What Are Altcoins?

Altcoins are cryptocurrencies launched after the success of Bitcoin, which sell themselves as better alternatives to Bitcoin. The term "altcoins" refers to all cryptocurrencies other than Bitcoin. As of March 2021, there were almost 9,000 cryptocurrencies. According to CoinMarketCap, altcoins accounted for over 40% of the total cryptocurrency market in March 2021.

Key Takeaways

  • The term "altcoins" refers to all cryptocurrencies other than Bitcoin.
  • Some of the main types of altcoins include mining-based cryptocurrencies, stablecoins, security tokens, and utility tokens.
  • Altcoins might include only mining-based cryptocurrencies other than Bitcoin in the future as usage continues to develop with technology.
  • Ethereum and Binance Coin were the largest altcoins by market capitalization in March 2021.

Understanding Altcoins

"Altcoin" is a combination of the two words "alt" and "coin" and includes all alternatives to Bitcoin. The success of Bitcoin as the first peer-to-peer digital currency paved the way. Many altcoins are trying to target the perceived limitations of Bitcoin. An altcoin must have a competitive advantage to succeed against Bitcoin.

Many of the altcoins are built upon the basic framework provided by Bitcoin. Thus, most altcoins are peer-to-peer. They try to offer efficient and inexpensive ways to carry out transactions on the Internet. Even with many overlapping features, altcoins vary widely from each other.

Types of Altcoins

As altcoins evolved, distinct categories emerged. Some of the main types of altcoins include mining-based cryptocurrencies, stablecoins, security tokens, and utility tokens. There is also some movement toward separating most of these concepts from altcoins. If that trend continues, altcoins might refer only to mining-based cryptocurrencies other than Bitcoin in the future.

It is possible for an altcoin to fall into more than one category.

Mining-Based

These altcoins have a mining process by which new coins are generated by solving challenging problems to unlock blocks. They are more similar to Bitcoin than other altcoins. Most of the top altcoins in early 2020 fell into this category, with Ethereum as the best-known mining-based altcoin as of March 2021.

Stablecoins

Stablecoins seek to improve on Bitcoin by reducing volatility. In actual practice, this is achieved by tying the value of the coins to existing currencies. Popular choices for backing altcoins include the U.S. dollar, the euro, and gold. Facebook's Libra is by far the most famous stablecoin, which the company plans to launch sometime in 2021. While Facebook has shifted its plan a few times with Libra, the project will now "reportedly transition to supporting both existing government-backed currencies...and the Libra token" when it is officially launched, according to The Verge.

Security Tokens

These altcoins are linked to a business, and they often launch in an initial coin offering (ICO). Security tokens resemble traditional stocks, and they often promise some type of dividend like payout or ownership in a business.

Utility Tokens

Utility tokens provide a claim on services, and they are sometimes sold as part of an ICO. Filecoin is an excellent example of a utility token offered in an ICO. Filecoins are designed to be exchangeable for decentralized file storage space.

Advantages and Disadvantages of Altcoins

Altcoins are frequently looked to as promising alternatives to Bitcoin, though they occupy a much smaller share of the market and often have different use cases. With Bitcoin dominating the cryptocurrency market as the first mover in the blockchain industry, many businesses are relying on Bitcoin as a well-known first step into cryptocurrencies. At its core, Bitcoin was created as an alternative to national currencies, cementing its spot as a store of value and medium of exchange.

However, altcoins like Etherum are competing against Bitcoin and giving it a run for its money. Many of the traditional critiques against Bitcoin have been addressed by altcoins, such as the volatility of Bitcoin through stablecoins. Those who are looking to invest in more traditional means can also find a happy hybrid by investing in initial coin offerings, as well.

Pros
  • Critics of Bitcoin can turn to altcoins to invest in "better" versions of the cryptocurrency.

  • Investors can choose altcoins based on the projections of their underlying algorithm or use case.

  • Stable coins, a type of altcoin, offer a less volatile investing alternative to BTC.

Cons
  • Bitcoin dominates the cryptocurrency market with 60% of market share.

  • Not all altcoins are designed to be alternatives to currency or as monetary investments.

  • Altcoins vary greatly from each other, though many were built upon BTC's basic framework and make it hard to truly get a market advantage over it.

Early Examples of Altcoins

The earliest notable altcoin, Namecoin, was based on the Bitcoin code and used the same proof-of-work algorithm. Like Bitcoin, Namecoin is limited to 21 million coins. Introduced in April 2011, Namecoin primarily diverged from Bitcoin by making user domains less visible. Namecoin allowed users to register and mine using their own .bit domains, which was intended to increase anonymity and censorship resistance.

Introduced in October 2011, Litecoin was branded as the "silver to Bitcoin's gold." While fundamentally similar in code and functionality to Bitcoin, Litecoin differs from Bitcoin in several essential ways. It allows mining transactions to be approved more frequently. It also provides for a total of 84 million coins to be created—exactly four times Bitcoin's 21 million coin limit. Some think Litecoin could be a better investment than Bitcoin itself.

Future of Altcoins

The future of altcoins is promising, as many new altcoins saturate the market and pose their own challenge to the reigning Bitcoin. For investors looking to diversify within the cryptocurrency space, altcoins are perfect in order to boost portfolio returns for when Bitcoin rallies, as some have exploded and multiplied 40 or 50 times in value. Especially as companies like Facebook look to roll out their own altcoins, there is plenty of space in the market as blockchain technology matures.

Altcoin FAQs

What Is an Altcoin?

The term "altcoins" refers to all cryptocurrencies other than Bitcoin.

What Are the Top 10 Altcoins?

The top 10 altcoins are Ethereum, Binance Coin, Tether, Cardano, Polkadot, XRP, Uniswap, THETA, and Litecoin as of March 2021.

How Much Is an Altcoin?

Altcoins range in price, from $1.51 for an IOTA to $1,809.92 for an Ethereum, or more.

What Is the Best Altcoin to Invest In?

Based on market capitalization, Ethereum is the largest and most well-established, open-ended decentralized software platform. It is the leading altcoin.

The Bottom Line

Altcoins account for over 40% of the total cryptocurrency market, posing a mounting challenge to the dominant Bitcoin. While some like Ethereum are recognizable by name, the majority of the almost 9,000 altcoins are holding their own as potentially attractive medium and long-term investing opportunities.