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After its birth in 2009, Bitcoin ruled the cryptocurrency space as the only digital asset on the market.
But not for long.
After seeing BTC’s success, altcoins have appeared on the crypto market to introduce their own digital asset solutions.
But what are altcoins, what are their purpose, and what is the major difference between an alternative cryptocurrency and Bitcoin?
We will find out in this article!
What Are Altcoins?
Before deep-diving into our topic, let’s first define “altcoin.”
Altcoin, or alternative digital asset, is a term used to describe cryptocurrencies other than Bitcoin.
The reason for the name is pretty straightforward, as BTC is often viewed as the original cryptocurrency, while other digital assets provide alternative solutions to crypto users.
In addition to being the original cryptocurrency, Bitcoin has been dominating the digital asset industry. The BTC dominance index – the metric that measures Bitcoin’s share from the total crypto market cap – currently stands at 63.7%.
According to CoinMarketCap, there are nearly 5,400 cryptocurrencies on the market, and none of them have managed to take over Bitcoin’s leading position since the inception of the digital asset industry.
The Brief History of Altcoins
The history of Bitcoin started in 2009 when the mysterious Satoshi Nakamoto created the world’s first cryptocurrency.
But when did altcoins appear on the crypto market?
2011 marks the birth of altcoins when Namecoin (NMC) emerged as the first cryptocurrency ever created after Bitcoin.
Namecoin has an ambitious goal to replace the domain name system with a decentralized network, which allows users to register domains for a small fee, which is paid in cryptocurrency.
While Namecoin was the first digital asset after Bitcoin, its position as the second-largest cryptocurrency was soon taken by other altcoins.
One of them is Litecoin (LTC) – a cryptocurrency that is very similar to Bitcoin – that also launched in 2011.
Unlike Namecoin, LTC – which features a higher supply and transaction speed than Bitcoin – managed to stay among the top ten cryptocurrencies by market capitalization since its creation, standing at position seven at the time of writing this article.
In August 2013, Ripple (XRP) joined the ranks of cryptocurrencies, using the “OpenCoin” name at the time for its payment network.
Ripple has since partnered with numerous financial institutions and payment services – such as MoneyGram, American Express, and Santander – while featuring the world’s third-largest cryptocurrency by market cap.
Let’s jump ahead to one of the most important events in the history of altcoins: the birth of Ethereum in July 2015.
Ethereum is a decentralized platform where users can deploy smart contracts – self-executing agreements between two or more parties in the form of computer code – and run decentralized applications (DApps).
The platform also allows crypto projects to issue their own Ethereum-based altcoins via the ERC-20 token standard. As a result, the number of altcoins skyrocketed soon after Ethereum’s birth.
Furthermore, the ERC-20 standard was commonly used by many crypto projects that had launched Initial Coin Offerings (ICOs) for fundraising, allowing blockchain startups to issue their tokens and sell them to investors in exchange for major digital assets.
Since then, thousands of new altcoins have appeared on the market, providing the crypto industry with new use-cases and innovative solutions.
Altcoin vs. Bitcoin: What’s the Difference?
To see the difference between altcoins and Bitcoin, it’s important to take a deeper look at BTC first.
Bitcoin 101: The Basics
As per the original BTC whitepaper, Bitcoin operates as a peer-to-peer (P2P) electronic payment system where users can transact cryptocurrency in a decentralized way.
Since there is no central authority in the blockchain network, users can avoid censorship while taking charge of their finances.
Also, Bitcoin’s network is maintained by numerous miners from all over the world, which makes it more secure against hacker attacks than conventional systems that use central servers to operate.
Unlike the banking system, Bitcoin lacks third parties, which allows the blockchain network to feature low-cost and fast transactions.
As the maximum coin supply is capped at 21 million, investors often consider BTC as a decent store of value that has no to minimal correlation with general market assets.
Furthermore, BTC possesses one of the highest liquidity among cryptocurrencies as well as the lowest levels of volatility compared to non-stablecoin digital assets.Because of these reasons, Bitcoin is considered one of the lowest risk crypto assets for investors.
Due to the benefits mentioned above, Bitcoin has established a great reputation for itself as the world’s original cryptocurrency while featuring a decent infrastructure and a large community of active supporters.
Bitcoin’s Limitations
However, Bitcoin has some limitations, which prevent it from being used as the universal (and only) cryptocurrency in the digital asset space.
First, BTC’s use-cases are limited. Apart from sending and receiving crypto payments and holding the asset to hedge against general market risks, Bitcoin is rarely used for commercial purposes.
Also, the algorithm used to reach consensus in the Bitcoin network, Proof-of-Work (PoW), is highly energy-intensive as it requires miners to continuously operate their equipment to secure the blockchain.
While Bitcoin mining uses more energy in a year than Finland, due to the inefficiencies of the PoW consensus algorithm, the BTC network faces issues of limited scalability.
