Introduction

Generally, all cryptocurrencies other than Bitcoin (BTC) are defined as Altcoins. However, some people consider all cryptocurrencies except Bitcoin and Ethereum (ETH) to be altcoins because most cryptocurrencies are derived from either of the two. Some altcoins use different consensus mechanisms to try to differentiate themselves from Bitcoin and Ethereum, by validating transactions, opening new blocks, and providing new or additional capabilities or purposes.

Most altcoin developers design their tokens or cryptocurrencies using different visions or objectives. Learn more about altcoins and how they differ from Bitcoin.

Understanding about Altcoins

"Altcoin" is a combination of the words "alternative" and "currency". This term generally refers to all cryptocurrencies and tokens other than Bitcoin. Altcoins belong to different blockchains because of which they were specifically designed. Many forks, such as Bitcoin, Ethereum, or other chains create blockchains. There are usually multiple reasons for creating this divide. Most of the time, a group of developers can't agree with others and thus take the initiative to create their own currency.

Many altcoins are used within their respective blockchains to accomplish certain tasks, such as Ether, which is used in Ethereum to pay transaction fees. Some developers have created a split of Bitcoin and re-emerged as a payment method similar to the split creating Bitcoin Cash as an attempt to compete with it.

Others branched out or developed from scratch, trying to create a blockchain and token focused on a specific industry or community, such as Ripple, which was originally built using the XRP ledger and XRP app to leverage the banking system with a faster payment system.

When Dogecoin and Meme Coin first launched there was apparently a bit of a joke among clients. It was forked from Litecoin, which itself was forked from Bitcoin in 2011. Regardless of the motive behind its creation, it still remains viable as a digital payment method.

Altcoins attempt to improve upon the perceived limitations of any cryptocurrency and blockchain by forking or challenging it. The first altcoin in 2011 was Litecoin, which was created from the Bitcoin blockchain. Litecoin uses a Proof-of-Work (PoW) consensus mechanism called Scrypt (pronounced ess-crypt), which is different than Bitcoin. Litecoin's Scrypt (pronounced ess-crypt) is less energy-intensive and faster than Bitcoin's SHA-256 PoW consensus process.

Ether is another popular altcoin. However, it has not been split from Bitcoin. It is the world's largest blockchain-based virtual machine created by Vitalik Buterin, Dr. Designed by Gavin Wood, and others for use on Ethereum. Ether (ETH) is used by participants in the network to validate transactions on their machines. It is also used as collateral or staking for validation and the privilege of being a block proposer.

Types of Altcoins

There are so many Altcoins in many flavors and categories. Here is a summary of what some types of altcoins are used for.

An altcoin can fall into multiple categories, such as TerraUSD, which was a stablecoin and utility token.

Payment Token

As the token name suggests, payment tokens are designed to be used as currency to exchange value between two parties. For example, Bitcoin is a prime example of a payment token.

Stablecoins

Volatility has been observed in cryptocurrencies since their introduction to usage and trading. Stablecoins are pegged to assets or currencies of equivalent value to reduce volatility. This could be reserve asset holdings, fiat currencies, precious metals or investment assets held as collateral by stablecoin creators. Stablecoins tend to have very narrow price fluctuations.

Notable stablecoins include Tether's USDT, MakerDAO's DAI, and USD Coin (USDC). In March 2021, payment processing giant Visa Inc. (v) announced that it would begin settling certain transactions on its network via the Ethereum blockchain in USDC, with plans to roll out more settlement solutions.

Security Tokens

Security tokens are designed to raise funds or represent ownership. These tokens can represent tokenized assets. Converting an asset into a token is called tokenization. You can tokenize real estate, stocks or any asset. But while doing so, assets must be kept transparent and secure. Otherwise, the tokens will become worthless assets and they will not represent anything. Security tokens are designed to act as securities and are therefore regulated by the Securities and Exchange Commission.

In 2021, bitcoin wallet firm Exodus successfully executed a Securities and Exchange Commission-qualified Reg A+ token offering, allowing $75 million shares of common stock to be converted into tokens on the Algorand blockchain. The event was a historic event in the US-based issuer's equity offering and digital asset security.

