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What Are Altcoins?

Oct 20, 2022
10m
Yavor Kaludov Ariel Monjes

In the world of cryptocurrency, there are plenty of new terms and concepts for users to get accustomed to. If you’re a crypto beginner, this article is here to walk you through what an altcoin is, the types of altcoins that exist, and ways they could potentially make you money. 

What Are Altcoins? 

The word “altcoin” is derived from the word “alternative”, meaning that it’s an alternative to Bitcoin. In fact, all coins except Bitcoin are called altcoins. The only reason Bitcoin isn’t considered an altcoin is because it was the first decentralized cryptocurrency (and was the only relevant player in the space for years).

Shortly after its launch, the Bitcoin blockchain was forked to create Litecoin (one of the first altcoins). This was an attempt to improve upon Bitcoin and address some of its shortcomings without having to create a new blockchain from scratch.  

Forking is the act of creating a copy of a blockchain for the purpose of changing, improving, or retaining its functionality. Many of the biggest blockchains today are forks of other blockchains. For example, BNB Chain is a fork of Ethereum and Litecoin is a fork of Bitcoin.

Altcoins vs Bitcoin

There’s no fundamental difference between altcoins and Bitcoin. Each blockchain (and its corresponding cryptocurrency) tries to solve different challenges. Some attempt to create decentralized global payment systems, others, decentralized data storage solutions. When it comes to solving problems using blockchain technology, imagination is the only limitation.

How Many Altcoins Exist? 

At the time of writing, there were more than 20,000 altcoins (including cryptocurrency tokens). Among them exist thousands of legitimate projects striving to build a better Web3 future, but there are also some less-than-impressive altcoins on the market today. 

Due to cryptocurrency’s open-source nature – and the ability for anyone to copy a project’s code – many altcoins are low-effort imitations of others. There’s also a large number of so-called “shitcoins” which are bottom-of-the-barrel meme coins (with zero utility and purpose). It’s important to note that many altcoins are now defunct. 

Why Do People Buy Altcoins?

Crypto is a bustling industry that’s full of innovative products. Many people see crypto as the latest gold rush and want to get in on the action. The space is often compared to the days when many of today’s megacompanies like Amazon and Google were just starting out. 

There are also countless ways to earn passive income in crypto. Once you’ve invested in a few projects, you can let your coins and tokens work for you through staking, liquidity mining, and other types of yield farming. 

Additionally, many users believe in the ethos of crypto and prefer having sovereignty over their finances, privacy, and independence. They see a bright future for this technology and choose to invest their time and resources in exploring and embracing this space. Users are able to use crypto-based peer-to-peer (P2P) payment solutions, establish Decentralized Autonomous Organizations (DAOs), and support the projects they believe in. 

Types of Altcoins

Like many things in crypto, “altcoin” is a relatively new term. Its origins are in the crypto community and public consensus on its meaning is fairly fluid. 

The situtaion is similar regarding the different types of altocoins that exist today.

One of the more important lessons to learn in crypto is that many of the terms used to describe technologies, features, and attributes in this space are community generated. They’ve arisen naturally from years of constant discussions and debates in the blockchain space. 

Since we’re witnessing the creation of definitions and terms in real time, it takes a while for different definitions to become widely accepted (and potentially replace their less popular counterparts). So if you run into confusion, don’t worry: Just dig a little deeper. 

While our list isn’t definitive by any means, these are some of the most widely accepted altcoin categories: 

1. Stablecoins

Stablecoins are one of the most popular cryptocurrency types. 

These are tokens issued by smart contracts on blockchains (e.g. Ethereum) which follow the price of other assets. The biggest stablecoins are pegged to the US Dollar. Companies and protocols that manage them hold reserves (ie. collateral) to back them. Different stablecoin types exist based on the type and size of their reserves. 

2. Utility Tokens 

Utility tokens are one of the more contentious topics regarding cryptocurrency classification.

All cryptocurrencies which facilitate the utility of a service, organization, network or any other type of system should theoretically be considered utility tokens. Sadly, there’s still no concrete framework for determining which tokens are utility tokens. The most popular method among regulators is the Howey test

3. Governance Tokens

Some utility tokens can also serve as governance tokens. These tokens grant holders the right to vote on the future of projects (e.g. blockchains, DAOs, protocols).

4. Security Tokens 

In the “real world”, securities are fungible, liquid (i.e. tradable) assets that represent ownership of another asset, a stake in a company, and so on.

In crypto, security tokens serve the exact same purpose. However, because these tokens are cryptocurrencies, they exist on an immutable, decentralized blockchain. Trading them and verifying their ownership is done without the need for intermediaries, and purchasing them can be done without restrictions (for now). 

