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The Beginner’s Guide To Altcoins: How, What, Where and Why!

Written by: Qadir AK

April 1, 2021

The world of crypto and crypto-based projects seem to be in constant flux. Ideas become trends, some of which evolve into yet newer concepts. Many are still-born tech and never get the momentum needed to get off the ground. However, there are a few concepts that evolve and stick- garnering massive attention and popularity.

Altcoins and tokens are cryptocurrency terms created after Bitcoin’s development in 2009. 

The first-ever altcoin was ‘Namecoin’ which was introduced to the world in 2011 for a short period and was the only alternative to Bitcoin back then. 

Soon after, several coins were introduced as alternatives to Bitcoin to provide improved security and privacy and perhaps tackle the shortcomings of the king crypto through different approaches. 

To date, many investors and crypto enthusiasts do not wholly understand the ideology behind this concept- what they are and how they work. 

Read on as Coinpedia brings you a detailed guide to understanding Altcoins and tokens. Let’s dive in. 

What are Altcoins?

Altcoins are the cryptocurrencies that stand for “Alternative Coins”. Therefore, any coin other than Bitcoin is referred to as altcoins. 

In other words, the digits assets providing alternate solutions to the crypto industry are known as altcoins. 

Altcoins also work on Blockchain technology as Bitcoin. A blockchain is a decentralized, digital, and distributed ledger that works as a secure database. The data, once stored here, is impossible to tamper with. 

Each altcoin is unique and better than its counterpart in transaction speed, processing fee, and mining cost. 

Some strong examples of altcoins can be Ethereum, Litecoin, Ripple, and many others.

Though the concept might be similar to Bitcoin, but these tokens do have their characteristics and defining qualities. Altcoins are classified depending on their functions and mechanisms.

Types of Altcoins

Mining-Based

Altcoins are divided into two categories based on mining:

  1. Proof-of-work altcoins: Proof-of-Work cryptocurrencies are created by solving challenging mathematical problems.
  2. Pre-mined altcoins: The Coins that aren’t created by an algorithm query are known as pre-mined coins. They are frequently included in an initial coin offering and are distributed before being listed on cryptocurrency exchanges.

Stablecoins

Stablecoins, as the name implies, are stable in nature. These coins reduce value volatility by tying their value to a basket of goods like fiat currency, precious metals, or other cryptocurrencies. 

Security Tokens

Security tokens are similar to traditional equities. They often provide holders equity in the form of ownership or a dividend distribution. This type of ownership incentivizes investors to put their money into it.

Utility Tokens

Within a network, utility tokens are utilized to deliver services. For example, they could be used to buy services, pay network costs, or redeem prizes. 

Memecoin

Meme coins are based on a joke or a witty imitation of popular cryptocurrencies. They usually gain popularity in a short period of time, boosted further by renowned crypto influencers.   

How do Altcoins Work?

Altcoins function in a similar way to Bitcoin. Whenever a request for a transaction on the blockchain is made, a block is created.

A technique known as mining is used to process the transaction block. 

Most mining-based cryptocurrencies use proof-of-Work (PoW) to connect to the Blockchain network.

For security verification, the block is sent across numerous nodes (miners). For the block to be validated, miners must solve complicated mathematical calculations.

Miners are compensated in cryptocurrencies such as ETH, SOL, and others as “evidence” of the Proof-of-Work accomplished. The transaction is performed while the authorized block is transmitted to join the chain of blocks.

The goal of mining is to slow down coin generation and ensure that each transaction request is processed safely and correctly.

Note: A private key is used to move money from one digital wallet to another, and a Blockchain serves as a permanent record of the transaction that cannot be changed. 

Difference between Altcoin and Bitcoin

Bitcoin and Altcoins differ in numerous aspects, even though they are very similar and operate simultaneously. 

Bitcoin takes 10 minutes to produce a coin. In contrast, altcoins like Litecoin can generate coins every 2.5 minutes.

Proof-of-work — the technique used to construct crypto blocks — uses a lot of energy, is intensive and limiting, and implementing and using Bitcoin is quite tricky.

On the other hand, some of the Altcoins have gone beyond this. Instead, they employ the proof-of-stake system to acquire a competitive advantage, which saves energy and shortens the time it takes to validate a transaction. Furthermore, the smart contract possibilities of Bitcoin are severely limited.

Altcoins are improvised Bitcoin versions. The coins are usually created to address issues with the Bitcoin architecture, such as mining costs, speed, and other aspects. 

Altcoins were created to leverage Bitcoin’s success by tweaking the rules to appeal to various users. 