Utility Tokens

Utility tokens are used to perform the task of providing services within a network. For example, utility tokens are used to pay network fees, redeem rewards or access services. FileCoin is an example of a utility token, used to purchase storage space on a network and secure information.

Ether (ETH) is a utility token. The Ethereum blockchain and virtual machines are designed to pay for transactions. Former stablecoin USSterra used utility tokens to maintain its peg to the dollar. It is then followed by the minting and burning of two utility tokens on May 11, 2022, to create downward or upward pressure on prices.

Utility tokens can be purchased and held on exchanges, but they are used to keep active on the blockchain network.

Meme Coins

As the coin's name suggests, meme coins are jokes or other well-known cryptocurrencies inspired by something silly. These coins usually gain popularity quickly and are often promoted online by prominent influencers or investors capitalizing on short-term gains.

The intense run of such altcoins in April and May 2021 has been referred to as "meme coin season", during which hundreds of cryptocurrencies made huge profits based on accurate speculation.

Both an Initial Public Offering (IPO) and an Initial Coin Offering (ICO) in the cryptocurrency industry are of the same standard. A company launches an ICO to raise funds to develop a new currency, app or service.

Governance Tokens

A governance token grants its holders certain rights within a blockchain, such as voting for protocol changes or having an opinion in the decisions of a decentralized autonomous organization (DAO). Since they are typically native to a private blockchain and used for blockchain purposes, they are utility tokens but are considered separate tokens due to their distinct purpose.

Pros and Cons of Altcoins

Pros

Improve upon another cryptocurrency's weaknesses: Altcoins are "advanced versions" of the cryptocurrencies from which they are derived because they aim to address existing flaws.

Higher survivability: Altcoins have a good chance of survival due to many utilities that continue to use them, such as Ethereum's Ether.

Thousands to choose from: Investors can choose from a variety of altcoins to suit their needs to perform different functions in the crypto economy.

Cons

Several "dead" altcoins have caused many losses for investors. Due to many altcoins scams developers and the community have lost interest in investing in altcoins.

Lower popularity and smaller market cap:  Altcoin investment market is smaller than Bitcoin. As of 2016, the Bitcoin market accounted for over 40% of the global cryptocurrency market.

Less Liquid than Bitcoin: The altcoin market has seen fewer investors and less trading activity, resulting in diluted liquidity.

Difficulty in identifying use cases: Identifying different altcoins and their respective use cases is challenging, making investment decisions complex and confusing.

Future of Altcoins

When discussing the future of altcoins and cryptocurrencies, one can consider the situation with the dollar issued by the US federal government in the 19th century as a precedent. There were several forms of local currency in circulation in the United States, each with distinct characteristics and backed by a different mechanism.

Local banks were sometimes issuing currency backed by fictitious reserves. The current situation in the altcoin market parallels the diversification of currencies and financial instruments. There are thousands of altcoins available on the market today, each one claiming to serve a different purpose and serve a different market.

Considering the current state of the altcoins market, consolidation into a single cryptocurrency is unlikely. But it's also true that the thousands of altcoins listed on the crypto market probably won't last. The altcoin market will most likely consolidate into a few altcoins with the strongest utility, use cases, and a solid blockchain market to dominate.

If you want to diversify within the cryptocurrency market, altcoins can be less expensive than Bitcoin. However, the cryptocurrency market, regardless of currency type, is young and volatile. Cryptocurrency is still figuring out its place in the global economy, so caution should be entered into all cryptocurrencies.

Conclusion

Altcoins are any cryptocurrency but not Bitcoin or Ethereum. There are a large number of altcoins in the market, so it is very difficult to tell which ones are legitimate and which ones are not. You should read all the documents about the cryptocurrency you are interested in.

If blockchain and tokens have a specific purpose, consider investing in other coins if not worth looking at. If you are unsure, consult a financial advisor familiar with cryptocurrencies to help you make decisions and consider whether they are appropriate for your portfolio.