What Are Altcoins?

Altcoins are the other cryptocurrencies launched after the success of Bitcoin. Generally, they sell themselves as better alternatives to Bitcoin. The term "altcoins" refers to all cryptocurrencies other than Bitcoin. As of early 2020, there were more than 5,000 cryptocurrencies by some estimates. According to CoinMarketCap, altcoins accounted for over 34% of the total cryptocurrency market in February 2020.

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 Ripple were the largest altcoins by market capitalization in February 2020.

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. Ethereum was the best known mining-based altcoin as of February 2020.

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, even though it had not launched yet as of January 2020.

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.

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.