People tend to use the words ‘Cryptocurrency’ and ‘Bitcoin’ interchangeably – they think Bitcoin IS Cryptocurrency and Cryptocurrency IS Bitcoin. Whilst Bitcoin is the oldest and largest coin, there are thousands and thousands of other cryptocurrencies out there. In fact, there’s around 19,000. We refer to these coins as ‘altcoins’. Let’s break it down below.
Altcoins are all coins other than Bitcoin. Altcoin = alternative coin. Don’t worry if this is a facepalm moment for you, it was for me when I first discovered the term.
Even Ethereum (ETH), the second-largest coin with a market cap of $524,406,003,698 at the time of writing this blog, is technically an altcoin.
To put it into perspective, there are almost 19,000 cryptocurrencies as of May 2022, and they account for around 60% of the total cryptocurrency market.
Just like Bitcoin, altcoins use the blockchain as a means of securing peer-to-peer transactions, however as I’ll go into a bit further detail soon, they do have their differences. Further to this, only a small amount actually have real purpose and help advance blockchain technology. For instance, Ether and Chainlink aim to bridge the gap between blockchain tech and real-world applications. Oh and then we have sh*tcoins that do…well…nothing (hence the name).
Examples of Altcoins
So considering altcoins are all coins other than Bitcoin, even these common coins below are altcoins:
- XRP (Ripple)
- USD Coin
The rise of Altcoins
We are currently in the largest rise of cryptocurrency we have ever seen, with BTC leading the way with a market cap of $813.175B.
This rise of Bitcoin has led to the rise of Cryptocurrency in general, meaning altcoins are gaining more and more momentum and adoption. Bitcoin dominance shifts throughout the different stages of the market cycle and sometimes, we see altcoins taking more control in the market.
Thousands of altcoins exist, but very few have achieved success. Market Capitalization (Market Cap) can be used to identify the current value of an altcoin. Market Cap = Price multiplied by Circulating Supply. For example, if Ethereum was valued at $3,000 per coin and there were 10,000,000 coins in supply, the market cap or perceived value of the coin would be $3,000 x 10,000,000 = $30B.
How do altcoins Work?
They work the same way as Bitcoin in that people send payments from one digital wallet to another using a private key, which is recorded on the digital ledger in the blockchain. However, they also have their unique features by providing new or additional capabilities. Each altcoin has its own feature or characteristic that it does best. For example, whilst Bitcoins are mined every 10 minutes, Litecoin produces coins every 2.5 minutes, making for speedier transactions. Monero on the other hand, is much more anonymous than Bitcoin, making transactions much harder to trace.
They may also have different ways to solve equations or validate transactions. But let’s not overdo it right now.
Types of Altcoins
There are a few ways we can categorise altcoins and sometimes, they overlap.
Price stable cryptocurrencies that attempt to peg their market value to some external reference that is less volatile, such as USD or Gold. Tether is an example of a stablecoin and is pegged to the U.S. Dollar. Many crypto investors use Tether to escape the volatility of the market and find stability in their portfolios
Utility tokens are used to provide services within a network, such as purchase services, network fees, or redeeming rewards. XRP is an example of a utility token, providing faster and cheaper transaction fees.
As you can guess, these are cryptocurrencies based on internet memes and social movements. These are entirely speculative valuations based on popularity and hype. These tend to spike up in price when a community gets invested in this coin, followed by a massive sell off. Please be careful if considering these, you do not want to be left holding the bags. Dogecoin is the king/queen of memecoins and it has survived years but there are hundreds more memecoins that no longer exist.
These coins use mining to verify transactions, adding more coins to the supply in the process. Miners use mining rigs to solve mathematical equations which verifies a block of transactions on the blockchain. The first miner to solve the transaction gets rewarded with the crypto they’re mining. For example, a bitcoin miner gets rewarded in bitcoin if they solve the transaction first. However, mining uses significant energy expenditure.
Governance tokens provide holders with voting rights to help shape the future of a project. These are more common in De-Fi land (decentralised finance).
How they differ from Bitcoin
There is no arguing that many altcoins aim to provide a similar solution to Bitcoin, with many using the market leader as inspiration for their projects.
