What Is Altcoin?
An Altcoin refers to any cryptocurrency or digital currency that acts as an alternative to Bitcoin. Each such coin is unique and better than its counterpart in transaction speed, processing fee, and mining cost. However, like Bitcoin, they utilize blockchain technology to facilitate secure peer-to-peer transactions.
Even though Bitcoin is the most valuable cryptocurrency, its skyrocketing price and processing time made people look for an alternative. Despite sharing a similar digital payment framework with Bitcoin, alternative coins provide low-price volatility and additional transaction capabilities, such as advanced consensus mechanisms and smart contracts. Alternative cryptocurrencies have grown at an incredible rate since the debut of Namecoin in 2011. It now accounts for more than one-third of the cryptocurrency market.
- An altcoin is any digital currency or cryptocurrency other than Bitcoin. It shares the same digital payment framework with the latter but provides low-price volatility and additional transaction capabilities.
- Since Bitcoin emerged in 2009, several other digital currencies came into existence as its alternative. Namecoin was the first-ever alternative coin introduced in 2011.
- In some instances, developers artificially inflate the coin price by spreading misinformation to promote altcoin trading. They first accumulate and then sell off their virtual currencies to investors at this increased price. It eventually results in a significant price drop and loss for investors.
- The different types of alternative coins available in the market are mining-based, stablecoins, utility tokens, and security tokens.
How Does Altcoin Work?
The evolution of Bitcoin has disrupted traditional payments systems. Satoshi Nakamoto introduced it in 2009 with the idea of replacing fiat currency. Since then, it has grown in popularity for enabling people to use it to transfer funds online, purchase products and services, place bets in gambling, etc. But as its supply is limited, the increasing demand pushed its price to go up. Also, it took more time to process a transaction. All this gave birth to several other digital currencies as its alternative.
The alts, or altcoins, work on the same technology as Bitcoin, wherein each transaction is stored in a block forming a chain, known as the blockchain. Miners then verify these transactions by solving complex mathematical puzzles and record them in a distributed public ledger. Rules of deploying blockchain could differ based on the purpose of alternative coins. While some alternative cryptocurrencies promise faster and cheaper transactions, a few ought to maintain 100% anonymity, i.e., keeping the identities of the payer and payee hidden.
Technically, most alternative coins use the open-sourced, original blockchain protocol of Bitcoin and hence are a variation or fork of it, in some way. With that said, they have enhanced capabilities in the form of the Proof-of-Stake (PoS) consensus mechanism and smart contracts to validate transactions. As these features minimize energy usage and time consumption to create blocks, transaction processing becomes cheaper and faster.
Because of decent and, in some cases, unlimited supply, these coins tend to be cheaper than Bitcoin. Furthermore, considering cryptocurrencies as the future of money, investors believe these will only appreciate.
To encourage altcoin trading, developers adopt artificial ways of marketing coins. As part of this, they accumulate digital coins over a period. After which, they artificially inflate the coin price by spreading misinformation and sell off their virtual currencies to investors at this increased price.
It creates a lot of altcoin buzz around, making investors invest heavily in the Bitcoin alternatives. But the artificial inflation eventually results in a significant price drop, leaving investors wondering where their investments vanished. The fake buzz created to lure investors for investments in alternative digital assets is referred to as a “pump-and-dump schemePump-and-dump SchemePump and dump is a practice of artificially inflating the market price of a stock by adopting immoral practices like misleading the investors through false statements or overstated financial performance..”
Let us consider the following examples to understand the concept even better:
Buying a cup of coffee in exchange for Bitcoins would make customers wait for the transaction to process. Usually, it takes approximately 10 minutes for blockchain to validate and record one transaction or create a block.
So, if the number of orders is more, the time taken to process transactions would be proportionately more. Thus, for an order of six cups of coffee, customers will have to wait for an hour to receive the beverage. In addition, it would be a loss for outlets, given the delay in handling the orders of other customers in the queue.
In such a scenario, an alternative coin that takes around two minutes for a transaction to be verified, the order processing would be much faster.
