What Are Altcoins And How To Invest In Them?
The term “Altcoin” combines two words, “alternative” and “coin”. Altcoin is a term used to refer to all cryptocurrencies apart from Bitcoin. Some people consider altcoins to be any other cryptocurrency than Ethereum and Bitcoin. Several altcoins implement different blockchain technologies from Bitcoin. Many of the altcoins distinguish themselves by offering additional capabilities or plugging the shortcomings of the more popular coins.
Read on to understand Altcoins, their types, how they are different from Bitcoins and how to invest in Altcoins.
What are Altcoins?
Many altcoins came from forks, which refers to a divergence of a blockchain that lacks compatibility with the actual chain. These forks may materialise for different reasons. In most cases, the members of a team of developers had a disagreement amongst themselves, and some of them left to create their own cryptocurrency.
Various coins were forked into Altcoins to raise funds for financing the expenses of a new project. The aim of an altcoin is to improve upon the drawbacks of the cryptocurrency that it is competing with or was forked from.
For example, the first-ever Altcoin, “Litecoin”, formed as a result of the forking of the Bitcoin blockchain in 2011. It utilises a PoW (Proof of Work) consensus mechanism that is much more energy efficient than that of Bitcoin.
There are various types of Altcoin. Let’s take a look at them in the following section.
What are the Different Types of Altcoins?
The following are the various types of Altcoins:
- Mining-based Altcoins: As the name suggests, these altcoins are dependent on mining. The PoW consensus mechanism of these cryptocurrencies is utilised to create new coins. It involves solving complex problems to form new blocks as per the coin’s demand. Monero and Litecoin are two noteworthy altcoins.
- Security Tokens: These altcoins are very similar to financial instruments that are bought and sold on stock exchanges. Usually, they promise equity by offering dividends or ownership to the holders. Many people invest in security tokens primarily because they have the potential for significant value appreciation.
- Utility Tokens: One can use these tokens to pay for services within a specific network. Moreover, individuals can utilise these Altcoins for paying network fees or redeeming certain rewards.
- Pre-Mined Altcoins: As you can get an idea from the name, these altcoins are the complete opposite of mining-based altcoins. They are not developed via any algorithm. Ripple’s XRP is an example of a pre-mined Altcoin.
- Stablecoins: Stablecoins aim to minimise the volatility that is associated with buying and selling of cryptocurrencies. To achieve this, they peg their price to a range of goods, for example, precious metals, fiat currencies and other cryptocurrencies. These goods collectively serve as a reserve that holders can redeem in case the cryptocurrency doesn’t succeed or faces some issues.
- Meme Coins: These altcoins are inspired by memes or jokes on social media platforms. They are also referred to as parody coins. The first meme coin to be introduced was Dogecoin. It is based on the Shiba Inu dog and came into existence in 2013. A few more examples of meme coins are Floki Inu (FLOKI), Mehracki ( MKI) and Akita Inu (AKITA).
Also Read: List Of 7 Most Popular Types of Cryptocurrencies In India
How do Altcoins Work?
Similar to Bitcoin, the functioning of altcoins is based on blockchain technology. Blockchain refers to a shared digital database or a ledger that facilitates the tracking of assets and recording of transactions in a particular business network. The growing list of records of transactions (blocks) is linked together securely with the use of cryptography. After any transaction is broadcasted on a blockchain, it cannot be reversed.
Various Altcoin creators provide one-of-a-kind features that help in differentiating the cryptocurrency from Bitcoin as well as other cryptocurrencies. Let’s take the example of the Stellar Lumen (XLM) currency. The aim of this cryptocurrency is to be cheaper, faster and more energy-efficient than its competitors.
Why are Altcoins Important?
Since Bitcoin does not offer a solution to all issues that cryptocurrencies are trying to solve, Altcoins have become a necessity for plugging the shortcomings of Bitcoin. Moreover, altcoins are also essential for providing utility across multiple markets and sectors. In the world of cryptocurrency, one cannot expect a single cryptocurrency to complete all tasks.
Altcoins offer investors various options to invest in while enabling different projects to showcase their potential use cases. With time, the altcoins lacking unique use cases may cease to exist, while the ones with the best use cases would likely turn into staple utility tokens in different ecosystems.
Differences between Altcoins and Bitcoin
Altcoins are very similar to Bitcoin, and all of them work based on the same mechanism. That said, there are some crucial differences. The use and implementation of the latter are difficult as it is energy-intensive and restrictive.
On the other hand, many Altcoins utilise the Proof of Stake mechanism to ensure a competitive advantage. It makes the entire process much more energy-efficient and minimises the time taken to validate transactions.
Moreover, the smart contract capabilities of Bitcoin are extremely limiting. Altcoins have addressed these issues of Bitcoin in a very efficient manner. For example, Ether (ETH) can be used for fuel and other related transactions on the Ethereum blockchain.
How to Invest in Altcoins?
To invest in Altcoins in India, follow these steps:
Step 1: Download a cryptocurrency exchange app.
Step 2: Fill in the required details to open an account and complete the KYC procedure.
Step 3: Once you open the account, transfer the necessary funds to your account and purchase altcoins of your choice.
Also Read: What Is Cryptocurrency: Definition, Types And How Does It Work
Final Word
Before investing in altcoins, one should be aware of the Altcoin prices in India to make sure that you create a proper investment plan. Avoid making investments based on rumours and half-baked information as that could lead to substantial losses. Do proper research and conduct a thorough analysis of the digital assets before parting with your savings.
FAQs on Altcoin
Ans: Here are some popular altcoins that you can consider investing in:
Cardano
Uniswap
Polkadot
Tether
XRP
Stellar
USD Coin
Chainlink
Aave
Monero
Polygon
Ans: Individuals can use a blockchain wallet to store coins which is much like any other digital wallet available today. This wallet ensures smooth exchanges. All the transactions are secure since they are signed cryptographically.
Ans: Here are some of the essential aspects that you must consider before purchasing altcoins:
– Legitimacy of the cryptocurrency
– Value proposition of the project
– Risk profile
– Investment objectives
– Investment time horizon
Make sure to conduct thorough research before investing in any of the altcoins available in the market.
Ans: Here are two significant limitations of altcoins:
– Since the crypto market is unregulated, there is a lot of speculation surrounding altcoins
– Some Altcoins have failed in the past. As a result, investors incurred substantial losses.
Ans: Altcoins gain value when the demand for them is higher than the supply. When a cryptocurrency has many use cases, a lot of investors wish to own it. This increases the demand, which, in turn, increases the price.
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Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions.
Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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