Although BTC is the most dominant coin in crypto, the technology isn’t perfect. Coming onto the scene a few years later, altcoins have the luxury of finding gaps in its offering and providing superior solutions or more efficient processes. Take this for example: Bitcoin uses a proof of work (PoW) consensus mechanism to validate transactions through mining, which uses significantly more energy than the proof of stake (PoS) model that many altcoins are using. It is also less time efficient to validate transactions. This has created a whole new market for altcoins with many investors preferring this consensus mechanism. To read more about PoW vs. PoS, see our article here.
Whilst Bitcoin initially aimed to be a peer to peer payment system (as set out in Satoshi Nakamotos’ 2008 whitepaper), its volatility means it will unlikely in the near future get to a stage where it will be exchanged for goods and services and will likely remain as a store of wealth. However, Bitcoin has paved the way for this idea with altcoins, in particular stable coins, to fulfil the aspirations from the whitepaper and be a means for everyday payments between parties.
From a financial perspective, altcoins offer a higher return on investment (ROI) due to their smaller market cap. For example, if Bitcoin is currently priced at $45,000 with a market cap of $758B, another $758B would need to be injected into Bitcoin for the price to increase 100% to $90,000 per coin, doubling your money. An altcoin with a market cap of only $100m, would only need another $100m to double its price. However, this does inherit higher risk.
However, as mentioned earlier, the altcoin market is much more speculative and accounts for less investors resulting in thinner liquidity. This means we expect to see more volatility in the price action of these coins, with a high number of these coins going bust as a result.
It is also much harder to distinguish the characteristics of different altcoins and can give investors a choice overload bias.
Are altcoins riskier than Bitcoin?
Yes, altcoins are much riskier investments than Bitcoin as they are mainly valued off speculation. As their market cap is a lot lower, their price action is also a lot more volatile than Bitcoin.
Altcoins generally, but not always, follow the price movements of Bitcoin. They lag just behind Bitcoin’s movements, generally with amplified price action. For example, if the price of Bitcoin goes up by 10%, we may see an increase in 15-20% of altcoins across the market. On the other hand, if the price of Bitcoin drops 20%, altcoins may drop 25-30% in the coming days. A rising tide lifts all boats…
Price movement of Altcoins
We often see a sea of green or red on the same day across the altcoin market in line with bitcoins price action. More altcoins show glimpses of decoupling from Bitcoin’s price action as time goes on, but this will take time. Once the crypto market matures into a better-established market, other coins will become independent to create their own destiny.
One key determinant that determines the extent of the price movement of a particular coin is if it plays a part in a theme circulating the news headlines or plastered over Twitter. Examples are coins with a privacy focus, in a gaming sector or eco friendly, to name a few. Altcoins located within the relevant social theme generally receive more love and capital than other altcoins at the same time,
To build on this, altcoins with a smaller market cap mean more potential upside and volatility that you can experience. This is because it takes fewer funds to move the price in either direction. Larger market cap altcoins typically move slower as it takes a lot more capital to shift the price.
How To purchase Altcoins
New Altcoins are relatively harder to buy and are less supported by wallets, meaning you may need to have a few different wallets to purchase all the different altcoins you want. However, exchanges are constantly updating their coins and onboarding new altcoins to the platform for users to purchase.
Digital Surge offers a lot of the main altcoins out there on the market (click here for $10 free crypto), but for the smaller cap options, you’ll need to likely set up a Binance and KuCoin account.
Should You Invest In Altcoins?
We believe cryptocurrency is here to stay (WOW, major news alert!), and adoption increases every day. We see more and more use cases for the technology, and even the Biden government over in the United States has stated they’re looking at regulating it. This will result in the rise of more altcoins with genuine utility, purpose and long term value.
There are an array of altcoins out there, all with their own unique purposes and competitive advantages (things they do better than other coins/projects). These altcoins offer higher potential rewards than Bitcoin, so we like to find the best altcoins out there and dedicate a specific amount of our portfolio to them, ensuring we have an appropriate risk management set up. Remember, the higher possible returns from altcoins comes with higher risk.
But don’t overdo it. Remember – only a few altcoins have genuine long term value, and the majority won’t last the test of time. A lot of research is required before investing to minimise the risk of scams or losses.
If you invest in altcoins, ensure you understand the risk involved.