Compared to traditional payment networks like Visa and Mastercard that can process thousands of transfers per second, Bitcoin only has the capabilities to process a maximum of seven transactions per second (TPS).
As a result, there’s an increased risk of network congestion in the Bitcoin network – which often results in excessively high transaction fees and long processing times.
Altcoins to Empower Crypto With More Use-Cases
Due to Bitcoin’s limitations, altcoins have appeared on the market with the ambitious goal of empowering the crypto space with more use-cases.
To date, many successful altcoin projects have delivered value to crypto users.For example, Ethereum supercharged its blockchain platform with smart contracts and DApps to provide new functionality to cryptocurrencies.
As a result, Ethereum is one of the busiest blockchain networks, featuring nearly 900,000 transactions every day.
Due to Ethereum’s features, decentralized finance (DeFi) – a fast-growing movement in the crypto space to create decentralized alternatives to traditional finance solutions (e.g., lending, borrowing, insurance) – has become a reality.
Higher Risks but Increased Profitability
Investing in legitimate altcoins often comes with a higher potential for greater profits for investors.
However, compared to Bitcoin, altcoin investments usually bear increased risks; as such, Altcoins have much lower market capitalization than Bitcoin.
While major altcoins should be fine, the ones with lower market caps and limited liquidity could carry high risks of market manipulation (e.g., pump and dump schemes), volatility, and fraud.
Furthermore, some altcoin projects – especially a part of those that launched their token sales during the “ICO craze” of 2017-2018 – are dishonest about their goals or their products.
Unfortunately, several altcoin projects couldn’t deliver on their promises after their token sales ended. And even some of those that tried to do their best have failed to satisfy investor demands.
What Is Altcoin Mining and How Does It Differ From Bitcoin Mining?
As mentioned before, Bitcoin uses the Proof-of-Work consensus algorithm, which requires miners to leverage their computational power to maintain the BTC blockchain.
For this, they purchase special mining equipment, called application-specific integrated circuit (ASIC) miners.
However, as ASIC miners are often expensive for the ordinary Bitcoin user, some altcoins utilizing the PoW consensus model deployed alternative mining algorithms to BTC’s SHA-256 to combat the dominance of ASIC rigs.
As a result, these altcoins can be mined with lower-end mining equipment (e.g., GPUs, CPUs, smartphones) that require a smaller investment from the user’s end.
Also, many cryptocurrencies have utilized consensus algorithms alternative to Bitcoin’s Proof-of-Work to solve the energy-consumption and scaling issues of BTC’s blockchain network.
While there are still validators in the network (who are miners in BTC’s case), most of these algorithms do not require users to physically use their computational power to maintain the system. Instead, they reach consensus by other means.
For example, the Proof-of-Stake (PoS) algorithm requires validators to lock a part of their tokens for a specific time to verify transactions and add new blocks to the distributed ledger.
What Are the Pros and Cons of Altcoins?
Below, you can find a table that includes the pros and cons of altcoins.
Pros
- Higher potential for greater ROI
- Legitimate altcoin projects add new value and functions to cryptocurrencies
- Many altcoins utilize more efficient consensus algorithms than Bitcoin
- Some altcoins feature highly scalable blockchains (e.g. Permission.io)
Cons
- Increased risks of volatility
- Some dishonest altcoin projects are run by scammers, while others have failed to deliver on their promises
- Altcoins with small market caps and limited liquidity face increased risks of market manipulation
What Are the Different Types of Altcoins?
Now that you know the essentials about altcoins, it’s time to see their different types.
Major Altcoins
Examples: Ethereum (ETH), Ripple (XRP), Bitcoin Cash (BCH)
This category includes those altcoins that have managed to carve out large shares of the crypto market.
Major altcoins often feature higher liquidity, lower volatility, as well as big communities of active users, and an already established infrastructure.
Due to these reasons – after Bitcoin – major altcoins are considered to pose the lowest risk to investors among cryptocurrencies.
Stablecoins
Examples: Tether (USDT), DAI, Digix Gold (DGX)
As most cryptocurrencies possess higher volatility than general market assets, many have criticized the crypto asset class for the risks digital assets pose to individuals and businesses who utilize them for everyday transactions.
To solve this issue, many crypto projects have introduced their stablecoin solutions, a cryptocurrency that has its value pegged to one or a basket of assets.
The most common stablecoins are pegged to major fiat currencies like the USD or the EUR so they can maintain low levels of volatility while taking full advantage of blockchain technology’s benefits.
Altcoins that have value pegged to other general markets (such as gold or silver) also fall in the category of stablecoins.
Utility Tokens and Coins
Examples: Status (SNT), Augur (REP), Tezos (XTZ)
Most altcoins are categorized as utility tokens.
These digital assets grant specific rights to their users. These could be anything from providing access to their platforms and services to giving discounts or special perks. The main goal of crypto projects that use tokens or coins is to incentivize users to power their ecosystems. In exchange, users can redeem the tokens or coins they gain on the crypto’s native platform or trade them on an exchange.
