What is an altcoin? A beginner's guide to cryptocurrencies beyond Bitcoin

This article aims to clarify various questions like how do I buy or sell altcoins? What's the difference between Bitcoin and altcoins? Are altcoins better than Bitcoin?

What is an altcoin? A beginner's guide to cryptocurrencies beyond Bitcoin
altcoin

What is an altcoin? Altcoins explained

An altcoin is an amalgamation of “alt,” referring to “alternative” and “coin,” referring to “cryptocurrency,” i.e., all coins that are not Bitcoin (BTC) are altcoins. Bitcoin was the cryptocurrency that introduced blockchain technology to the world after the global financial crisis of 2008–09. 

BTC has established itself as the “gold standard” of cryptocurrencies and brought a revolution to the world of finance. It has become the stable equilibrium among cryptocurrencies based on blockchain technology due to its first-mover advantage. Alternative cryptocurrencies have been created to improve on Bitcoin's technical and practical challenges (more on this later). So, is Ethereum an altcoin?

The birth of altcoins was followed by the introduction of second and third-generation blockchain-based cryptocurrencies like Litecoin (LTC) and Ether (ETH). While Bitcoin is frequently quoted in dollars, yuan, euros and other fiat currencies, altcoins (alternative cryptocurrencies) are typically priced in BTC.

Types of altcoins

Altcoins can be categorized as proof-of-work (PoW) and proof-of-stake(PoS) altcoins (based on consensus mechanisms), stablecoins and decentralized finance (DeFi) altcoins.

PoW and PoS altcoins

The Bitcoin network follows the PoW consensus method to verify and process transactions. Other PoW altcoins include LTC, Bitcoin Cash (BCH), and Zcash (ZEC). In contrast, validators (instead of miners) verify transactions in the PoS model. 

Ethereum is moving to the PoS consensus mechanism due to the energy-intensive nature of the PoW method. Cosmos (ATOM) and Tron (TRX) are other examples of PoS altcoins.

Stablecoins

Coins which have their value pegged to fiat like USD are called stablecoins. The value of the stablecoin is equivalent to one unit of the fiat currency to which it is pegged. For instance, Tether (USDT) is a stablecoin the value of which is pegged to USD.

To accomplish the peg, the stablecoin's issuer normally keeps cash or other assets that are equal to the number of coins in circulation in its reserve. In that manner, if the coin fails or has issues, the holders will be compensated.

DeFi altcoins

Blockchain-based DeFi stablecoins allow holders to lend and borrow their cryptocurrencies to earn passive income in return. Compound (COMP), Synthetix (SNX) and Uniswap (UNI) are examples of DeFi altcoins to buy.

What's the difference between Bitcoin and altcoins?

Altcoins set themselves apart from BTC by expanding their capabilities and filling in the gaps left by Bitcoin's alleged flaws. Various altcoins like LTC, ETH, BCH and ZEC have been compared to BTC in the below sections.

Litecoin vs. Bitcoin

On October 7, 2011, Litecoin was introduced in an attempt to make minor improvements to the original Bitcoin technology. Litecoin is heavily based on Bitcoin, but it differs in a few key aspects. For example, LTC reduced the time needed to construct a block from 10 to 2.5 minutes in the hope that increasing the number of completed transactions in a given amount of time would increase the speed of the network. 

However, decreasing the block time comes at the expense of orphaned blocks that miners have solved but which were not picked as the blockchain's next path. As a result, miners could not process the sheer amount of transactions at a suitable rate in December 2017, causing Litecoin to experience scalability challenges.

To address the above issues, Litecoin adopted Segregated Witness (SegWit), Mimble Wimble and the Lightning Network to decrease the congestion over the network. Furthermore, Litecoin picked a different algorithm than Bitcoin, relying more on the memory of a mining computer than the original code, which gave it better efficiency with more processing power. Bitcoin uses the SHA-256 encryption algorithm, while Litecoin uses Scrypt.

Finally, LTC differs from BTC in that the total supply of coins has been increased from 21 to 84 million. This means that the same trade in Litecoin would cost 2 units instead of 0.5 units in Bitcoin, making it more realistic in appearance and more useful to those with poor numeracy skills.

Ethereum vs. Bitcoin

Ethereum was born on July 30, 2015, and is very distinct from Bitcoin in terms of functionality — like LTC. Rather than using Bitcoin as a model for digital currency, Ethereum employs the blockchain concept to create a decentralized Turing-complete virtual machine. The Ethereum virtual machine is a decentralized computer that can process scripts and codes from anywhere on the network.

Ethereum also introduced smart contracts to the world, demonstrating the decentralized applications' fundamental logic. With a limitless supply, 14-second block durations, and blocks capped by their computational cost, Ethereum's inner workings differ dramatically from those of Bitcoin.

