What is an Altcoin?
An altcoin is any token or coin that is not Bitcoin.
Currently (2021) there are more than 10,000 altcoins and more are created every day.
Not all altcoins are equal, it is important to understand just as with the dot com bubble many coins and tokens will collapse long term, but some will become household names like Ethereum.
Altcoins can be put into categories just as with stocks. Some altcoins are a Blockchain, finance coin, insurance coin, NFT, yield farming, smart contracts, nodes, spending coins, memes, gambling, sports, etc.
All altcoins use blockchain technology which allows secure peer-to-peer transactions.
Some altcoins are proof-of-work (POW), some are proof-of-stake (POS).
It is worth noting that altcoins are often speculative investments and can move up and down as much as 20% a day or more. Many altcoins promise the world but end up delivering very little and so expect most altcoins over time to collapse and disappear.
However, some altcoins have already proved themselves like Ethereum and so are very much here to stay.
You can visit coinmarketcap and see altcoin categories here.
What is Proof of Stake and Proof of Work?
Investors who stake are usually rewarded with a percentage of the transaction fees which are used to run the network.
POW is different from POS, as it rewards the miners of an altcoin when they create (mine) a new coin for the network. Bitcoin is POW.
If you would like to learn in more detail how POS works please visit this site.
If you would like to learn in more detail how POW works please visit this site.
How do Altcoins work?
Usually, altcoins work in a similar way to Bitcoin. You have a private key (password to your digital wallet) and a public address which works like a bank account number to receive altcoins from others.
You can send and receive an altcoin from your digital wallet. For example, if you have an Ethereum wallet, you can receive and send Ethereum from your wallet.
Each transaction (send and receive) uses a blockchain and is permanently recorded on a ledger.
If you would like to learn more about what a ledger is please visit this site.
Different types of Altcoins
1. Security Tokens
What is a Crypto Security Token?
These are altcoin tokens that work in a similar way as securities traded on a stock exchange. The only real difference is that they are digital tokens as opposed to shares.
Security tokens usually offer equity (ownership) in a crypto company and sometimes offers a dividend payout to its token holders.
Security tokens are in their infancy, but many Crypto investors are drawn to them as they offer real ownership in a crypto company and a monthly (dividend) reward for holding their tokens.
Learn more about Security Tokens
If you would like to learn more about Security Tokens please visit this site.
2. Utility Tokens
What is a Crypto Utility Token?
Utility tokens differ from security tokens as they do not offer a stake or ownership in a company.
Utility tokens often do not offer a dividend, although they do sometimes offer the chance to stake your token (POS) and receive a daily, weekly, or monthly reward.
These rewards are usually paid out in the same (native) token you stake and the rewards range from a low yearly percentage to as much as hundreds of percent a year.
Utility tokens are used to provide a service within a network. For example, you can use your token to pay for a product or service.
What is a Crypto Stablecoin?
The problem with altcoins is their price volatility.
The solution is stablecoins.
Stable coins are designed to be very stable. To accomplish this, stablecoins are usually pegged to fiat currencies such as the US dollar.
Stablecoins are incredibly important as part of the overall crypto ecosystem. When an investor realises a profit in an altcoin trade they have the option to sell out into a stablecoin as opposed to into another altcoin or Bitcoin. This helps protect a trader’s profits from volatility.
The next evolution of stablecoins is large corporations creating and using their own. An example of this is Facebook creating their own stablecoin called Diem.
Should you invest in Altcoins?
Altcoins are very risky, however, with great risk can come great reward.
Many altcoins have increased in value as much as a 100 times or more from their initial price. In an altcoin bull season, many alt coins will 10x within days or weeks. If you can find a gem you can make life-changing profits.
Remember for every winner just as in stocks there is a loser and you want to form a strategy that works for you. The main rule of thumb is to always to look to protect your initial investment with stop losses just as you would in stock options trading.
Unlike the stock market, the crypto market is very young and not fully regulated. One day it will be a mature investment sector, but for now, you need to tread carefully in this speculative market.
The safest way to play the altcoin market is to always look to take your initial investment out as soon as possible and then play with pure profits only.
Why do investors trade Altcoins?
Active traders and bitcoin accumulators
Some long-term experienced crypto investors trade the altcoins as they often give a much higher return over a specified time than if they had simply bought and held bitcoin.
The aim is to jump in and out of altcoins as they increase in value and then take these profits and sell directly back out into bitcoin, thereby always increasing your overall bitcoin holdings.
Done correctly an investor may put 0.2 BTC into an altcoin and a month later sell out and now have 0.3 BTC. Altcoins can be traded as a means to add to your overall bitcoin holdings.
Long term crypto investors
Long-term investors simply dollar cost average into Bitcoin and a few select altcoins (over time) and have been handsomely rewarded for this strategy.
If an investor believes in this market they can make a lot of money long term finding solid companies that will survive and thrive in this sector. This is often referred to as the buy-and-hold investing strategy.
Crypto swing traders
Crypto IDO, ICO, and early investors
This is very similar to investing in IPO’s in the stock market, the only difference is you are investing in an ICO or IDO and they are often NOT regulated.
Early crypto investors have made absolute fortunes from getting into an altcoin before it can be publicly traded on an open cryptocurrency exchange.
As long as you are selective and do your due diligence this can be one of the safest risk-reward strategies in the crypto investing sector.
We would also like to mention that you can invest in IDO and ICO platforms such as CARDS. This company card starter allows early investors to invest in startups looking to run on the Cardano network. Early CARDS investors not only saw their initial buy-in increase by more than 20x in the first few months, but most of the IDO’s on this platform have 30X or more. A double whammy return.
What are the pros and cons of Altcoins?
Improve on Bitcoin
Altcoins, especially spending tokens look to be faster, cheaper, and easier to mine than bitcoin, and some reward owners with staking rewards.
Low transaction fees
Many altcoins are designed to be far more affordable than bitcoin as a payment method. Transaction fees can be minuscule for some spending coins.
Store of value
Stablecoins are often now used as a store of value after a successful trade and also used as a means of trading between other cryptocurrencies, which only a few years ago was done mainly using bitcoin.
There are many altcoins allowing exposure across multiple different market sectors and perform different functions in the crypto economy.
Scams, fraud and many fail
There have been many altcoins that have simply turned out to be a scam, or committed fraud to entice investors, other altcoins have simply not lasted more than a few months due to many reasons like market conditions or poor financial management by companies.
Altcoins volatility, especially early on is often huge and makes them very unstable investments.