might dabble in if you’ve already got a healthy, diversified investment portfolio.
Closing Thoughts
Bitcoin and altcoins both have their own strengths and weaknesses. Bitcoin is the largest cryptocurrency, but it is not as dynamic in terms of adoption. Altcoins can shoot up in price, but can also fail and leave investors empty-pocketed.
When deciding between Bitcoin and altcoins as an investment, one must take into account their personal risk tolerance, quality of the specific project and length of investment. In general, altcoin investing isn’t necessary for anyone taking a whole-market and/or passive investing approach.
However, if you plan to engage with crypto and learn more about DeFi, having read this article in entirety is a great way to educate yourself on altcoin meaning, the types of altcoins and their uses!
