It’s no secret that cryptocurrency is continuing to gain more traction in the broader investment landscape. To add to that, emerging crypto services like cryptocurrency credit cards and crypto paychecks are becoming more commonly used and widely available. As a result, new investors are often encountering unfamiliar terminology – such as “altcoin” – along their journey into the crypto marketplace.
If you’re new to the cryptocurrency market, understanding some of the key terms makes navigating this financial landscape much easier. To answer the question of what an altcoin is — and why it’s important to understand — here are the basics you need to know.
Defining Altcoins: What They Are (and Aren’t)
“Altcoin” is a term that refers to every cryptocurrency aside from Bitcoin. Essentially, it’s a category for Bitcoin alternatives, with “alternatives” serving as the basis for the name of the coin group — “alt.”
Functionally and technically, altcoins have a lot in common with Bitcoin. For instance, they may share certain code or rely on peer-to-peer systems for data processing and transaction verifications.
However, an altcoin can also offer capabilities beyond what Bitcoin provides, like advanced smart contracting features. Additionally, altcoins may use different consensus mechanisms, technical structures, validation processes and value-setting concepts.
While there’s some debate about the exact number of cryptocurrency coins on the market today, most sources agree that there are at least 10,000. Of those, effectively all but one qualify as altcoins.
Since Ethereum has the second-largest market share – coming in over $360 billion, putting it behind Bitcoin, which is firmly in the number-one spot – Ethereum is the most popular altcoin. While there are other prominent players, the vast majority of altcoins have tiny market caps by comparison.
Common Types of Altcoins
Altcoins come in a variety of forms. Usually, they’re divided based on functionality, technical framework or similar points, allowing them to stand apart from other offerings within the marketplace. Any given altcoin may fall into one or several categories. Below is an overview of some of the more common types of altcoins.
Mined altcoins – like Bitcoin – are brought into the marketplace through mining. When a person mines, they use a capable computer to perform certain calculations. If they’re the first to solve a particular equation, the miner receives a bit of the associated crypto in return.
Mining is a crucial part of the ecosystem for proof-of-work coins. In that case, the calculations play a role in transaction verifications. Typically, providing crypto to miners allows the newly released coins to serve as a reward for participating in transaction-verification activities. That ensures the blockchain builds itself — while giving those who lend a hand an incentive to support those critical processes.
There are numerous mined altcoins on the market. Some of the most popular include Litecoin, Monero and ZCash, though they aren’t the only ones.
Pre-mined altcoins aren’t released through mining processes. Instead, they’re typically distributed using a set procedure, such as issuing the coins during an initial coin offering (ICO). XRP is an example of a pre-mined altcoin.
Stablecoins are altcoins that aim to address the volatility you typically see in the cryptocurrency market. The value of stablecoins is aligned with another asset, such as a fiat currency or precious metals. USDT and USD Coin are both examples of stablecoins.
Meme coins are cryptocurrencies that were inspired by meme culture, often representing a popular joke within that circle or acting as a parody of an existing crypto. While many meme coins experience short periods of rapid growth – followed by dramatic tumbles – some ultimately gain traction. Dogecoin is the strongest example of one doing far better than most people expected.
Utility tokens are coins with limited capacity. Typically, they’re designed only for accessing services on a specific platform. They don’t represent an ownership stake in a company or provide dividends. However, they can experience value increases and decreases.
Security tokens are functionally more like stocks than cryptocurrencies. Typically, they represent an equity stake in a company or provide dividends to investors. Since that’s the case, they’re viewed as securities by various government agencies, including the Securities and Exchange Commission and IRS.
Why Are Altcoins Viewed Differently?
Generally, Bitcoin is the quintessential cryptocurrency. As a result, anything that hit the scene afterward is commonly compared to Bitcoin when it comes to form and function. The fact that the comparison occurs is the main reason altcoins are often viewed in a different light.
However, other factors can play a role. Not all altcoins are as well-established as Bitcoin, which can and does influence whether some people choose to invest in them. Additionally, some may feel that altcoins have more growth potential because the majority are usually available at lower price points.
Additionally, many altcoins aim to correct some of the shortcomings that exist in Bitcoin. This causes them to become functionally or technically different. The end result is that altcoins create some actual separation when it comes to the roles they serve or benefits they offer.
Are Altcoins Good Investments?
If you’re looking to safely invest in crypto, you’re likely wondering whether altcoins are a good investment. The issue is that far too many altcoins already exist in the marketplace to make a blanket determination.
Along with functional and technical differences, popularity plays a big role when it comes to the value of an altcoin in essentially every altcoin category, aside from stablecoins. Additionally, what’s popular isn’t always the most capable or useful coin.
Speculation is another factor that impacts most cryptocurrencies. By and large, altcoins aren’t backed by other assets. Since that’s the case, their value is based on potential applications, broader market adoption likelihood, and similar points that are hard to predict.
Some altcoins have effectively died out because they didn’t gain traction, even though their underlying concepts and technologies were sound. Others were actually scams, serving as little more than a way for someone else to collect funds from investors before vanishing.
In the end, the altcoin market is risky, volatile and mainly unregulated. It’s not possible to say if altcoins as a category are a good investment. Instead, you should research individual coins to determine if they align with your investment strategy and only pursue those where you feel the risk balances out with reward potential.