Utility tokens are often Ethereum-based altcoins that have been often issued with the ERC-20 standard during Initial Coin Offerings (ICOs) or Initial Exchange Offerings (IEOs).
Security Tokens
Examples: Blockchain Capital (BCAP), 22x Fund (22X)
Unlike utility tokens, security tokens grant altcoin holders a fraction of the project’s ownership.
Some crypto projects even provide security tokens to their investors that represent digital shares of the company and pay dividends to the holders.
In the latter case, the value of the digital asset is tied directly to the valuation of the company. Therefore, if the valuation of the firm grows, so will the security token.
As most security tokens – which are often distributed via Security Token Offerings (STOs) – have to comply with strict regulations, the risk of fraud is limited.
However, security tokens are quite rare among altcoins, and they haven’t reached widespread adoption within the crypto community.
Where Can You Buy Altcoins?
The easiest way to purchase altcoins is by utilizing a cryptocurrency exchange’s services.
On fiat-to-crypto exchanges, you can purchase BTC and a great share of major altcoins via bank transfers or credit cards.
On the other hand, if you want to buy altcoins with smaller market caps, you have to first exchange your fiat currency into a major crypto (preferably ETH or BTC).
Then you need to transfer your crypto to an altcoin exchange that supports the coin you want to purchase.
Below, you can see a simple step-by-step guide to make things easier for you.
Step 1: Register an Account at a Prominent Fiat-to-Crypto Exchange
The first step to buy altcoins is to register an account at a reputable crypto exchange where you can exchange fiat currency for digital assets.
Due to regulation, cryptocurrency exchanges – especially the ones that offer fiat-to-crypto trading – will ask for Know Your Customer (KYC) and Anti-Money Laundering (AML) documents.
After you have created your account at the exchange, submit the required documents to verify your identity and residence. Some services may also ask for further information, such as the source of your income.
After submitting your documents, the exchange will process and verify them, which usually takes a few days.
Step 2: Buy Crypto Using Fiat Currency
As soon as the exchange has verified your documents, you can start trading on the platform.
Before you purchase crypto, you have to first decide on the payment method you will use to fund your account.
The most convenient method to purchase crypto with fiat is by using a credit card as it usually takes a few seconds for your funds to appear in your exchange wallet.
On the flip side, buying crypto with a credit card is the most expensive method as exchange services charge a fee ranging from 3% to 5% for card transactions.
Furthermore, some crypto services use payment processors that place an additional charge (4-6%) on credit card transactions.
You can also choose to fund your exchange account via bank transfers. As there are no credit card companies or payment processors involved in the process, bank transfers are among the most cost-efficient methods to purchase crypto.
However, bank transfers could take several days to arrive, so this payment method is much slower than credit card payments.
The best way to speed up your transactions is to use a crypto exchange that supports local bank transfers (e.g., SEPA for EU countries or ACH for the US) as these usually take 1-2 working days to arrive at your account.
After selecting your preferred payment method and funding your account, head to the trading page on the exchange platform, choose your crypto-fiat currency pair (e.g., BTC/USD), set the number of coins you want to purchase and execute the transaction.
Step 3: Transfer Crypto to an Altcoin Exchange
After you have your crypto ready, the next step is to register an account and verify it at an altcoin exchange. The process should be identical or very similar to fiat-to-crypto exchanges.
When you are done, transfer your crypto from the first exchange to the altcoin exchange service.
Copy-pasting your wallet address or scanning the QR code of your wallet (when you are on mobile) is recommended when transferring your crypto.
Be sure to double and triple-check your wallet address before sending your coins to ensure that everything is correct.
After initiating the transaction, it usually takes a few minutes for altcoins to arrive while it could take up to 1-2 hours for your BTC to be credited to your exchange wallet.
Step 4: Trade Your Major Crypto to Altcoins
When your coins have been transferred to your wallet, it’s time to exchange them to your altcoin of choice.Head to the trading platform of the exchange and choose your preferred altcoin-major crypto pair.
After setting the number of coins you want to buy, execute the trade.
Don’t forget to withdraw your altcoins from the exchange to a secure wallet – where you own the private keys to your crypto wallet – to ensure the safety of your funds.
Summary
Bitcoin has established a reputation for itself as the world’s original cryptocurrency that could be used for decentralized payments and as a store of value.
On the other hand, altcoins fill the void that’s left by Bitcoin’s limitations, empowering the crypto industry with innovative use-cases.
Disclaimer: The content of this blog is for general informational purposes only and is not intended to provide specific advice or recommendations for any individual or on any investment product. It is only intended to provide education about the cryptocurrency industry. Nothing in this post constitutes investment advice or any recommendation that any cryptocurrency or investment strategy is suitable for any specific person. Do your own research thoroughly before making any investments of any kind.