Altcoins: Definition, Types and The Process of Work

Like Bitcoin, Altcoin is a cryptocurrency. An altcoin is a substitute cryptocurrency To Bitcoin. When it comes to cryptocurrency, Bitcoin stands first. Like Bitcoin, Altcoin is also a decentralised digital currency. This alternative cryptocurrency possesses the same characteristics as Bitcoin and Altcoin operate under the same rule as Bitcoin.

Definition Of Altcoin

Altcoin covers more than half of the crypto's market value. There are different types of altcoins, which are not equal in value. While some altcoins are pennies, some are hundreds of dollars per coin. While some altcoins have a short span, others have long-term applications.

With the launch of Namecoin, the very fast altcoin, the rate of altcoin is increasing day by day. Neither the central banks issue cryptocurrencies nor do the cryptocurrencies follow bank policies. Altcoins use blockchain technology for transactions.

What Is The Difference Between Altcoins And Bitcoin?

• Bitcoin is the first cryptocurrency, which was launched in 2009. Crypto coins other than Bitcoin are Altcoins. 11,000 Altcoins are listed on CoinMarketCap.
• After the success of Bitcoin, Altcoins came into appearance. But the rules to appeal to customers are slightly different among Bitcoin and Altcoins.
• The second-largest crypto coin Ethereum introduced smart contracts, which are limited in Bitcoin. According to smart contracts, only after meeting predetermined conditions, do codes start working.
• Bitcoin uses the Proof-of-work mechanism of Blockchain technology, while the Altcoins use the Proof-of-stake mechanism of the same technology. The former mechanism is an energy-intensive and time-consuming mechanism, while the later mechanism is eco-friendly.

What Are The Different Types Of Altcoins?

Altcoins can be divided into different categories based on mechanisms and functionalities. Based on mechanisms, altcoins are of two types- 1. Stablecoins, and 2. Mining-based coins. Mining-based coins can further be classified into two categories- 1. Proof-of-work altcoins, and 2. Pre-mined altcoins.

Based on functionalities, altcoins can be classified into two tokens-

1. Utility tokens and
2. Security tokens.

• Stable Coins

Stable coins are cryptocurrencies that are stable. Stable coins reduce price volatility by tying the value to an existing currency. For example, the stable coin Tether ties up with US Dollar. 1 Tether is same as 1 US Dollar. The value of stable coins doesn't fluctuate frequently. So, you can use stable coins for payments, investments, and loans. USDC, Tether, and MakerDao are examples of stable coins.

• Mining-Based Coins

Mining-based altcoins use a proof-of-work mechanism to create blocks. This mechanism solves difficult mathematical queries and thus helps to create new coins. Bitcoin Cash, Litecoin, Bitcoin SV, and Monero are several proof-of-work coins.

Pre-mined altcoins are those altcoins that get distributed through an algorithm. For example, Ripple. Any mathematical query does not generate pre-mined altcoins.

• Utility Tokens

A Utility Token is a cryptocurrency that serves within a particular blockchain ecosystem. Utility tokens help you to perform actions on an altcoin's network. Utility tokens may be called a piece of software instead of a form of digital money. They help to transfer value. BAT, Filecoin are examples of utility tokens.

• Security Tokens

A security token is a digital and handy device that validates a person's identity electronically. It stores personal information. Security tokens, issued by Security Token Services, allow the owner to grant access to a network service. The security tokens prove the owner's identity and therefore you can use this token instead of a password.

Security tokens are of different kinds- hardware tokens, USB tokens, and wireless Bluetooth tokens. You can plug USB tokens into USB ports. Hardware token possesses chips. Wireless Bluetooth tokens activate devices remotely.

What To Consider Before Buying the Altcoins?

Every day, new businesses are taking interest in crypto assets. With the stabilisation of the market, investments in cryptocurrency will increase. Before investing in cryptocurrencies, you must consider the following things.

1. What Is The Purpose Of Buying Crypto?

Before taking a big financial decision, consider the aim of buying crypto. When you start your career and are far away from your retirement, cryptocurrency investment is considered a higher-risk investment. You should include investment in cryptocurrency within your retirement-planning program.

Some investors see long-term value in cryptocurrency. They find its prospective to drive innovation in predictable finance. If you are targeting earning quick easy money, then investing in cryptocurrency is a wrong decision. Maybe the hope of profitable investment is exciting for you.

You should think of crypto investment with a long view in mind.

Limited institutional adoption and volatility of cryptocurrency are major barriers to the wide acceptance of cryptocurrency in place of cash. The large-scale adoption of altcoins by businesses will determine the wide acceptance of crypto as an alternative to national currencies.

2. How Much Risk Tolerance Do You Have?

Do you have a high-risk tolerance to invest in altcoins? The Crypto market is young and new. The value of altcoins is volatile. That means the value of cryptocurrencies rises and falls drastically. If they collapse completely and make you worthless overnight, how would you feel? Can you tolerate this risk?

3. From Where To Buy Altcoins?

Crypto exchanges are uncertain. Here investors lack the protections that they get from banks. Before buying altcoins, the investor should assess the security and insurance offered by crypto exchanges. Coinbase, the first public crypto exchange, and famous crypto marketplace offer FDIC insurance to its customer. However, Kraken, another crypto exchange, does not offer any insurance protection.

Some investors buy and sell crypto from brokers. But the disadvantage of a broker is that he is unable to transfer cryptocurrencies to an offline wallet. He can only transfer it digitally. Therefore, investors can't control their crypto.

How Do The Altcoins Work?

Altcoins need a private key to send payment from one digital wallet to another one. Blockchain technology keeps records of the transaction permanently. Therefore, the transaction can't be reversed. Mathematical proofs, which approve transactions in blocks, make safe the blockchain.

The Advantages Of Altcoins

• Altcoins aim at removing Bitcoin's shortcomings. So, altcoins can be considered the better version of Bitcoin.
• Like Bitcoin, altcoins can potentially meet the need for daily transactions.
• Some altcoins like Ether of Ethereum and ADA have high valuations because they have increased traction among main institutions.
• With thousands of altcoins, you can choose any one altcoin. Different altcoins have different functions in the crypto market.

What Is The Future Off Altcoins?

Though there are thousands of altcoins in the current crypto market scenario, the majority of altcoins will not survive in the future. Those altcoins, which have strong utility and use cases, will only dominate the market. An altcoin is a cost-effective way to expand investors' horizons beyond Bitcoin. Volatility and absence of regulation result in risks involved in altcoin investing. More maturity of altcoins markets more capital and sophistication into the industry. It will lead to less volatility and more regulation.

Conclusion

Investors, who are interested in diversifying their portfolios, must invest in altcoins. Though some altcoins still have yet to make a mark, altcoins have the potential to reshape modern finance. But before investing in altcoins, do in-depth research of the crypto market. Thus from the above discussion, it is clear that though there are some risk factors, some altcoins have bright future.

Kevin Hill is an experienced finance, crypto exchange, and cryptocurrency writer with over 2,000+ published articles, guides, and financial market insights.