Altcoins came into existence shortly after Bitcoin (BTC) and offered an alternative to the most established cryptocurrency. Now, altcoins account for nearly 80% of the crypto market. Moreover, more than 5,000 altcoins are currently in circulation. On the flip side, investing in altcoins poses a greater risk compared to traditional cryptocurrencies like Bitcoin and Ethereum (ETH).
Altcoins offer users an opportunity to earn high returns, especially those who know how to squeeze more earnings from the altcoins they already own. Users may consider this a quick guide for first-time investors in altcoins.
What is an altcoin?
“Altcoin” is short for “alternative coin.” Altcoins comprise all cryptocurrency coins that are not Bitcoin (BTC) and include Litecoin (LTC), Uniswap (UNI), Dogecoin (DOGE), Zcash (ZEC) and Cardano (ADA).
Since Bitcoin's inception in 2009, a plethora of cryptocurrencies have launched in the space, and others keep sprouting up almost daily. These Bitcoin alternatives began diverging further from the Bitcoin consensus mechanism to include various combinations of privacy features, functionalities and supply schedules.
The altcoin strategy of offering additional functions makes them more enticing and valuable compared to their original counterpart (Bitcoin) and gives them additional utility in the eyes of investors. Some of the most common altcoins in the market at present include the following.
Ethereum is the second-largest cryptocurrency after Bitcoin by market cap, and it is the largest altcoin. However, many investors no longer regard it as an altcoin due to its potential for price stability; it is a more risk-adjusted investment than most altcoins and is close to Bitcoin.
Moreover, Ethereum was the first blockchain to launch with smart contracts, in turn giving rise to decentralized finance (DeFi) and the consequent novel financial instruments used at present. Ethereum is thus considered an actual money protocol compared to Bitcoin, which is chiefly transactional.
Ethereum can also be used to lend, borrow, short, long and so on — none of which can be done on Bitcoin’s base layer. Compared to Bitcoin, Ethereum acts as a ledger on which investors can build decentralized applications (DApps) using their native tokens (ETH).
Litecoin is also called the silver alternative to Bitcoin's gold and is a fork of the original Bitcoin mechanism. It comes with a different hashing algorithm (Scrypt) and has a faster block processing speed, which results in a production capacity of 4x what Bitcoin can supply. However, it’s been dismissed as a redundant (and ultimately unnecessary) Bitcoin fork.
Unlike most cryptocurrencies, Stellar focuses on international bank transfers. Stellar leverages distributed ledger technology (DLT) to exchange value across various boundaries and then exchanges the cryptocurrencies into fiat.
Ripple (XRP) is a popular digital payment platform that hosts crypto coins. It's also one of the most common cryptocurrencies and uses a consensus mechanism that is different from the traditional proof-of-work (PoW) mining process of Bitcoin.
Uniswap is the first decentralized exchange (DEX), and it’s hosted on the Ethereum blockchain. Therefore, Uniswap uses the ERC-20 algorithm native to its platform. Since it is open source, it has spawned several copycat competitors in the space, including Sushiswap (on Ethereum as well) and PancakeSwap (on the Binance Smart Chain).
Polkadot (DOT) is the brainchild of Dr. Gavin Wood, one of the cofounders of Ethereum. Polkadot is a promising blockchain because, like Cardano, much of it is peer-to-peer research-based. But instead of having a testnet on its own blockchain like with Cardano’s testnet on its chain, Polkadot first launches its experimental features on the Kusama chain for testing.
Where can I buy altcoins?
The emergence of numerous altcoins has led to a surge in the development of Bitcoin-altcoin exchange platforms, increasing market activity. However, most investors still struggle with where to buy small-cap altcoins.
“Small-cap” refers to cryptos with a market cap lower than $1 billion. A sound general principle to follow when investing in cryptocurrencies is to arrange them into groups based on market cap. A larger market cap tends to indicate a safer investment, but this is not a hard rule, and user experiences may vary.
Now, many platforms allow traders to buy, hold and sell altcoins. However, each of these platforms comes with different privacy policies and features. Thus, the best altcoin exchange depends on several factors, including buyer preferences.
However, many users have also incurred losses due to scams and bugs that have been exploited on numerous exchange platforms. Therefore, it's up to every investor to transact on a reputable exchange.
Moreover, if an investor chooses to trade privately with another investor via direct transactions, they should spend some time identifying reliable traders. One of the best ways to protect one’s investments is by conducting significant research on every platform and trader before committing funds.