Bitcoin does not have an intrinsic value, whereas Ethereum's smart contracts, speed, scalability, disinflationary supply and move to switch to a PoS algorithm and innovation layer add to the network's value, offering ETH an intrinsic value.

Bitcoin Cash vs. Bitcoin

On August 1, 2017, Bitcoin Cash was formed as a software update (fork) from the original Bitcoin network to use SegWit to fix Bitcoin's scaling issues. However, later users modified their approach to expand the block size from 1 to 8 MB, allowing for an eightfold increase in the number of transactions each 10 minutes, reducing transaction fees.

Furthermore, BCH supporters believe it is better suited as a means of exchange, whereas Bitcoin is better suited as a store of value.

ZCash vs. Bitcoin

Zcash was introduced on October 28, 2016, with block times reduced from Satoshi Nakamoto's original proposal of 10 minutes to 2.5 minutes. Zcash extends Bitcoin's idea of "pseudonymity" (where owners are unknown but addresses are available publicly) to anonymous transactions.

To account for the added data within its more complicated transactions, ZEC chose a block size of 2 MB, which is twice that of BTC.

A summary of differences between the above-mentioned altcoins and Bitcoin is listed below:

How do I buy altcoins?

If you are wondering: Should I invest in altcoins? And want to know how you can do this, please follow the steps below.

Determine what percentage of altcoins you want to add to your portfolio

Your altcoins investing strategy depends upon how risk-averse you are or the extent of risk you are willing to take. Based on the level of risk-return you expect, determine a portion of altcoins that you want to add to your portfolio.

Research altcoins in which to invest

For altcoin trading, first determine the best altcoins by looking at the project's website, social media handles and the team behind the project. All these factors will help you figure out the authenticity of the project. Also, find out if your current wallet is compatible with the altcoin you want to buy or if you need to get a new cryptocurrency wallet.

Choose an exchange and find a currency pair

Some exchanges may not support buying altcoins with fiat, so you need to buy BTC to proceed. After acquiring BTC, you'll need to discover one or more exchanges that accept your altcoin. You'll need to register once you've decided on the best exchange.

You need to transfer part of your BTC to the exchange after completing registration. Don't forget that you're trading in currency pairings; thus, the BTC will be converted into your altcoin.

If the answer to the first two questions is “yes” and for the last question is “no,” you should proceed with that exchange. However, you can also register with an exchange that has been attacked based on how they responded to that hack and the quality of investigation and security measures implemented by the exchange following the attack.

Trade BTC for your favorite altcoin

You're ready to start buying altcoins once your cash or BTC has arrived in your exchange's account. Place an order for your favorite altcoin when you are prepared to trade BTC for altcoins. 

Store your altcoins into a crypto wallet

After the transaction is completed, your valuable altcoins need to be stored on the exchange. However, your crypto assets should be stored off-exchange and stored into a wallet if you're buying for the long term. You may want to choose any of the hot, cold, web, mobile or desktop wallets as your altcoin wallets. 

Related: https://cointelegraph.com/altcoins-for-beginners/altcoin-exchange-101-a-comprehensive-guide-on-how-to-buy-and-sell-altcoins

How to sell altcoins?

Some investors do not keep cryptocurrencies for the long term since they are highly volatile. If you are among such investors and want to know how you can sell altcoins, please follow the steps below:

What is altcoin season?

The term "altcoin season" refers to a period in the cryptocurrency market when several altcoins have price surges exceeding those of BTC and fiat currencies like the US dollar. The first instance of an altcoin season occurred during the apex of Bitcoin's journey in 2017 when Ethereum's smart contract functionality prompted the development of a slew of new coins.

Many crypto-investors have reaped enormous rewards due to Bitcoin's price hike. On the other hand, other investors attempt to make a fortune by investing in the altcoin market, leading to an altcoin season. 

There is no foolproof way to predict the impending cryptocurrency season. Nonetheless, the Blockchain Center offers a one-of-a-kind instrument called the Altcoin Season Index, which assesses market sentiment and calculates whether BTC or altcoins dominate the cryptocurrency market. The craze for nonfungible tokens and meme coins like Dogecoin and Shiba Inu also lead to the development of an altcoin cycle.

The future of altcoins

Investing in altcoins is an inexpensive way of diversifying the investment portfolio beyond BTC. 

Moreover, investors can participate in the governance decisions of various projects. A bunch of altcoins are available in the crypto market. 

However, the ones with strong use-case will survive the competition and dominate the market. Also, the lack of regulation poses various risks to altcoin investing. Nonetheless, regulatory risks will be addressed with the maturity of the cryptocurrency market.