Investing in Altcoins: What You Need to Know
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When Bitcoin arrived on the scene in 2009, it was totally unique: A decentralized currency that could be sent from user to user on a peer-to-peer network, with a publicly viewable ledger called a blockchain, was a new concept for the finance world. However, it took years for Bitcoin to become the popular currency it is today.
Meanwhile, an entire cryptocurrency ecosystem blossomed as other coins launched and gained popularity. Today, there are more than 10,000 different cryptocurrencies listed on CoinMarketcap.com. While none are as popular as Bitcoin, other coins accounted for more than 60% of the cryptocurrency market in 2021.
These coins bear the nickname altcoins since they represent an alternative to Bitcoin. Why do these alternative coins exist? And it worth investing in altcoins or should crypto investors stick with the original cryptocurrency? In this snappy guide to altcoins, we answer those questions and more.
The Short Version
- Altcoins are cryptocurrencies that provide an alternative to Bitcoin.
- Some altcoins, such as Ethereum, have legitimate utility, while others are simply “meme coins.”
- You can buy altcoins on most exchanges. However, you’ll have to do some research to find out which exchange supports the coins you want to buy.
What Is an Altcoin?
Altcoins are cryptocurrencies that provide an alternative to Bitcoin. Like Bitcoin, they run on blockchain technology and use peer-to-peer systems. Most altcoins have different functionality from Bitcoin or were invented for a specific purpose.
For example, Ethereum, the second most popular cryptocurrency, runs on the Ethereum blockchain. It can run apps, execute contracts, and, once it switches over to a proof-of-work consensus mechanism, has plans to be much less energy-intensive than Bitcoin.
Read more >>>How to Explain Blockchain in Under 30 Seconds
Are All Altcoins Created Equal?
Simply put, no. There are many altcoins, and each was invented for a purpose. There are several categories of altcoins and weve outlined them below:
Mining-Based
These coins are mined into existence using proof-of-work, an energy-intensive way of generating new coins. Mining uses massive amounts of computing power to solve problems and create new blocks in the blockchain.
Examples of mining-based altcoins include:
- Ravencoin
- Monero
- Litecoin
- Zcash
We should also note that not all coins are mined. Some are released all at once as part of an initial coin offering, such as XRP.
Stablecoins
Cryptocurrencies have a reputation for volatility — coins can go to the moon or take a nosedive to near-zero. Stablecoins generally reduce this volatility by attaching their value to a tangible commodity like fiat currency, precious metals, or another cryptocurrency.
For example, Tether (the third-largest coin on coinmarketcap.com) has its value tethered to the USD. Whenever Tether issues new tokens, it allocates the same amount of USD to its reserves, which makes Tether backed by cash. A Tether coin will always be worth 1 USD, making it very stable.
Algorithmic stablecoins are more controversial as they use very little to no collateral. Instead, they use sophisticated minting and burning mechanisms to maintain their peg to a specific currency. Many crypto experts are skeptical of the long-term viability of algorithmic stablecoins. And the recent collapse of Terra (UST) and its sister coin LUNA lends credence to those doubts.
Meme Coins
The cryptocurrency world has a sense of humor, and several crypto coins were invented with no value or purpose at all. These coins are usually created as a joke or were inspired by a meme, hence the name “meme coins.”
The most popular meme coin to make its way into mainstream culture is Dogecoin, inspired by the famous 2013 meme.
Memecoins tend to be volatile and are easily influenced by prominent investors like Elon Musk. He regularly causes the Doge currency to dip and soar with his tweets. For this reason, dont take meme coins too seriously, and invest with caution.
Game Coins
Gaming coins are a relatively new class of cryptocurrencies used as in-game currency for metaverse games that are built on blockchains.
Previously, online gamers exchanged their fiat money for in-game currency. However, blockchain-based games like The Sandbox are increasingly turning to cryptocurrency to allow users to buy weapons, outfits, and more. These games often reward their users by giving them tasks to complete that earn more of the cryptocurrency.
These currencies are usually based on the game they serve. For example, Decentraland is a virtual reality game that allows users to buy digital land, join communities, etc. The digital currency in Decentraland is MANA, and you can buy and sell MANA on external exchanges like Nexio. Game coins are still an emerging category but one that we expect to grow significantly.
Read more >>> What is Decentraland (MANA) and Is It Worth Investing In?
The Most Popular Altcoins & Where to Buy Them
As of May 2022, here the ten most popular altcoins by market cap according to CoinMarketCap.com:
- Ethereum (ETH)
- Tether (USDT)
- USD Coin (USDC)
- BNB (BNB)
- Cardano (ADA)
- XRP (XRP)
- Binance USD (BUSD)
- Solana (SOL)
- Dogecoin (DOGE)
- Polkadot (DOT)
The top ten coins under Bitcoin are well established and may provide good returns in the short term, although there is no guarantee of how they will perform.
You can buy and sell altcoins using a cryptocurrency exchange such as Crypto.com, Gemini, or eToro.
Read more >>>The 10 Best Crypto Exchanges for 2022
An Altcoin Isnt On My Preferred Exchange, Now What?
The coins mentioned above are pretty popular, and many are considered stablecoins. Therefore, they are easy to find and purchase on popular cryptocurrency exchanges.
For example, youll find all of the currencies above on Coinbase, but a less popular currency might not be available. If there is a specific coin that you are interested in purchasing, youll need to search various exchanges for that coin. Almost all exchanges post directories of the coins they support.
Read more >>>Centralized vs. Decentralized Exchange: Which Is Right for You?
The Final Word on Investing in Altcoins
Investing in altcoins can be fun. But keep in mind that these coins tend to be volatile and its not uncommon for them to lose value.
For this reason, consider limiting your altcoin investments to a small percentage of your portfolio. And be prepared for any of your altcoins to drop dramatically in value at any time, for any reason.
To avoid disappointment, get clear about your intent for each coin. Perhaps youre looking for a quick, short-term gain. Maybe youre looking for a currency that allows you to play blockchain games, and you arent concerned about its value relative to USD. Or perhaps youre looking for a coin that will provide long-term value.
Each of these objectives are very different and will impact which altcoins (if any) are right for you.
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