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Cryptocurrency

What Are Altcoins And How Do They Work?

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The world of cryptocurrencies is expanding at a rapid pace. Altcoins are digital currencies other than Bitcoin and they also share some aspects with bitcoins, such as their use of a distribution method through mining or distributing tokens in exchange for goods/services provided by individuals running “mining” nodes on the network.

Altcoins also set themselves apart from Bitcoin by providing capabilities that are completely new like smart contracts or low price volatility.

As of November 2021, there are over 14,000 cryptocurrencies. Altcoins make up a significant percentage of the market, and Bitcoin and Ether are still the two most popular cryptocurrencies, according to CoinMarketCap.

Altcoins are a response to Bitcoin’s success. They often have the same traits and values as their parent currency, but they were created due in part because there was an overwhelming demand for cryptocurrency that could not be met by just one coin type alone. Developers saw it fit to create alternative coins through different methods such as Altcoin.

What You Need To Know About Altcoins

Altcoins are formed by joining two words, namely: ‘alternative’ and ‘coin’. Altcoins use the same basic framework as Bitcoin. Altcoins work in a similar way to Bitcoin by being a peer-to-peer system or a giant computer that can process huge volumes of data and transactions simultaneously. Altcoins, in many cases, also aim to be the next Bitcoin by being a cheaper mode for digital transactions.

Bitcoin is the first iteration of a cryptocurrency and was created with several design goals in mind. Some of these include being a global currency and having smart contract capabilities. However, Bitcoin has several shortcomings compared to other coins. Altcoins are cryptocurrencies that were created in response to these shortcomings. Altcoins typically have different consensus mechanisms, which make them more efficient and faster than Bitcoin. Altcoins also have more robust smart contract capabilities.

Altcoins improve upon Bitcoin’s limitations and establish a competitive advantage. Altcoins mainly use the proof of stake (PoS) consensus method. This method helps it reduce energy consumption and take less time to create new blocks or validate transactions.

Ether, the second largest cryptocurrency by market cap, is used as gas in smart contracts on the Ethereum blockchain. Ethereum 2.0 has finally arrived to address the problems that Bitcoin faces, like scalability and sustainability.

Because Altcoin has a different value proposition from Bitcoin, Altcoins have been to create a niche for themselves. In turn, this has attracted investors who see Altcoins as an alternative to Bitcoin. Investors expect Altcoins will grow in popularity and increase in price, which would make Altcoins a profitable investment.

How Do Altcoins Work?

Altcoins are digital currencies that work similarly to Bitcoin. They use a private key to send payments from one user’s wallet to another user’s wallet. Transactions are permanently and publicly recorded on a blockchain, so they can’t be altered or denied after the fact.

The Bitcoin network is secured by proofs of work which verifies transactions. This is more cumbersome and less environmentally friendly than other more recent cryptocurrencies.

Ethereum, an altcoin, is a cryptocurrency that has been rapidly growing in popularity over the years. Ethereum, similar to Bitcoin, also operates on a blockchain system where users can access and transact with digital currency.

Unlike Bitcoin, however, Ethereum does not require “proof-of-work”, but instead relies on “proof-of-stake”. Proof-of-stake makes it faster and simpler, while also being more energy-efficient.

Types Of Altcoins

Altcoins can be classified depending on their features and consensus mechanisms. Some of the more common categories are:

Mining-based Altcoins

Mining-based altcoins are created through a process called mining. In most cases, this involves solving difficult problems to create blocks and generating new coins. Some examples of mining-based altcoins are Litecoin, Monero, and ZCash.

The altcoins that were popular in early 2020 were mainly those that were mined. Mining-based altcoins are created through an algorithm, as opposed to being premined and distributed before they hit the cryptocurrency markets. This means that the coins are not simply given to people but are earned by those who participate in the mining process. An example of a mining-based altcoin is Ripple’s XRP.

Stablecoins

Stablecoins are designed to have their value pegged to a basket of goods, usually fiat currencies, precious metals, or other cryptocurrencies. Stablecoins are supposed to act as a reserve to help holders if the cryptocurrency either fails, or hits any hurdle. Stablecoin price fluctuations are not meant to exceed a narrow range.

Notable stablecoins include Tether’s USDT, MakerDAO’s DAI, and the USD Coin (USDC).

Many people had been waiting for Visa to begin using Ethereum blockchain technology, and Visa finally announced it in March 2021. Visa announced that it would use USDC stablecoin as a means of payment on their network later this year with plans for more transactions being settled over the same platform next year.

Security Tokens

Security tokens are digitally transferable securities that rely on cryptocurrencies as a means of value. Security tokens can be seen as digital securities and provide equity to those who invest in them. The token has the potential for prices to increase which is a motivating factor for many people to invest in them.
In 2021, Exodus completed a Securities and Exchange Commission-qualified Reg A+ token offering to be converted into tokens on Algorand’s blockchain. The sale of $75 million shares of created tokens on Algorand’s blockchain that could be converted back into common stock at any time.