5. Memecoins 

Memes are a cultural force these days. While most are fun, lighthearted jokes, they can be powerful methods to communicate concepts and their influence shouldn’t be taken lightly. 

Memecoins are tokens that have mostly been created without much consideration for things like utility and future value. They tend to burst into existence, rally a large community, and fizzle out quickly. However, two of the biggest cryptocurrencies today are the memecoins Dogecoin and Shiba Inu.

6. Shitcoins

You’ll find “shitcoins” at the bottom of the cryptocurrency food chain. While this term may sound harsh, it’s widely used in this space for good reason: Most are memecoins with zero utility, community support, and staying power. 

They’re essentially useless and the majority are crypto scams. 

In stark contrast to the early days of Bitcoin, the current crypto world is buzzing with diversity. A large number of blockchain projects are tackling a wide range of issues, niches, and industries. In fact, more than fifty of the top altcoins have market caps in the billions which is a showcase of how much institutional and retail interest there is in the crypto industry.

Ethereum (ETH)

After Bitcoin, the second most popular altcoin today is Ethereum’s native cryptocurrency, Ether (ETH). 

ETH powers the entire Ethereum network. It’s used to reward node operators and serve as a medium of exchange across Ethereum's Decentralized Application (DApp) ecosystem. Ether’s one of the most successful cryptocurrencies because of the innovations introduced by its home blockchain network (specifically smart contracts). 

BNB Chain (BNB)

BNB is the cryptocurrency of the BNB chain (previously referred to as Binance Smart Chain). The BNB chain started out as an Ethereum fork with a few key changes, mainly a massive reduction in gas fees and a switch to Proof-of-Stake (PoS) consensus. 

Note: BNB was developed by the Binance exchange and fuels many of its features. Since its launch, the BNB chain has grown into one of the most successful projects on the market to date. 

Solana (SOL)

Solana is a blockchain-based, smart contract platform that’s built for speed. Its goal is to have transaction throughput that’s fast enough to rival – and overtake – traditional payment networks like Visa

The SOL token is the main way users transact on the network, powering all of Solana’s functionality. 

Cardano (ADA)

Cardano is another smart contract platform focused on scalability. Created by Charles Hoskinson, one of Ethereum’s co-founders, Cardano’s approach to development is unique in that it’s based on peer-reviewed research. 

Cardano is a proof-of-stake (PoS) blockchain. The ADA token is used for staking, community governance, and as the network’s main medium of exchange. 

Dogecoin (DOGE)

We can’t talk about altcoins without mentioning the memes, and Dogecoin is by far the most popular. 

The cryptocurrency was created as a joke in 2013 by Jackson Palmer and Billy Markus. As we all know, the internet loves memes, so it was only natural for DOGE to become one of the most popular cryptos ever. It’s even managed to find some utility in recent years, becoming widely accepted for things like micropayments, tips, and charitable donations. 

USDT & USDC

The two most popular stablecoins are Tether’s USDT and Circle’s USDC. Both are fully collateralized (ie. fiat-backed) stablecoins and follow a peg to the US Dollar. 

Though they can be used for trading on both centralized exchanges (CEXs) and decentralized exchanges (DEXs), they’re centralized in nature. 

Pros of Altcoins

Altcoins offer many benefits to those who chose to invest in or use them.

Access to Innovative Projects

In recent years, one of the main drivers of crypto adoption has been the expectation of massive returns on investments. 

Though the blockchain space is still in its relative infancy, many experts believe that we’re witnessing the emergence of companies, organizations, protocols, and infrastructure projects that will shape our digital future for decades. 

Alternatives to Established Players

The crypto space is all about decentralization, independence, autonomy, and freedom of choice. The original intent of cryptocurrency and blockchain technology was to disrupt established industries and systems and provide better opportunities to everyday people.

That’s why altcoins enable so many services offering decentralized alternatives to social networks, streaming sites, games, and more. While still young (and often less functional than their centralized counterparts), these projects give their users the freedom of choice.

The topics of online independence and personal freedom have gained a lot of attention in recent years. As a result, interest in these alternative solutions is growing. 

Cons of Altcoins

Altcoins aren’t without their downsides. Many exist in a sort of legal gray area and could soon be exposed to laws they’re not prepared to comply with. Some don’t have any utility and are purely based on hype. Others may be downright scams.  

Unregulated Altcoins

Crypto regulation is a hot topic and for good reason: There’s little clarity on how, and even when, crypto will be regulated in different countries. 

  • In the US, various ideas are being proposed but nothing concrete has been implemented. 

  • In the EU, a comprehensive regulatory framework called Markets in Crypto Assets (MiCA) has been passed, laying out laws that are relatively favorable for continued crypto innovation. 

  • In some countries (like China), crypto has been banned. That hasn’t stopped many from adopting it. 

