What are altcoins: understanding everything that isn't Bitcoin

Newcomers to crypto may find the industry to be quite intimidating at first. One of the reasons for this is the fact that the digital assets spaces comes with a whole dictionary of new terminology to understand. Among the most common new terms that would-be crypto traders encounter is “altcoin.” The word sounds similar to Bitcoin, which is the industry’s oldest and largest crypto. However, altcoins have nothing to do with Bitcoin.

In this guide, we'll address the term “altcoin”, exploring what it is, the advantages and risks of altcoins, and the different types of altcoins. We'll also provide some trading tips and strategies so you can gain exposure to altcoins with confidence.

TL;DR

• Altcoins are cryptocurrencies besides Bitcoin, providing an alternative to BTC.

• Altcoins include utility tokens and stablecoins, each with specific roles in crypto.

• When trading altcoins, research, diversify, and be aware of the market’s volatility and speculation.

• Risks of altcoin trading include market volatility, potential fraud, and regulatory uncertainties.

• While highly volatile, memecoins also have strong communities behind them, but always do your research before trading.

What are altcoins?

To start, let’s explain what altcoins are. Altcoin, as a term, is a short form of “alternative coin.” It was invented as a word that would include all cryptocurrencies except for Bitcoin. With Bitcoin being the original cryptocurrency, all assets that came after it are alternatives to BTC.

It's worth noting that there are some who believe that Ethereum should be exempt, as well. The project’s contribution to the crypto industry easily makes it the second-most important crypto asset ever created. Whether you agree with this or not, the fact is that the term puts almost every cryptocurrency under one umbrella.

Altcoins belong to different projects, where they can serve different purposes. Some projects only have a single altcoin, while others can have several. In that case, each of them plays its own role in the project’s ecosystem. Before Ethereum, each altcoin emerged as a fork of Bitcoin, or launched its own blockchain. However, Ethereum created different cryptocurrency models, and that made it easier to launch new altcoins.

Instead of building coins and new networks from scratch or forking them off Bitcoin, developers discovered a shortcut. This led to a major surge in new projects, and the available token number grew rapidly. This led to the creation of an entire altcoin market.

Some of the new projects allow users to engage in altcoin mining. This is a process where users contribute computing and electrical power to the network. In doing so, they allow the project to use their resources to process transactions. In return, they receive a certain portion of the project’s digital assets. This actually started with Bitcoin, but many new projects adopted it. These days, altcoin mining is considered to be a more expensive and less efficient method of earning crypto.

Instead, staking — locking up your tokens in a smart contract in return for rewards — seems to be the preferred option. However, mining is still possible, and many still engage in it to this day.

Advantages and risks of altcoins

Most cryptocurrencies have emerged to solve issues within the crypto industry. Additionally, many altcoins tend to solve real-world problems, and therefore provide some sort of utility to that specific token.

Another advantage of altcoins is that they generally have more utility than Bitcoin. The more utility a token has, the greater its chance of survival. Some altcoins offer access to unique networks with unique features. Others let users earn money through staking, lending, and similar services. There are even those that give users voting power and let them contribute to deciding the project’s future.

However, trading in altcoins also comes with its own risks. For example, the altcoin market cap is smaller compared to Bitcoin’s. Historically, Bitcoin’s market cap was as large as the rest of the crypto industry put together. At the time of writing, Bitcoin’s market cap is around $1.2 trillion. Meanwhile, the market cap of the total crypto industry is $2.25 trillion. This suggests that roughly 53% of all capital within the industry goes into Bitcoin. This leads to higher volatility within the altcoin market, making it a potentially riskier trade compared to Bitcoin.

An additional disadvantage of the altcoin market is that it has fewer traders and less activity. This is something that may or may not be an issue, depending on the token or a coin in question. You won’t struggle to exchange Ethereum for example, however, some small-cap coins suffer from this issue frequently.

Another risk associated with altcoins is that many of them are fraudulent projects. Scammers came to the crypto industry seeking a way to earn. Unfortunately, they’ve selected unethical methods, and their goal is to trick people out of their money. Usually, their schemes revolve around fraudulent ICOs (initial coin offerings). They hype up their project, attract users, sell them coins, and then abandon the project and disappear with the money, otherwise known within the industry as a "rug pull".

Finally, there’s also the possibility that an altcoin is simply a bad project. It might be completely legitimate, but if it fails to capture attention, it’ll eventually die.

