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What are Altcoins? | Everything You Need to Know

Damilola Adedoyin Ezekiel 26 January, 2022 | 4 min read

Definition of Altcoins

Altcoins are cryptocurrencies other than Bitcoin. The term Altcoin is coined from two words:Alternative and Coin and this includes all alternatives to Bitcoin. Altcoins are quite similar to Bitcoin, only that they have different features and use cases. Both Altcoins and Bitcoin work on the same technology, but they have different applications.

Altcoins were an attempt to create a better version of Bitcoin. Most Altcoins have better technology than bitcoin but because Bitcoin was the first-ever known cryptocurrency, this gives it an edge over others.

The market value of Altcoins is usually determined by the value of Bitcoin. Bitcoin dominates the entire crypto market. It often happens that when the value of Bitcoin rises, the value of most altcoins also rises and when the value of Bitcoin falls, the value of most Altcoins also falls.

How are Altcoins created?

ICO a short term for Initial Coin Offering is a term used to describe an event that occurs when a company attempts to raise money for a new project which could be an app, coin, or any service. In other to do this, the company hands out coins/tokens in exchange for public funds.

In short terms, ICO is a popular way of raising funds for a project in cryptocurrency.

When a cryptocurrency company wants to launch a new project through ICO, they create a white paper. A White paper is a document that contains the details of the project such as:

  • the description of the project
  • problems the project will solve upon completion
  • how much fund is needed to run the project
  • how long the ICO will run.

After setting up the ICO, the public can now decide to invest in the project by sending money and receiving the project token or coins in exchange.

Categories of Altcoins

There are different categories of Altcoins and some coins may fall into more than one category. Here are the major ones:

  • Stablecoins
  • Meme coins
  • Security tokens
  • Utility tokens

Stablecoins

Stablecoin is a price-stable cryptocurrency whose market price is pegged to another stable asset e.g US dollars. Stablecoins are an attempt to create a cryptocurrency that is not volatile.

One of the main usages of stable coins is in cryptocurrency exchange, for instance, traders can trade their volatile cryptocurrencies for stable cryptocurrencies when they want to lower their risk and this is because the price of stable coins is unlikely to fluctuate compared to the price of Bitcoin and Ethereum.

Types of Stablecoins

  • Fiat Collateralized Stabelcoin: This is a type of cryptocurrency that is backed by a real-world currency like the USD. Examples include Tether (USDT), Binance USD(BUSD), USD coins (USDC), True USD(TUSD).
  • Crypto Collateralized Stablecoin: This type of cryptocurrency works the same way as the fiat collateralized stable coin but it is backed by the reserves of another cryptocurrency instead of a fiat currency. A notable example is MakerDAO's DAI.
  • Commodity Backed Stablecoin: commodity-backed stable coins are collateralized using physical assets like precious metals, oil, and real estate. The most popular commodity to be collateralized is gold; Tether Gold (XAUT) and Paxos Gold (PAXG) are two of the most liquid gold-backed stable coins. However, these commodities can, and are more likely to, fluctuate in price and therefore have the potential to lose value.

You can visit this link to know more about Stablecoins and their use cases.

Memecoins

A meme coin is a cryptocurrency that is based on a meme or that was created as a joke in much the same way as a meme. Memes are often used to create coins for fun, and they may also be used to make a point about the state of cryptocurrency in general.

A meme coin is a joke that turns into a crypto coin, most of the time with a high market capitalization. A very notable example of a meme coin is Dogecoin.

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Security Tokens

Security tokens are tokens that represent a tradeable financial asset. These tokens are meant as a form of investment. Security tokens can be likened to traditional stocks, and they often promise equity in the form of ownership or a dividend payout to holders

Utility Tokens

Utility tokens are tokens that promise the future use of a product or service. The asset a utility token represents is a certain level of access to a product or service which the holder can gain by redeeming it. You can think of a utility token as coupons or vouchers.

Examples of Altcoins

There are different types of Altcoins in the market. Different altcoins have different market values. Here are some of the altcoins present in the market today:

  • Ethereum (ETH)
  • Litecoin (LTC)
  • Solana
  • Cardano (ADA)
  • Polkadot (DOT)
  • Binance Coin (BNB)
  • Ripple
  • Tether (USDT)
  • XRP
  • U.S Dollar Coin (USDC)

What are the Pros and Cons of Altcoins?

Currently, Bitcoin holds the largest shares in the crypto market, but Altcoins are also rising in speed and value. There are advantages and disadvantages to Altcoins and these factors should be considered before an investor decides to invest in Altcoins. Here are some of the pros and cons of Altcoins:

Pros

  • Altcoins such as stable coins are a good medium of daily transactions.
  • There are a lot of altcoins in the market and this makes it easy for investors to choose from the varieties of altcoins in the market.
  • Altcoins are better versions of Bitcoin as they aim to stop the shortcomings of Bitcoin.
  • Altcoins like Ethereum's ether are already gaining a lot of traction in the crypto world thereby resulting in high valuation.

Cons

  • The market capitalization value is low as compared to Bitcoin
  • It poses a significant risk as some altcoins are scams or they may end up failing.
  • Altcoins have a smaller investment market as Bitcoin shares 60% of the market.
  • Altcoins have very low acceptance compared to Bitcoin.

Summary

  • Altcoin is any other coin that is not Bitcoin
  • ICO's (Initial coin offerings) are like Kickstarter for a crypto project
  • Altcoins come in different categories and can belong to more than one category.
  • Ethereum's Ether is the world’s second-biggest cryptocurrency by market capitalization.

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