What Is Altcoin? A Guide to Alternative Cryptocurrencies

Cryptocurrencies are one of the most exciting and innovative developments in the financial world. While Bitcoin is the pioneer and leader of this space, there are many other cryptocurrencies that offer different features, functions, and purposes. These alternative cryptocurrencies are known as altcoins, and they have attracted a lot of attention from investors, developers, and enthusiasts. In this article, we will explain what altcoins are, how they differ from Bitcoin, what types of altcoins exist, what are their pros and cons, and what is their future outlook.

What Is Altcoin

Cryptocurrencies are digital assets that use cryptography to secure transactions and control the creation of new units. Bitcoin is the most well-known and widely used cryptocurrency, but it is not the only one. There are thousands of other cryptocurrencies, collectively known as altcoins, that offer different features, functions, and purposes.

In this article, we will explore what altcoins are, how they differ from Bitcoin, what types of altcoins exist, what are their pros and cons, and what is their future outlook.

Understanding Altcoins

The term altcoin is a combination of the words “alternative” and “coin”. It is generally used to include all cryptocurrencies and tokens that are not Bitcoin. Altcoins belong to the blockchains they were explicitly designed for. Many are forks—a splitting of a blockchain that is not compatible with the original chain—from Bitcoin and Ethereum. These forks generally have more than one reason for occurring. Most of the time, a group of developers disagree with others and leave to make their own coin.

Many altcoins are used within their respective blockchains to accomplish something, such as ether, which is used in Ethereum to pay transaction fees. Some developers have created forks of Bitcoin and re-emerged as an attempt to compete with Bitcoin as a payment method, such as Bitcoin Cash. Others fork and advertise themselves as a way to raise funds for specific projects.

For example, the token Bananacoin forked from Ethereum and emerged in 2017 as a way to raise funds for a banana plantation in Laos that claimed to grow organic bananas. Dogecoin, the popular meme coin, was apparently created as somewhat of a joke. It forked from Litecoin, which itself forked from Bitcoin in 2011. Whatever the intent behind its creation, it was still designed to be a digital payment method.

Altcoins attempt to improve upon the perceived limitations of whichever cryptocurrency and blockchain they are forked from or competing with. The first altcoin was Litecoin, forked from the Bitcoin blockchain in 2011. Litecoin uses a different proof-of-work (PoW) consensus mechanism than Bitcoin, called Scrypt (pronounced es-crypt), which is less energy-intensive and quicker than Bitcoin’s SHA-256 PoW consensus mechanism.

Types of Altcoins

Altcoins can be classified into several types based on what they were designed for:

• Payment tokens: These are altcoins that aim to be used as currency—to exchange value between parties. Examples include Litecoin, Bitcoin Cash, Dash, and Nano.
• Stablecoins: These are altcoins that try to reduce the volatility of cryptocurrencies by pegging their value to a more stable asset, such as fiat currency or gold. Examples include Tether, USD Coin, Dai, and Paxos Standard.
• Security tokens: These are altcoins that represent ownership or rights to an underlying asset or project, such as equity, debt, or real estate. Examples include Polymath, tZERO, and Harbor.
• Utility tokens: These are altcoins that provide access or functionality to a platform or service, such as computing power, storage space, or network bandwidth. Examples include Ethereum, EOS, Filecoin, and Binance Coin.
• Governance tokens: These are altcoins that allow holders to participate in the decision-making process of a protocol or platform, such as voting on proposals or changes. Examples include MakerDAO, Compound, Uniswap, and Aave.

Pros and Cons of Altcoins

Altcoins have some advantages and disadvantages compared to Bitcoin²:

Pros

• They can improve upon some aspects of Bitcoin’s weaknesses, such as scalability, speed, privacy, or energy efficiency.
• They can offer higher potential rewards due to their lower prices and higher growth rates.
• They can provide a large selection of altcoins with different use cases and niches.

Cons

• They have lower popularity and smaller market cap than Bitcoin, which makes them more vulnerable to market fluctuations and manipulation.
• They are less liquid than Bitcoin, which means they have lower trading volumes and higher spreads.
• They face more regulatory uncertainty and legal challenges than Bitcoin.