Meme Coins

Meme coins are inspired by jokes about other cryptocurrencies. They typically gain popularity quickly, often fueled by big crypto influencers and retail investors trying to receive short term benefits.

Elon Musk, CEO of Tesla Inc., regularly posts cryptic tweets about leading meme coins Dogecoin and Shiba Inu. These often substantially move their prices thanks to the power that comes with his message on Twitter.

Shiba surged 91% in a 24-hour period after Musk tweeted a picture of his pet Floki, the Shiba Inu puppy, on a Tesla in October 2021. Referred to as Meme coin season tat occurred during April and May 2021, it saw hundreds of cryptocurrencies posted enormous profit gains based on pure speculation.

Utility tokens

Utility tokens are used for various services within a network. They can be used to buy different services, pay fees related to, or redeem rewards. Unlike security tokens, utility tokens do not have an ownership stake or pay dividends. Filecoin is an example of a utility token that can be used to buy storage space on a network.

Altcoins vs. Bitcoin

Bitcoin is also referred to as a cryptocurrency, which is a digital currency. Altcoins are currencies that use decentralized computing and cryptography for security purposes. Altcoins do not rely on the same rules as Bitcoin.

For example, an Altcoin called Litecoin will produce coins every 2.5 minutes; while Bitcoin will only produce bitcoins every 10 minutes. Litecoin also has 84 million Litecoins in supply while Bitcoin will only have 21 million Bitcoins in supply.

The first Altcoin, Namecoin, was created in April 2011. Bitcoin was the only currency at that time. Altcoins are a result of the open-source software movement. Altcoins are different from Bitcoin because they can be mined with home computers. Bitcoin can only be mined with ASIC miners, which are expensive and difficult to obtain.

Altcoins can also be used to purchase items and services. Bitcoin can only be used to purchase items and services through exchanges that trade in Bitcoin. Altcoins are also used to pay for goods and services on some websites. Bitcoin is not accepted as payment on most websites.

Bitcoin is the most popular cryptocurrency on the market, but there are thousands of altcoins available. Some altcoins are popular alternatives to Bitcoin, although they don’t reach Bitcoin’s $1.07 trillion market value. Litecoin is one example of an altcoin that has gained popularity as an alternative to Bitcoin.

A few other examples of altcoins include:

  • Ethereum (ETH)
  • Cardano (ADA)
  • Polkadot (DOT)
  • Monero (XMR)
  • Litecoin (LTC)
  • Stellar (XLM)
  • Bitcoin Cash (BCH)
  • Solana (SOL)
  • Dogecoin (DOGE)
  • Shiba Inu (SHIB)
  • Ripple (XRP)
  • Terra (LUNA)

What Are The Top 5 Altcoins?

Bitcoin and Ethereum are the two most popular cryptocurrencies in the world. However, newer players are gaining ground with their cheaper transactions, less energy consumption, and greater speed. These newer players are called altcoins — alternative cryptocurrencies that aren’t Bitcoin.

Ethereum is undoubtedly one of the most well known digital currencies in today’s market, but its worth doesn’t quite compare to some other more established cryptocurrencies

There’s disagreement over whether Ethereum is really an altcoin, since its market value of $557 billion far outpaces any other cryptocurrency in the crypto universe.

Here are 5 of the most promising altcoins in today’s market:

Solana (SOL)

Solana swept the world by storm in 2020 with its own blockchain, fast transaction speeds and an ability to integrate with tokens from other networks.

The success of Solana can be attributed largely to its ability to provide developers access to smart contracts without having them depend solely upon Ethereum as their go-to cryptocurrency for these needs.

Solana, an Ethereum-inspired platform, has shown to be well-suited for high-throughput decentralized finance solutions. Solana use less processing power than Ethereum, and hence the cyber community tagged it as an ‘Ethereum killer’. The recent upgrades of Ethereum have made its capacity better than that of Solana.

Ripple (XRP)

Ripple is the name of a cryptocurrency and digital payment network. It can be used as both, although it is mainly used for transactions between banks and financial institutions. Ripple was first released in 2012 and was co-founded by Chris Larsen and Jed McCaleb. The main process of Ripple involves the settlement of asset exchanges and remittances, which is like SWIFT’s system for international money transfers, which is used by banks and financial intermediaries dealing across currencies.

Polkadot (DOT)

Another Ethereum killer has been born. Polkadot (DOT), a project by the Swiss research foundation, aims to make it easier for people, businesses and networks of all sizes without sacrificing security or scalability.

With a maximum supply allocation of 1 billion DOT tokens, transacting with Polkadot is cheaper and faster than older cryptocurrencies.

There are currently 511 projects built on Polkadot, with the use cases ranging from ordinary transactions and finance to exotic ones like file storage and identity verification.

Dogecoin (DOGE)

Dogecoin was created as a joke by its founders in 2013, but it turns out that the combination of a Shiba Inu meme, cute dogs and crypto was powerful enough to get the attention of tech billionaire, Elon Musk. He liked it, his followers bought into it, and the rest is history.