What types of altcoins are there?

Over the last 14 years, the crypto industry has launched tens of thousands of altcoins. The real number is likely more than that, but only a portion can be considered live, active projects. The rest of the projects disappeared after being too weak, or they ended up abandoned. The surviving projects can be split into several categories of digital assets, as described below.

Utility tokens

Utility tokens are digital assets that aim to provide a service within a network. They might let users purchase something, like storage space. They might also let users receive discounts on transactions or allow them to vote on project-related proposals. As long as they represent a way to obtain something, altcoins can be considered utility tokens.

Governance tokens

Governance tokens are cryptocurrencies that allow users to participate in the project’s governance. They emerged as part of an attempt to bring decentralization in the crypto industry to the next level. There’s no central authority, just community members that hold governance tokens, which grant them voting rights. Whatever the community decides on, the project’s developers implement it.

Memecoins

Memecoins are another popular group of altcoins that emerged with Dogecoin (DOGE) in 2013. At the time, Dogecoin was supposed to be just a fun joke coin with no real utility. It wasn’t even supposed to survive for more than a few weeks. However, the project attracted a loyal following and the token grew stronger with each year. Since then, we've seen the rise of Solana and BRC-20 tokens adapt meme culture, with communities rallying behind them.

Privacy coins

Privacy coins used to be a very popular group of altcoins, as they allowed users to make transactions privately. The crypto industry’s biggest feature is decentralization and transparency. With that said, all transactions should be public, and nothing can be hidden. Privacy coins allowed users to make hidden transactions, which is why they were eventually banned on most platforms. Regulators estimated that their usage could aid criminals, so any exchange that wants to register must remove them.

Stablecoins

Lastly, there are stablecoins — altcoins tied to other assets of value, that transfer their value to the coins. Most of the biggest stablecoins use fiat currencies, like the USD, so each coin has a fixed price of $1. However, stablecoins can maintain their value by using algorithms or even by using other crypto as underlying assets.

Strategies for trading altcoins

When it comes to altcoin strategies, there are several that are fairly simple. One of them is to go all in when you find a coin/token that you like and HODL. This essentially means that you would use your money, lock the coins in your cryptocurrency wallets, and keep them. No matter what happens, you keep them, waiting for their price to (hopefully) rise someday. This isn’t the best strategy for altcoins, but many people believe that it's ideal for Bitcoin.

A safer approach is to diversify your portfolio with multiple assets. In this situation, you’d focus on those altcoins that have the greatest potential, whether that's based on their technology, goals, popularity, or some other aspect. You'd identify multiple assets that you believe might have a future and put your money into all of them.

Another approach worth considering is actively trading cryptocurrency. When it comes to crypto, you can simply lock up your assets and forget about them. Holding is meant to be long-term. Cryptocurrency trading is not. Some traders buy assets only to sell them a few days later. Others may keep them for a few weeks, but there are those who only keep them for a few hours. The idea is to purchase them and then wait for an opportunity to sell them, hopefully at a higher price.

Tips for trading altcoins

Interested in trading altcoins? Below are some essential tips to keep in mind as you get started.

• Always do your own research to make sure you're fully informed before committing funds

• Understand the market and how different developments affect it

• Remember that the crypto market is always highly volatile

• For maximum security and control, use private cryptocurrency wallets to store your coins. We call that self-custody. Learn more about choosing a wallet here.

• Try to stay disciplined and not give in to your emotions.

• Start small until you learn the nuances of trading — never trade with more than you can afford to lose.

• Be aware that crypto gains are likely subject to taxation. This depends on the laws of the country you're in.

• Don’t participate in suspicious ICOs.

• Learn how to use risk management, including stop-loss and take profit.

The final word

There was a time when traders believed that most altcoins would die out. As such, they considered them worthless and a waste of time. Whether or not this will eventually happen is unknown at this time. However, with new developments across Web3, such a dire future now seems less and less likely to happen. It's more likely that many altcoins — although not all — will survive and find their role in the future.

The real challenge is discovering which altcoins have that long-term potential. In the end, no one can claim anything with any certainty. The altcoin market is volatile and at risk of manipulation. It’s deemed an immature market, and while it is maturing, the process is slow and full of hurdles. The best thing you can do is research as much as possible and try to gather information before making a move.