Altcoins – Made for Everyone
Altcoin is a general term used to describe any cryptocurrency other than Bitcoin. The earliest altcoins to emerge were attempts to improve on Bitcoin’s design. Developers quickly began creating altcoins with additional features, showcasing different use cases for the blockchain. During the process, a new class of speculative assets emerged.
In 2022, there are more than 20,000 cryptocurrencies in circulation. Their total market cap (the current value of all cryptocurrencies) is $1 Trillion. Bitcoin dominance (the ratio of its market cap to that of all other cryptocurrencies) is about 40%. The remaining 60%, or $600 billion, is made up of altcoins. One-third of that ($200 billion) is made up of Ether (ETH), the native token of Ethereum, the altcoin with the greatest market cap by far.
Ethereum, a distributed blockchain computing platform released in 2015, was the most significant breakthrough following the launch of Bitcoin and blockchain technology. It soon distinguished itself from other projects at the time by introducing smart contracts and decentralized applications.
Smart contracts are code-based agreements that live on a blockchain. Smart contracts enable strangers to collaborate with the confidence that the terms of their agreement are honoured because they execute automatically when predetermined requirements and conditions are met.
Many innovations, such as Decentralized Finance, grew out of the possibilities provided by smart contracts. DeFi enabled investing, borrowing, and passive income generation through peer-to-peer financial services, eliminating the need for intermediaries such as banks or brokers. A growing number of financial institutions, including banks, exchanges, and more sophisticated financial services such as asset and liability management, are being recreated decentralized in the future.
Ethereum also has its own ERC20 standard for the creation of new tokens. Most cryptocurrencies that exist today began as ERC20 tokens before transferring to their own network (mainnet).
As the Ethereum network gained popularity, the cost of transactions (Gas) also rose to prohibitive levels, particularly during bull runs. As a result, several competitors, dubbed as Ethereum killers, such as Cardano (ADA) and Solana (SOL), emerged.
Various types of altcoins evolved, defined by distinct functions. While not exhaustive, the categories below show how this new asset class is contributing to a new version of the internet and finance based on the principle of decentralization.
Although the terms are frequently used interchangeably, there are distinctions between coins and tokens. Coins are digital currencies that are linked to public open blockchains and are intended to store value over time. They offer no use other than to serve as money. Tokens, on the other hand, are digital assets issued by the project that can be used to pay for goods and services within the project’s ecosystem. While comparable to coins, they allow the bearer to participate in the network.
Stable coins such as Tether (USDT) and USD Coin (USDC), are intended to keep their value stable. Because of their low volatility, they are great for payments and transactions. Stable coins enabled users who did not have access to USD to transact and send money. They are disrupting the remittance system, as crypto remittances increased by 900% in 2021, with Latin America accounting for most of these transactions.
Security tokens, such as Blockchain Capital (Bcap), are the digital equivalent of a company’s tradeable securities, such as shares or bonds. They are a regulated type of asset investment that entitles the owner to voting rights, dividends, and a cut of the profits.
Utility tokens, in contrast, are designed to enable people to use or access the services or rewards of a specific ecosystem. Despite their presence on numerous exchanges, they were not originally intended for investment purposes. Examples include Filecoin’s FIL, with which users pay storage providers for their services, and Smooth Love Potion (SLP), which is spent on prizes and interactions within the play-to-earn game ‘Axie Infinity’.
It can be difficult to balance the supply of utility tokens. If the token becomes too rare, or if users believe it will be more useful to them in the future, they may end up hoarding it, reducing its supply to dangerous levels. On the other side, if there are too many units accessible, customers will be willing to spend them, but the value of the token can plummet.
Meme coins, such as Dogecoin (DOGE) and Shiba Inu (SHIB) are crypto tokens that originated from an Internet meme or as a joke. They are characterized by their great volatility, which is mostly affected by online community sentiment.
Mining-based cryptocurrencies, such as Monero (XMR) and Litecoin (LTC), employ mining to authenticate transactions and add new coins to the supply (LTC). These share more of their DNA with Bitcoin.
Staking-based currencies, on the other hand, entail committing (proof-of-stake) cryptocurrencies to secure a blockchain network and validate transactions.
Despite the fact that cryptocurrencies have introduced significant advances to the ecosystem, none of them have been able to supplant bitcoin as the dominant store of value.
That said, Bitcoin is not universally recognized as perfect. While the code and reasons people invest in it haven’t changed in the last 12 years, the speed with which transactions are settled and the amount of energy required for mining are common areas of contention among programmers. As a result, the first altcoins to emerge (Namecoin in 2011) were developed as forks from the bitcoin blockchain (reproductions of the open-source code) to improve specific aspects of Bitcoin design.
The first consideration was speed. Bitcoin transactions are recorded in each new block. A new block is formed every 10 minutes or so, making transaction settlement time-consuming. Some attempted to increase the number of transactions in each block, while others sought speedier transactions.
Because each new use case necessitates a change in the original design elements, new altcoins introduce a trade-off in terms of decentralization, speed, and security.
The proliferation of altcoins has significantly increased the number of speculative assets available to traders and investors. They serve as the modern stocks of the digital economy, allowing investors to join initiatives and participate in their governance. Altcoins allow investors to diversify their portfolio beyond Bitcoin. While more volatile and risker than Bitcoin, numerous cryptocurrencies have delivered returns that are orders of magnitude bigger.
While short-term altcoin traders enter and exit the market based on technical analysis and sentiment on social channels, long-term investors establish a process to look past the hype and identify the altcoins that have a high potential for returns in the upcoming market cycle. Check out our guide to evaluating cryptocurrency projects before you invest!
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