  • Russia was initially against crypto adoption but did a quick 180º following the sanctions imposed in response to its war with Ukraine. 

Depending on their function, many altcoins could soon be classified as “securities.” This would greatly limit the number of investors that could acquire them, potentially impacting the projects they’re a part of. 

Less Popular Altcoins Are Riskier

Networks like Ethereum and protocols like Uniswap have been battle-tested with time. Newer projects might not be as robust. The further down the popularity list you go, the less tried-and-tested the altcoin will be. Many projects are experimental and security is a big concern. 

Unavailability and Credibility

An asset is only as liquid (ie. able to be sold quickly at a fair price) as the markets it’s offered in.

The bigger altcoins are listed on most of the major centralized cryptocurrency exchanges (CEXs). This exposes them to more investors with deeper pockets. There’s a certain level of prestige that comes with a Binance listing, for example, compared to lesser-known projects (which are naturally, less credible in the eyes of many investors). 

What Do I Need to Buy Altcoins?

Altcoins can be bought on both centralized and decentralized exchanges. As everything that’s not Bitcoin is considered an altcoin, we’re talking about practically all cryptocurrencies. 

Cryptocurrency Exchange Account

The easiest way to buy the most popular cryptocurrencies is through a centralized exchange (CEX). These don’t require you to set up any wallets and they feature a relatively intuitive user experience (UX). 

Keep in mind that, on a CEX, you aren’t the true holder of your cryptocurrencies. They’re being held for you by the exchange, which requires your trust. 

Non-Custodial Wallet

Decentralized Finance (DeFi) is where the more exciting and lesser-known altcoins can be found. To trade on DeFi, you need a non-custodial wallet. 

As the name suggests, these wallets don’t rely on third parties. Instead, they enable users to directly access their funds on the blockchain. They come with their own risks but, when used correctly, they can be safer and more convenient than storing funds on an exchange.  

Check out our introductory article on wallets. 

Another Currency

Of course, you’ll need something to buy crypto with. On CEXs, you can purchase crypto directly with your bank card or bank transfer. In DeFi, you’ll need stablecoins or other cryptocurrencies. 

What to Know Before Investing in Altcoins 

There are plenty of elements to consider before investing in a volatile and unpredictable market like crypto (e.g. market conditions, fundamentals, budget, risk vs reward). Here are some great basic tips for altcoin investment: 

1. Consider the Market Conditions

Markets ebb and flow and may even go sideways for months on end. A quick look at the weekly Bitcoin chart should give you a strong indication of the general market direction. 

Global macroeconomic factors like inflation, war, and supply chain health should be considered carefully. These conditions (and how governments respond to them) greatly impact the financial world, causing major recessions and subsequent explosions in growth and productivity. 

The way crypto is regulated should also be taken into account as it can have a massive impact on its future. 

2. Understand the Space

There exists something called the “Crypto ethos”. It is the philosophy that drove Satoshi Nakamoto to create Bitcoin – and its flame has only grown stronger since those early days. 

Take time to educate yourself on why crypto exists, what’s so special about it, and how it can help people. Do this and you’ll begin to understand which projects make sense and which are only going to waste your time. 

3. Do Your Own Research (DYOR)

Before investing money in any project, take the time to understand its fundamentals (e.g. business plan, roadmap, token distribution, management). 

“DYOR” is essential advice in this space. Many people come into crypto expecting big returns under the direction of friends or, worse, public personalities telling them how to invest. This is a recipe for disaster. Always do your research to understand what you’re buying and to avoid falling for scams. 

4. Don’t Overinvest

Never invest more than you can afford to lose. This one is pretty self-explanatory: Crypto should make your life easier, not put you in horrible debt because you misjudged a project.  

This strategy makes you far less susceptible to fear and bad decisions if the market turns against you. Although crypto offers plenty of opportunities for impressive financial gains, nothing happens overnight. You need to be able to stick to your guns and make decisions based on research. 

5. Always Have a Strategy

Investing is mostly planning. Plan when and how much you’ll dedicate to crypto and set an exit strategy. When will you cash out? You’ll have to do it at some point so you might as well have a plan. 

Are Altcoins Right for Me? 

Depending on your knowledge, ability to absorb negative market conditions, and risk tolerance, you could stand to make serious money by trading altcoins.

If you want to invest in a booming asset class that also provides access to innovative and exciting products, look no further than cryptocurrency. Altcoins of all kinds present amazing opportunities to earn, learn, and have fun in the blockchain space. 

At Sonar, we’re creating the tools and applications you need to make wise investment decisions and safely explore the crypto world. Take a look around our platform: If you like what you see, follow the form below to subscribe to our newsletter and receive notifications whenever new products and features are available. 

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