What are Altcoins?
5 mins read
8 mths ago
What are altcoins?
Altcoin refers to any cryptocurrency other than bitcoin, the first digital currency to come into existence. The terminology "altcoin" is derived from the idea that bitcoin is the original cryptocurrency while any other cryptocurrency is simply an alternative to bitcoin. Altcoins may also refer to digital assets considered as tokens other than coins such as ERC-20 tokens.
After the creation of Bitcoin, thousands of alternative cryptocurrencies have been created. Some of these currencies are created as a result of a hard fork, such as Bitcoin Cash (BCH) while others were created using different systems and algorithms. Although “altcoin" was initially used to differentiate other cryptocurrencies from the bitcoin which many consider as the only true cryptocurrency, the term is now widely used merely to classify these other cryptocurrencies.
A significant number of these altcoins are set up on a similar blockchain like bitcoin, which makes a lot of them peer-to-peer (P2P) inclusive. However, most altcoins are created for very different purposes.
Types of altcoins
Altcoins were created to improve the existing structure of Bitcoin and address specific needs such as security and scalability. As more altcoins evolved, different categories emerged with their purpose varying. The different categories of altcoins include:
Mining-based altcoins are similar to Bitcoin in operation. They involve a peer-to-peer exchange and necessitate a mining process just like bitcoin to generate more blocks. Ethereum is an example of a mining-based altcoin.
Stablecoins are created to address the volatility of bitcoin. These coins are created by pegging the value of digital currencies to existing digital assets, fiat currencies or commodities. Examples of stablecoins include Tether, Paxos Standard (PAX), USD Coin, and Libra, among many others.
Utility tokens can be sold as part of an Initial Coin Offering (ICO) and provide users with a claim on certain services. An example of a utility token is Filecoin which is designed to facilitate a decentralised file storage space network.
An altcoin may fall under one or more of these categories. The earliest forms of altcoins are Namecoin, Litecoin which were designed similarly to bitcoin but had distinct features to address certain Bitcoin limitations.
Purpose of altcoins
Altcoins are often pitched as a better alternative to Bitcoin with the aim of resolving the limitations of bitcoin. Altcoins are built on blockchain technology so they offer similar benefits to Bitcoin, including a decentralised network, anonymity, lower transaction fees, and cross-border payment. However, each altcoin may offer additional benefits based on the purpose of its creation. For instance, Ethereum was created to enable the deployment of smart contracts and decentralised applications (DApps) while Ripple was created for banks and payment networks for currency exchange.
The following are some of the common purposes of altcoins for cryptocurrency users.
- More alternatives to make a profit.
For crypto traders and investors, altcoins provide more options to invest in. Users of cryptocurrencies have the option to diversify their investments into multiple sources, increasing the potential to generate wealth.
- Improve on Bitcoin’s Limitation
Altcoins aim to solve bitcoin limitations like scalability, volatility, mining cost, transaction fees, among others. Altcoins like Bitcoin Cash came into existence to solve the bitcoin scalability limitation. Stablecoins also help solve the problem of volatility of cryptocurrencies. Altcoins are designed to resolve the limitations of bitcoin thus creating better alternatives for users.
However, the value of altcoins may be prone to fluctuations as they are relatively new. Increased adoption would help lower the volatility of altcoins. It is essential to exercise caution when trading with altcoins to avoid substantial loses and scams.
- Promotion of decentralisation
For each altcoin that exists, there is a centralisation issue being solved. As more altcoins come into existence, thanks to the blockchain, various sectors can enjoy transparency, ease of operation and wider access around the world.
Altcoins operate pretty much like bitcoin. You would need to set up a digital wallet to trade in altcoins. Like bitcoin, there is a blockchain that keeps a record of transactions that cannot be modified or deleted. However, bitcoin’s preeminence is still undisputed despite the thousands of altcoins in existence. This is why a significant number of altcoins are pegged to bitcoin to enable exchange on exchange platforms.
You can start trading Ethereum and similar altcoins on Yellow Card. All you have to do is to sign up on the website or mobile account and set up your digital wallet at no cost at all.
Disclaimer: This article is meant to provide general guidance and understanding of cryptocurrency and the Blockchain network. It’s not an exhaustive list and should not be taken as financial advice. Yellow Card Academy is not responsible for your investment decisions.