A famous Altcoin Ethereum, the second-largest cryptocurrency by market capitalization, for example, pioneered the concept of “smart contracts.” 

These smart contracts are computer programs that only operate when specific criteria are met. They use blockchain technology to execute agreements between two parties, allowing for the development of new crypto applications. 

Altcoins offer unique features like governance, smart contracts, and interoperability.

How And Why Were Altcoins Created?

Bitcoin’s skyrocketing price and processing time to complete transactions made people look for an alternative- limited circulation restricted to 21 Mn can be one of the reasons for this.

Most altcoins are built to compete with Bitcoin, claiming to provide superior privacy, decentralization, or focusing on something that Bitcoin cannot.

There are nearly 10,000 altcoins presently. It is simple to create a coin due to how straightforward and simple the process is.

The key attraction is that altcoins are typically far less expensive than Bitcoin and are appealing because they “have more room to grow.”

Things to consider before buying Altcoin

1. Do some research.

It is the initial step for anyone interested in investing in altcoins. Take your time and learn everything you can about the altcoin you’re considering.

2. Altcoin’s History

Every currency you intend to buy should have a proven track record. For example, one of the reasons Ethereum is trusted is due to the reputation it has built through time based on its past. History has always brought with it a sense of trustworthiness.

3. Uncertainty And Altcoins

Always keep in mind that there is little or no assurance with altcoins to some extent. Many of them may show up here today and disappear tomorrow. There are currently over a thousand cryptocurrencies vying for your attention. Before purchasing any altcoin, you must be confident that you are prepared to face the challenges ahead.

4. Why Are You Putting Money Into It?

As a potential investor, you should ask yourself this question. So, what exactly do you have in mind? Are you seeking a quick way to get rich, or do you have a long-term strategy in mind?

If you fall into the first category, you should look for other ways to invest your money. It’s because most cryptocurrencies take a long time to gain traction in preparation for a pump. 

Are Altcoins Good Investments?

Altcoins are a substitute for Bitcoin as everyone cannot afford to buy BTC. 

Cryptocurrency trading is similar to stock trading in the way that a well-diversified portfolio always wins. That means that even if Bitcoin suffers a setback, the risks and rewards can be balanced by others. 

Altcoins are steadily catching up with the latest market action and provide one the chance to be a part of this movement. The crypto space should be open for all, not just Bitcoin holders. 

Altcoins are smart investments since their potential returns are better than the standard equities and bonds. However, like with any investment, you must understand all aspects of your investment before deciding if it is good for you. If you determine that investing in altcoins is correct for you, make sure you do your research on anything you’ll be investing in.

What is the Altcoin season?

Altcoin season, also known as Alt season, is a type of cryptocurrency market cycle in which altcoin values climb rapidly. This price shift can occur with or without the effect of Bitcoin’s dollar value.

During this market time, the price success of altcoins frequently exceeds that of Bitcoin. As a result, altcoin prices are usually either stable or very slow-moving. However, now and then, the value of all altcoins might skyrocket in seconds.

Conclusion

A diversified portfolio always wins. If you’re someone that knows and understands cryptocurrencies and parts a “piece of the pie”, altcoins are the perfect way to go, especially to buy assets for a reasonable amount. Do your research on the coin and seek out the views of popular analysts in order to make a well-thought-out decision.

FAQ

Why are altcoins available?

Bitcoin sparked a decentralized banking ecosystem, but it quickly became evident that the economy needed characteristics that Bitcoin couldn’t deliver. Bitcoin can’t do everything, so altcoins step in. Altcoins were created to improve aspects like transaction speed, energy consumption, privacy, and price stability in comparison to fiat currency.

Why do people invest in Altcoins?

Altcoins are frequently less expensive, and if generally accepted in the market, they could have a greater upside than Bitcoin. Stablecoins, for example, are a mechanism for crypto investors to distribute or lessen their risk. 

How do altcoins add value to the crypto market?

Altcoins offer value to the cryptocurrency industry by introducing new and innovative features that provide new possibilities and solve problems.

What are the most popular Altcoins?

Ethereum, Ripple, Tether, Bitcoin Cash, Bitcoin SV, and Litecoin are some of the most well-known Altcoins.

How many Altcoins exist?

More than 15,000 of these “alternative” currencies have been produced at the time of writing .

Qadir AK

Qadir Ak is the founder of Coinpedia. He has over a decade of experience writing about technology and has been covering the blockchain and cryptocurrency space since 2010. He has also interviewed a few prominent experts within the cryptocurrency space.

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