For many years, Dogecoin was used for its intended purpose: online tipping and donations. It quickly became one of the first altcoins to get mass media coverage because it’s similar in design with Bitcoin or Litecoin when created – but there are some key differences worth noting! For example, no limit on how many coins can be mined means supply will never run out over time.

Terra (LUNA)

The LUNA token is a blockchain created by Terra, which intends to provide an improved digital financial system. With LUNA, smart contracts and DApp construction on the Terra network are possible, including DeFi protocols like Anchor and Mirror. One way that their adoption has been promoted is through partnerships with payment and e-commerce platforms in Korea like TMON and Yanolja.

Terra uses fiat currencies such as the US Dollar to create stablecoins, which is similar to how Tether creates USDT. The company claims that these stablecoins ‘help users avoid the volatility of Cryptocurrencies,’ and allow them to ‘invest, use, save and transact with stable digital assets.’

Should You Invest In Altcoins?

The Altcoin market is still very new and it is not as easy to trade as the Bitcoin market. Altcoins have a lower volume of buyers and sellers which leads to less liquidity. There are a lot of Altcoins that come out all the time which makes it difficult for people to choose which Altcoin they should invest in. All these factors lead to Altcoin being highly volatile, with prices going up and down quickly for no apparent reason.

The price of Ethereum’s ether has had a lot of movement in the last few years. In early 2018, the price reached its peak at $1,299.95. A few weeks later, it had crashed down to $597.36. By the end of 2018, the price had crashed all the way down to $89.52. However, just two years later in November of 2021, the price reached record highs of above $4,750. This shows that Ethereum’s ether is a very volatile cryptocurrency and that timing trades can provide traders with a lot of profits.

The Altcoin market is driven by speculation. Cryptocurrency markets are not yet mature; Altcoins are not backed by tangible assets but instead, they are virtual currencies which can’t be traced back to any real-world company or government. Altcoins also lack defined investment criteria or metrics which has led to many Altcoins dying after collecting investors’ money.

Altcoins are difficult to trade with. They can be great for people willing to take risks, but only certain people should do this investment. Altcoin trading is different than other types of trading because it is not regulated and the market is new. Investors need patience so they can deal with wild price swings.

Altcoins Pros & Cons

Pros

  • Altcoin developers can experiment with features that would not be possible on a public blockchain like bitcoin.
  • Bitcoin was originally designed as a medium of exchange for daily transactions. Altcoins, like stablecoins, can potentially fulfill this purpose.
  • Ethereum’s ether and Cardano’s ADA have gained traction with mainstream institutions, resulting in high valuations, that make them attractive investment options for some people.
  • Altcoins are a type of cryptocurrency that can be used in a number of different ways, which is one reason why investors may choose to invest in them.

Cons

  • Bitcoin has a much larger investment market as compared to Altcoins. As of November 2021, Bitcoin’s share in the cryptocurrency market stood at 42%. Altcoins have a much smaller investment market.
  • Altcoins have been affected by new regulations across the globe, continuous changes in the cryptocurrency space, and a lack of liquidity on some Altcoin exchanges.
  • In the crypto space, there are many different altcoins that can be confused with one another. This makes investment decisions even more difficult and confusing.
  • Some investors are likely to have lost out on the cryptocurrency market because of a few dead altcoins.

Future Of Altcoins

It is interesting to see how the situation with 19th-century U.S currency precedes current discussions about cryptocurrencies and their future in a way that should provide some perspective for what could happen next year or even decades from now.

There were a variety of local currencies circulating in the United States back then. Some of the government’s most famous bills, such as gold certificates or greenbacks used to finance Civil War-era debts, were backed by an underlying asset. Other currencies had more abstract backing systems in which they traded at a certain rate against other assets like foreign exchange markets and precious metals reserves at banks across America.

The value was guaranteed through these tradable instruments so people could trade them for goods without fear that inflation would suddenly increase their costs drastically due to loose monetary policy practices.

Altcoin markets are currently experiencing a similar situation like that of the 19th century. Local banks were also issuing their own currency, and it’s no wonder people had issues with how many currencies there were when the total reached nearly 1,000. With so many altcoins available in the markets, it can be difficult to know which one will serve your needs best. There are thousands of coins with different purposes and values.

With such a vast range of coins and tokens, it’s been hard to determine which ones will truly survive. But it’s also likely that most if not all 1,800+ altcoins listed on crypto exchanges will disappear eventually – their utility and use cases make them unfit for competitive trading due to low demand from traders around the world who prefer stability over volatility.

The market has been making its way towards an inevitable consolidation; some currencies might survive while others won’t.

Altcoins are less expensive than Bitcoin, so they are easier to buy. However, Altcoin markets can be risky because there is no regulation in the market yet. The Maturation of Altcoin Markets will make it easier for people to buy and sell without too much risk.

As the cryptocurrency market matures, it’s likely that we’ll see more sophistication and capital flowing in, paving the way for regulation and less volatility.

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