Bitcoin ushered in the era of cryptocurrencies in 2009. In fact, it dominated the growing market to the point where any other cryptocurrency was considered an “altcoin” – an alternative to Bitcoin. And the name stuck, even though today the original digital currency has literally thousands of competitors.
Altcoin is an alternative to the first cryptocurrency, Bitcoin, which itself was the only cryptocurrency at one point in time. In its early years, Bitcoin so dominated the market that all emerging cryptocurrencies were not defined as separate phenomena. People saw cryptocurrencies as Bitcoin and everything else. Anything that wasn’t Bitcoin was called altcoins.
Altcoins are any cryptocurrency that is not Bitcoin. In the early days of cryptocurrencies, this definition made a lot of sense, as Bitcoin occupied most of the market’s attention, and competitors amounted to dozens or at most a few hundred alternative coins. Currently, some experts estimate the number of individual cryptocurrencies to be around 15,000.
However, Bitcoin remains by far the largest cryptocurrency with a market capitalization – the value of the total number of coins in existence – more than three times that of the second largest player, Ethereum, according to CoinMarketCap.com.
Types of altcoins
Since there are literally thousands of cryptocurrencies, it can be difficult to sort out their nature. Altcoins are almost impossible to categorize on any single basis. Several major groups can be distinguished among them.
Mining-based coins
Mining-based coins are released into circulation by computer networks that solve complex mathematical problems that often require a lot of energy.
Stable coins
Stable coins are a type of cryptocurrency whose value is tied to the value of another asset, usually the U.S. dollar. Stable coins track the underlying asset in an attempt to keep the price of the coin equivalent to the currency. Often stable coins are backed by assets such as real dollars (often bonds and other assets), giving stable coins a basis in real currency. Examples of stable coins include Tether and USD Coin.
Despite their name, sometimes stablecoins are far from stable. TerraUSD, a stable coin pegged to the dollar, made headlines in May 2022 when it collapsed to 0.30 cents on the dollar. The coin’s automatic stabilizers couldn’t handle orders from traders looking to sell their positions.
Security tokens
A security token is a kind of coin that represents a partial stake in another asset. For example, a piece of artwork may have security tokens that share ownership of the asset and confirm ownership of the asset. Alternatively, the ownership of a company can be represented by security tokens. In this way, this type of token can allow more traditional assets to be secured.
Memecoins
Memecoins are a type of cryptocurrency that has gained public attention, perhaps through social media or tweets from celebrities such as Tesla CEO Ilon Musk. Memecoins often resemble a lottery, rising in value very quickly and then continuing to fall precipitously. Popular memecoins include Dogecoin and Shiba Inu.
What to consider before buying altcoins
The most unsafe investment in the crypto market is buying unknown altcoins. This is a game of Russian roulette – they can shoot up or fail completely. Deciding on such risks, you need to take into account several points.
Cryptocurrency is completely determined by sentiment
Since cryptocurrency is usually not backed by the assets or cash flow of the underlying company like stocks, it is only determined by sentiment. Sentiment can range from super optimistic to woefully pessimistic, which means traders have to rely on their own predictions about the altcoin’s potential popularity.
Investors are concentrating around the most popular coins
As cryptocurrency is driven by sentiment, investors are concentrating around the most popular coins, focusing on Bitcoin, Ethereum and a relatively small number of others. While every now and then an altcoin (such as Dogecoin or Shiba Inu) comes along that catches everyone’s attention, thousands of other new coins remain unknown. Keep in mind: if an altcoin falls into disfavor with the community, it may never come back into fashion, resulting in a partial or total loss of investment.
Do you have money you can afford to lose?
Given the extreme risks associated with altcoins, as well as their volatility, it’s important to ask yourself if you’re only betting the money you can afford to lose. Cryptocurrency and other financial markets are not places where credit money or other necessities of life are invested.
The technical capabilities of an altcoin are important
Some altcoins, such as Solana, have taken off because they provide high functionality at a low cost. The features of a cryptocurrency can help keep it in the public eye and therefore make it an attractive trading tool that traders can use all the time.
And remember, when buying highly speculative assets such as cryptocurrency, it is important to realize that you can lose your entire investment. At the very least, you should expect extreme volatility.
Conclusion
There are thousands of altcoins, and they continue to gain popularity. While no single coin will displace Bitcoin as the leading cryptocurrency, altcoins as a whole may continue to take market share away from the leader even as the overall “cryptocurrency pie” continues to expand.