In 2019, alternative coins, especially Ripple (XRP), grabbed the attention of investors, companies, and regulators in the cryptocurrency market. XRP successfully managed to become the third biggest digital currency in terms of the altcoin market cap. Despite a price drop, XRP promised to be a better alternative than Bitcoin and other leading cryptocurrencies in some areas.
The factors driving its growth were faster and cheaper transactions and increasing use for international payments. Also, people can use it for online shopping and peer-to-peer transfers beyond speculative trading. It indicated how effectively developers are achieving their objectives behind developing alternative coins.
Types of Altcoins
Much like Bitcoins, alternative coins have to go through a proper mining process. Miners solve complex mathematical puzzles to verify transactions, create blocks, and mine new coins simultaneously. The top list of mining-based Altcoins are Litecoin (LTC), Monero (XMR), Ethereum Classic (ETC), and DASH.
The altcoin mining process differs from that of Bitcoin. For example, the hash algorithm used by Bitcoin is SHA-256, while the one used for Litecoin is called Scrypt. Ether, commonly known as Ethereum, uses Proof-of-Work (POW) consensus protocol. It keeps off the system from any malicious attacks. The Ethereum blockchain utilizes smart contracts to ensure secure operations.
There are also pre-mined alternative coins that require no algorithm to generate cryptocurrencies and are rolled out in the market directly.
These alternative coins have low price volatility. Their value is dependent on real-life assets, such as fiat currencies, exchange-traded commodities, securities, and other cryptocurrencies. These coins assure stability in terms of price, which makes them a perfect option for cryptocurrency trading.
While Tether (USDT) is the most widely used stablecoin, other alternative coins in this category are USDCoin (USDC), Maker (MKR), and DAI.
#3 -Security Tokens
These alternative coins act as digital financial securities that investors can receive through initial coin offerings. By investing in them, token holders enjoy voting rights, dividendsDividendsDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company., market appreciation, and part ownership in the company. It is easier to assess the value of these coins as they are asset-backed.
As these digital coins fully comply with government regulations, institutional investorsInstitutional InvestorsInstitutional investors are entities that pool money from a variety of investors and individuals to create a large sum that is then handed to investment managers who invest it in a variety of assets, shares, and securities. Banks, NBFCs, mutual funds, pension funds, and hedge funds are all examples. trust and invest in these tokens. TZERO participated in one of the grand security token offerings. It raised over $130 million to establish a security token trading platform.
#4 -Utility Tokens
These alternative coins are not for investment purposes but allow token holders to purchase products and services or redeem rewards within a platform. The users get the right to vote and offer feedback on products they use while participating in the concerned blockchain ecosystem.
For example, Chainlink offers an enhanced blockchain ecosystem and an incentive arrangement to users via a link.
Pros And Cons Of Altcoin
Altcoins emerged as a tough competition for Bitcoin, which remained the only digital currency for two consecutive years. Here are their pros and cons:
- Offers faster transaction processing time (e.g., Litecoin) than Bitcoin
- Provides 100% anonymity, such as DASH and Monero (XMR)
- Mines coins at around every two minutes
- Results in low mining cost due to use of simple computer hardware
- Charges a lesser transaction fee than that of Bitcoin
- There are thousands of alternative coins
- The fluctuation in the value can be unexpectedly high or low.
- Lack of public acceptance and exposure.
- More often used in scams, such as pump-and-dump schemes.
- Their supply in the market is too high.
- Many alternative coins emerged but could not survive.
An altcoin is any cryptocurrency or digital currency besides Bitcoin but uses the same blockchain technology to mine and distribute coins. As the name signifies, it is an alternative coin that people can use to transfer funds online, buy products and services, make international payments, etc.
The list of top 5 altcoins of 2021 are:
Binance Coin (BNB)
Altcoins are different from Bitcoin by offering many unique features, such as smart contracts and advanced Proof-of-Stake (POS) consensus mechanism to validate transactions and create blocks. Also, they provide faster, cheaper, and safer transactions.
This has been a guide to Altcoin and its meaning. Here we discuss types, examples, and how does altcoin works along with its pros and cons. You may also have a look at the following articles –