Day 7 of 100 | Crypto Basics | 5 min read
What are Altcoins? Beyond Bitcoin
Master what are altcoins? beyond bitcoin in this comprehensive lesson. Build your cryptocurrency knowledge step by step.
### Exploring the Universe Beyond Bitcoin
While Bitcoin was the first cryptocurrency and remains the largest by market capitalization, it represents only a fraction of the digital asset landscape. Since Bitcoin's creation, thousands of alternative cryptocurrencies, collectively known as altcoins, have emerged. Each claims to offer something different or improved compared to Bitcoin. Understanding altcoins is essential for anyone looking to participate fully in the cryptocurrency ecosystem, whether as an investor, user, or developer.
The term altcoin is a combination of alternative and coin. It refers to any cryptocurrency other than Bitcoin. This includes everything from major projects with billions of dollars in market capitalization to tiny tokens created for specific purposes or even as jokes. The diversity of altcoins reflects the creativity and experimentation happening in the cryptocurrency space.
### Why Altcoins Exist
Bitcoin was a breakthrough, but it was not perfect. Its design reflects specific choices that prioritize certain properties over others. Some developers saw opportunities to create cryptocurrencies that made different trade-offs or served different purposes.
[TIP] When evaluating altcoins, always ask what problem they solve that Bitcoin does not. If the answer is unclear, the altcoin may not have long-term value. The cryptocurrency space is littered with projects that offered nothing new but briefly attracted speculation before fading away.
Early altcoins often focused on technical improvements. Litecoin, created in 2011, was one of the first major altcoins. It used a different mining algorithm that was intended to be resistant to specialized hardware, making it more accessible to regular computer users. It also offered faster transaction confirmation times. These were reasonable improvements that gave Litecoin a distinct purpose.
Other altcoins expanded what cryptocurrency could do. Ethereum, launched in 2015, introduced smart contracts, allowing developers to create complex applications on the blockchain. This opened up entirely new use cases beyond simple value transfer, including decentralized finance, non-fungible tokens, and decentralized organizations.
Some altcoins focus on privacy. While Bitcoin transactions are pseudonymous, they are recorded on a public ledger that sophisticated analysis can sometimes de-anonymize. Cryptocurrencies like Monero and Zcash implement advanced cryptographic techniques to make transactions truly private.
### Categories of Altcoins
The altcoin universe is vast and varied, but most projects fall into several broad categories.
Platform tokens power blockchain networks that enable smart contracts and decentralized applications. Ethereum is the largest and most established, but competitors like Solana, Avalanche, and Polkadot offer different approaches to scalability, speed, and interoperability. These platforms are like operating systems on which developers can build applications.
[EXAMPLE] Think of Ethereum like iOS or Android. Just as mobile app developers build applications that run on these operating systems, blockchain developers build decentralized applications that run on Ethereum. The ETH token is used to pay for computational resources on the Ethereum network, similar to how cloud computing services charge for processing power.
Payment coins focus on enabling transactions. While Bitcoin can serve this purpose, its relatively slow confirmation times and high fees during busy periods have created space for alternatives. Litecoin, Bitcoin Cash, and Stellar are examples of cryptocurrencies designed primarily for payments.
Stablecoins are designed to maintain a stable value, typically by being pegged to a traditional currency like the US dollar. Tether, USD Coin, and Dai allow users to enjoy the benefits of cryptocurrency, such as fast transfers and programmability, without the volatility. They serve as bridges between the traditional financial system and the crypto economy.
Utility tokens provide access to specific products or services within a particular ecosystem. For example, the BAT token is used within the Brave browser ecosystem to reward users and content creators. These tokens derive their value from the utility they provide rather than as a general-purpose currency.
Governance tokens give holders voting rights in decentralized protocols. Uniswap's UNI token, for instance, allows holders to vote on changes to the Uniswap decentralized exchange. As decentralized autonomous organizations become more common, governance tokens play an increasingly important role.
Meme coins started as jokes but have sometimes developed real communities and value. Dogecoin, created in 2013 as a parody of cryptocurrency hype, became a cultural phenomenon and is now among the largest cryptocurrencies by market capitalization. These tokens illustrate that value in cryptocurrency can come from community and attention as much as from technical innovation.
### The Second-Largest Cryptocurrency: Ethereum
No discussion of altcoins would be complete without focusing on Ethereum, which represents a fundamentally different approach to blockchain than Bitcoin.
