Almost everybody not living under a rock, whether they have any interest in crypto or not, have heard of Bitcoin. Its value skyrocketed since its launch in 2009, far surpassing any tradable asset over that period. Yet beyond that is a grand variety of thousands of altcoins, which come with an extensive list of wonderful technologies and features that people prefer due to their practicality and the profit opportunities they represent. Naturally, they do not come without risk as well. We’ll be giving you the rundown on altcoins today.
What are altcoins?
Short for “alternative coins”, these refer to any coins not named Bitcoin. All other arising coins have aimed to either improve upon the BTC’s shortcomings or cater to specific niches within the cryptocurrency ecosystem.
The purpose of their existence
Of course, the first cryptocurrency wasn’t generated as completely flawless right out the gate.
This led to new digital assets with the goal of:
- Improving transaction speed and scalability: Bitcoin took a lot longer to process transactions with than say Ethereum which popped up later and could be transacted via decentralized exchanges such as Quickex at lightning speed
- Serving specific functions: some enable decentralized applications (dApps), others center on privacy, while others aim to provide stable prices for everyday transactions
- Innovation and experimentation: tinkering around in different projects has laid the groundwork for the rise of new consensus mechanisms like proof-of-stake, the smart contract, and interoperability across different blockchain networks.
How altcoins came to be
When Bitcoin rose to prominence, it was the one and only cryptocurrency to exist for a couple years. Naturally, its wild success sparked a lot of new ideas for how to reinvent cryptocurrencies. The very first altcoin was introduced in 2011. Its goal was to decentralize domain name registration, laying the basis for functionality to serve as one of the goals for altcoin generation.
Ripple took shape in 2012 using a consensus algorithm and focusing on cross-border payments, serving financial institutions rather than focusing on individual users and decentralization. The first attempt to improve upon the Bitcoin’s processing speed was Litecoin in 2013. It was able to generate blocks a full four times faster than BTC.
The Bitcoin’s most prominent successor to follow it was Ethereum, which came about in 2015, at a time when altcoins began to explode. One of the innovations of Ethereum was the concept of smart contracts which could be used to operate dApps. Since then, Solana has gone on to far outperform even Ethereum’s speed.
Then came a period of ICO craze, followed by the rise of NFTs in 2020. Today, the altcoins that have managed to thrive have been those that exhibit great utility in terms of advancements, high speed, store utility, scalability, and decentralized governance.
How altcoins differ from Bitcoin
Let’s break down the various ways that new coins have been brought about, served additional purposes, and aimed to improve upon Bitcoin’s flaws.
Consensus mechanisms
One of the most important technical differences between Bitcoin and altcoins is the consensus mechanism they use to validate transactions and secure their networks. Bitcoin uses Proof of Work (PoW), a system where miners compete to solve complex mathematical problems in order to validate transactions and earn rewards. The system was energy-intensive, albeit secure. For this reason, it was slower and not as sustainable.
Altcoins like Ethereum 2.0., Cardano, and Polkadot would later incorporate the faster Proof of Stake consensus system, which allows validators to create new blocks and verify transactions based on the amount of cryptocurrency they hold and are willing to “stake” as collateral. EOS and TRON, in turn, use Delegated Proof of Stake which allows a smaller group of elected validators to confirm transactions.
Transaction speed and scalability
Bitcoin can only process a block once every 10 minutes, which comes out to about 7 transactions per second. This causes a great deal of congestion during high-activity periods. One of the fastest altcoins in existence, Solana, by contrast, can handle over 50,000 TPS to Bitcoin’s 7. Thus, decentralized altcoins are vastly more efficient at providing high-volume, real-time transactions.
Types of altcoins
Let’s break down the broad diversity of altcoins that exist, each serving different purposes, offering different technical features, or focusing on specific use cases.
Bitcoin forks
These were altcoins that used BTC’s original codebase to improve its sluggishness and other limitations. The most notable of these was Bitcoin cash, which upped its block size limit to accelerate processing and works better for everyday transactions. Bitcoin SV follows the same idea, also adhering to Satoshi Nakamoto’s vision.
Stablecoins
The coins are created to eliminate volatility and are thus pegged to the value of traditional currencies. The USDT (USD tether) is pegged to the dollar 1:1. DAI is conversely maintained in value by crypto assets using smart contracts.
Privacy coins
These aim to actually provide true anonymity and privacy for people engaging in transactions, something that the original Bitcoin intended but failed to do. The most popular of these is Monero. Governments are heavily in opposition to these as they fear they could be used to facilitate crime.
Platform coins
These are designed to create and run dApps, powering whole ecosystems and allowing developers to create and run decentralized services. Cardano, Ethereum, and Polkadot are a few of them. In a recent article, Forbes broke down the possibility of whether Ethereum will rise to the level of Bitcoin.
Memecoins
These, for example, the Doge coin, lack strong technical foundations generally but are driven by humor, social media trends, and occasional viral popularity.
Utility tokens
These provide access to a specific product or service within a blockchain ecosystem and can be used to pay for transaction fees, premium services, or governance.
Risks and challenges of investing in altcoins
Of course, altcoins are not all sunshine and roses. Most of them never take off at all, referred to as “shitcoins”. The crypto market as a whole is difficult to predict and unregulated. Let’s talk about some of the downsides of altcoins.
- Market volatility: cryptocurrency is notorious for its extreme volatility, altcoins more so than BTC. Price swings happen in short periods. Of course, investors see opportunity in this. Rises in price often happen due to celebrity mentions and social media campaigns. Research Gate performed a study, analyzing the reasons for such high volatility in the market.
- Lack of regulation: for this reason, there is a higher risk of fraud and scams like rug pulls. In other countries, crypto coins are outright banned and tax policy on them can be unclear in some countries.
- Low liquidity: people might have a hard time executing large transactions without significantly affecting the price.
- Technological risks and security issues: bugs and flaws can expose investors to losing their assets. This refers to smart contracts which may have bugs. There was a DAO hack of Ethereum that cost millions of dollars.
- Failure: a lot of altcoins don’t get the funding they need and are abandoned. Competition is fierce from other products and some teams lack the know-how to break the mold.
Future of altcoins
While Bitcoins dominate as a store of value, many altcoins have carved out niches with unique use cases. Going forward, altcoins with strong utility and adaptability are likely to thrive, especially in sectors like gaming, supply chain, and Web3. However, the market is still challenged by the potential for regulation and only the special projects will break big.