For new investors, it's safer to avoid the lesser-known platforms and stick to reputable exchanges like Coinbase, Binance, KuCoin, eToro or Crypto.com.
Before making a purchase, users should shop around to review the permitted exchanges in their respective jurisdictions and check the exchange markets to ensure that they have access to the cryptocurrencies of their choice.
It’s also prudent to consider the exchange fees to avoid spending more when there are cheaper options out there.
How to buy altcoins?
The process for buying cryptocurrencies on different platforms may differ slightly, but the steps are mostly similar and fairly straightforward.
While exchanges are safe for beginners and help users avoid fraud, advanced traders may even choose to purchase altcoins from owners over-the-counter.
Step 1. Decide on a percentage of portfolio allocation for the investment
Most altcoins are still in an experimental phase, while many other teams have launched their coins and then vanished after dumping their allocated sums on the market (also known as a rug pull). Thus, a significant percentage of blockchain projects fail pretty quickly.
Purchasing altcoins is a fairly risky investment, and the chances of the coin sinking are relatively high. Therefore, it's safer to separate a portfolio into different risk layers, especially for investors eyeing lesser-known altcoins.
Step 2: Shop around for the most promising coins
Thousands of altcoins are available for investors. Whether one is suitable for investment depends on several factors, including the investor's needs and preferences.
Thus, every user should learn more about altcoins that are tied to their favorite projects. They should also examine their various features and select the coins that most appeal to them.
These questions will help guide users to arrive at viable decisions and pick the right altcoin in which to invest.
Step 3: Exchange fiat currency for cryptocurrency
Most exchanges aren’t fiat on-ramp platforms and do not support U.S. dollar purchases. Thus, investors are required to purchase supported cryptocurrencies and then swap them for altcoins on the exchange.
Several exchanges allow the direct purchase of cryptocurrencies via credit card, making it easy to obtain coins for an altcoin exchange.
Step 4: Pick the right exchange
With a bag of cryptocurrencies ready for trading on an altcoin exchange, investors will have to identify the exchanges that offer their favorite altcoin. New buyers are safer transacting on popular exchanges since they have high liquidity and fewer fraud cases.
Thus, it's essential to find different cryptocurrency exchanges that offer a favorable trading pair. Once they identify the trading pair they want, users begin trading their coins. But before executing a trade, here are some critical questions to consider:
Is the exchange reputable?
Are there any past reports of hacking or bug exploits on the platform?
What are their fees compared to competitors?
Step 5: Pick a currency pair
The next step is to connect a Web 3.0 wallet storing the altcoins to the exchange. Before executing the trade, it's worth noting the trends of the currency pair and its performance over the past month or few weeks to ensure that the user makes the trade at the best time.
Step 6: Execute the trade
If the conditions look promising and the user is ready to make the trade, it's time to execute. If trading for the first time, invest some time in learning how orders work and then place an order for the desired altcoin on the exchange.
Step 7: Check that the altcoins are already in the wallet
Having executed the trade, the cryptocurrency will already be sitting in the wallet. The only time a user must transfer their funds off of an exchange and to their wallet is when the exchange is centralized. For DEXs, funds are not custodied by the exchange unless they’re provided for liquidity pools, yield farming or some other DeFi tool.
Crypto wallets are available in two different forms: cold (also called “hard” because they’re hardware) and hot wallets. Cold wallets like Trezor and Ledger are USB-like devices that store a user’s private keys, making it difficult for hackers to control user funds without also having physical access to the hard wallet.
Hot wallets, by comparison, are connected and hosted online, either via a phone (Trust wallet, for example), desktop (Daedalus) or web app (Metamask). Hot wallets are more vulnerable in terms of security, but lower security affords greater convenience to users.
How to buy altcoins on Uniswap?
Uniswap is the ultimate altcoin exchange app for trading most ERC-20 token standards.
How to buy altcoins on Coinbase
Coinbase allows investors to trade as little as $2 or €2. The following are steps that even first-time investors can use to purchase coins on this platform.
The “One-Time Purchase” button allows users to schedule recurring purchases. Click on it to modify the frequency of purchases.
How to buy altcoins on Binance
Binance is one of the largest crypto exchanges in the world, boasting millions of users worldwide. To buy altcoins on the Binance platform, users should complete the following steps:
Before finalizing any purchase, it's important to double-check every detail to make sure no mistakes are being made. Any mistake during the purchase can lead to loss of coins or unwanted exchanges. Many investors have lost their funds simply because they sent them to the wrong wallet address.