Altcoins vs. Bitcoin

Altcoins and Bitcoin have some similarities and differences in terms of technology, purpose, market value, and adoption:

Technology

• Both use blockchain technology to store transactions and validate new blocks through consensus mechanisms.
• Both use cryptography to secure transactions and prevent double-spending.
• Both have limited supply of coins that can be mined or minted over time.

Purpose

• Both can be used as a medium of exchange or a store of value.
• Both can facilitate peer-to-peer transactions without intermediaries or central authorities.
• Both can enable financial inclusion and innovation.

Market Value

• Bitcoin has the highest market cap among all cryptocurrencies at over $600 billion as of November 2021.
• Altcoins have a combined market cap of over $600 billion as of November 2021, with Ethereum being the largest altcoin at over $200 billion.
• Bitcoin has the highest price among all cryptocurrencies at over $30,000 as of November 2021.
• Altcoins have lower prices than Bitcoin, ranging from a few cents to a few thousand dollars.

Adoption

• Bitcoin has the widest adoption among all cryptocurrencies, with over 100 million users and over 10,000 nodes worldwide.
• Altcoins have lower adoption than Bitcoin, with varying degrees of user base and network size depending on the project.
• Bitcoin has the most institutional support and recognition among all cryptocurrencies, with several companies, funds, and governments holding or accepting it.
• Altcoins have less institutional support and recognition than Bitcoin, with some exceptions such as Ethereum, which is used by many enterprises and organizations.

Examples of Altcoins

There are thousands of altcoins available in the market, each with its own features and functions. Here are some examples of popular altcoins:

• Ethereum (ETH): The second-largest cryptocurrency by market cap, Ethereum is a platform that enables developers to create decentralized applications (dApps) and smart contracts using its native token ether. Ethereum also supports many other altcoins that are built on its blockchain.
• Binance Coin (BNB): The native token of Binance, the largest cryptocurrency exchange by trading volume, Binance Coin can be used to pay trading fees and get discounted trades on the platform. Binance Coin also powers the Binance Smart Chain, a blockchain that supports many dApps and tokens.
• XRP (XRP): The native token of Ripple, a payment network that facilitates cross-border transactions using blockchain technology. XRP can be used to transfer value between different currencies and institutions in a fast and cheap way.
• Cardano (ADA): A blockchain platform that aims to provide a more scalable, secure, and sustainable alternative to Ethereum. Cardano uses a proof-of-stake (PoS) consensus mechanism that rewards holders for staking their coins. Cardano also supports smart contracts and dApps.
• Solana (SOL): A blockchain platform that claims to offer high performance, low cost, and scalability. Solana uses a novel consensus mechanism called proof-of-history (PoH) that timestamps transactions in a sequential order. Solana also supports smart contracts and dApps.

Future of Altcoins

The future of altcoins is uncertain and depends on many factors, such as technological innovation, regulatory landscape, market dynamics, and community resilience. Some possible scenarios for the future of altcoins are:

• Altcoins will coexist with Bitcoin and complement each other in different use cases and niches.
• Altcoins will surpass Bitcoin and become the dominant cryptocurrencies in terms of market value and adoption.
• Altcoins will fade away and lose relevance as Bitcoin consolidates its position as the leading cryptocurrency.
• Altcoins will diversify and proliferate into new categories and subcategories of cryptocurrencies.

Bottom Line

Altcoins are cryptocurrencies that are not Bitcoin. They are designed to improve upon or compete with Bitcoin in various aspects, such as scalability, speed, privacy, or energy efficiency. Altcoins come in different types based on what they were designed for, such as payment tokens, stablecoins, security tokens, utility tokens, or governance tokens. Altcoins have some advantages and disadvantages compared to Bitcoin. They can offer higher potential rewards but also higher risks. They can provide more functionality but also more complexity. They can enable more innovation but also face more uncertainty. The future of altcoins is hard to predict but likely to be influenced by technological innovation, regulatory landscape, market dynamics, and community resilience.