Ethereum was proposed in 2013 by Vitalik Buterin, who was just nineteen years old at the time. He envisioned a blockchain that could do more than just transfer value. Instead of having a specific purpose, Ethereum would be a general-purpose platform on which developers could build any application.
[KEY] While Bitcoin can be thought of as a calculator designed to do one thing well, Ethereum is more like a computer that can run any program. This flexibility has made Ethereum the foundation for most of the innovation happening in cryptocurrency, from decentralized finance to NFTs.
The key innovation is the smart contract. A smart contract is a program that runs on the blockchain and executes automatically when certain conditions are met. These contracts can hold funds, transfer tokens, interact with other contracts, and perform complex operations without requiring any central authority.
Ethereum's native currency, Ether or ETH, serves multiple purposes. It is used to pay for computational resources on the network, compensating the validators who process transactions. It also serves as a form of money within the Ethereum ecosystem and is widely traded and held as an investment.
In 2022, Ethereum completed a major upgrade called the Merge, transitioning from proof-of-work to proof-of-stake. This reduced the network's energy consumption by over ninety-nine percent and changed the economic model for network security. Validators now stake ETH as collateral rather than expending computational energy.
### Evaluating Altcoin Projects
With thousands of altcoins available, how do you evaluate which ones might be worth your attention? While there are no guarantees in cryptocurrency, several factors can help distinguish promising projects from likely failures.
Team and development activity matter enormously. Who is building the project? Do they have relevant experience? Is the project actively being developed, with regular code commits and updates? Abandoned projects litter the cryptocurrency landscape, so ongoing development is a positive sign.
[WARNING] Be extremely skeptical of projects that promise guaranteed returns, use excessive marketing without substance, or have anonymous teams with no track record. These are red flags that often indicate scams or projects likely to fail.
Technology and innovation should be evaluated carefully. What does this altcoin do differently from Bitcoin or other existing projects? Is the technology sound, or is it based on unproven or impossible claims? Projects that cannot clearly explain their technical advantages may not have any.
Community and adoption are crucial for long-term success. Does the project have an active community of users and developers? Are real applications being built on the platform? Are there partnerships with established companies or organizations? A strong community can sustain a project through difficult periods.
Tokenomics refers to the economic design of the token. What is the total supply? How are new tokens distributed? Are there large holdings concentrated in the hands of insiders who could dump on the market? Understanding these factors helps you assess whether holding the token makes economic sense.
Market position and liquidity matter for practical reasons. Can you easily buy and sell the token on reputable exchanges? Illiquid tokens can be difficult to exit when you want to sell, and tokens only available on obscure exchanges carry additional risks.
### The Risks of Altcoin Investing
Altcoins generally carry higher risks than Bitcoin. While this higher risk can come with higher potential rewards, it also means higher potential for losses.
Most altcoins will eventually fail. History shows that the vast majority of cryptocurrency projects created over the years have either been abandoned, lost most of their value, or turned out to be outright scams. For every successful project, there are hundreds of failures.
[TIP] A common strategy is to maintain a core portfolio in Bitcoin and Ethereum while allocating a smaller portion to promising altcoins. This balances the potential for higher returns from altcoins with the relative safety of the more established cryptocurrencies.
Liquidity risk is higher for smaller altcoins. If you own a significant amount of a thinly traded token, you may not be able to sell without significantly moving the price. This can turn paper profits into actual losses.
Regulatory risk is unpredictable. Regulators are still developing frameworks for cryptocurrency, and their decisions could dramatically impact specific projects. Tokens that might be classified as unregistered securities face particular risk.
Despite these risks, altcoins represent the frontier of cryptocurrency innovation. The next major breakthrough in the space will likely come from a project that is currently considered an altcoin. For those willing to do their research and accept higher risk, altcoins offer opportunities that do not exist in more established markets.
As you continue through this course, you will learn more about specific categories of altcoins, how to evaluate projects, and how to manage the risks of a diversified cryptocurrency portfolio.
Knowledge Check
What is a key aspect of what are altcoins? beyond bitcoin?
- It's only for advanced users
- Understanding the fundamentals is essential for making informed decisions (Correct)
- It doesn't apply to cryptocurrency
- It requires expensive equipment
Explanation: Understanding the fundamentals of what are altcoins? beyond bitcoin is essential for anyone participating in the cryptocurrency ecosystem. This knowledge helps you make better decisions and avoid common mistakes.