As mentioned, most exchange platforms have elaborate purchasing processes to help make it easy and painless for users to purchase and sell crypto, even if they’re beginners. Regardless, it is in the user’s best interest to familiarize themselves with every platform they plan to use. They should also test out the buying and selling experience.
How does a trader sell their altcoins?
The process for selling altcoins doesn't differ significantly from the buying steps outlined above. However, now that users know how to open an account with an exchange wallet, they can log in and follow the steps listed below to sell their coins. The steps are identical to the buying process, but with selling instead:
Cryptocurrency exchanges for altcoins
Every altcoin investor needs a cryptocurrency exchange platform to begin trading. Hundreds of cryptocurrency exchanges are available to users. However, the very best platforms that are reputed to be dependable are few. Picking those that would be ideal depends on several factors, including a user's circumstances, experience, preferences and reasons behind trading.
The following are some of the best exchanges, depending on user circumstances and preferences.
For mobile users: Gemini
Gemini comes with a sleek mobile app that's compatible with Android and iOS mobile devices. The Gemini app also lets users monitor their assets and manage their wallets on the go.
Similarly, the crypto exchange comes with an insured wallet, providing an additional layer of security, and in addition to Bitcoin, Gemini supports up to 25 altcoins.
For active investors: eToro
The eToro crypto exchange has a social media platform that connects users and allows them to share ideas. Its simple interface makes it an ideal choice for many new investors who are reluctant to dive deep into crypto-infested waters.
Moreover, eToro comes with an additional CopyTrader feature, allowing users to control their portfolio allocations according to the portfolios of the most successful traders on eToro.
For users who want crypto-back rewards: Crypto.com
Crypto.com supports the storage, transfer and exchange of up to 90 cryptocurrencies on their platform. They also have a Visa card that lets investors make crypto payments and earn up to 8% crypto-back.
They have numerous products, including Crypto Earn, Crypto Credit, a DeFi wallet and more. Crypto.com is the answer for every investor aspiring to help accelerate the growth of the cryptocurrency space by using a wide range of products and services that will facilitate onboarding for those who are new to crypto.
For altcoin micro-caps: KuCoin
KuCoin Exchange isn’t as big as Binance or Coinbase, but it offers users an experience that is in line with its major competitors. For instance, KuCoin’s trading bot offers four automated strategies to help beginner and experienced traders to make more out of their assets.
The exchange has become popular because it offers many smaller-cap tokens that aren’t available on major exchanges. KuCoin also offers passive-income opportunities like soft staking. It also has its currency, KCS, the holders of which enjoy a variety of benefits, like discounted trading fees.
For altcoin variety: Binance
Binance supports a wide variety of altcoins (hundreds of cryptocurrencies) and offers numerous built-in features for traders interested in passive income. Furthermore, it's one of the few crypto platforms that allow exchanges in Tether (USDT), USD or BTC trading pairs.
Binance also has its coin, BNB, which investors can use to fund transfer fees and offer financial derivatives in select locations.
Are altcoins the right investment for crypto users?
Like investing in anything, investing in crypto assets is no different, and comes with its own set of risks. But high volatility is a given in a new market and presents considerable upside potential compared to traditional markets. While “more stable” altcoins like Ethereum seemingly have reduced risks, there's no guarantee that an investment will yield greater returns.
Before investing in altcoins, especially the highly volatile options, users should conduct thorough research and invest only what they’re willing to lose. A couple of the benefits that come with investing in altcoins include having more room for growth, and some have interesting utility and present promising use cases.
Users should be aware of a few other risks associated with investing in altcoins. First, there are thousands in the market, and it can be challenging not to overdiversify. Low liquidity may affect slippage and transaction fees, and selling could become problematic later on. Pretty much anyone can launch an altcoin. Home-baked DApps could be susceptible to security exploits.
Whether users should invest in altcoins depends on several factors, including the reasons for the purchase, risk averseness and others. As investors say on Wall Street, “Volatility is our friend.”
A trend to keep in mind is that altcoin prices are still coupled to BTC, so when BTC rises and falls, altcoins tend to follow (after ETH). Still, users should exercise caution when considering an altcoin in which to invest.
Although altcoins tend to rise in tandem overall, failing projects will only fall eventually. And most new projects can fade pretty quickly. On the other hand, solid altcoin projects like Ethereum, Polkadot, Cardano and Polygon have stood the test of time and warrant closer investor scrutiny.