What Is an Altcoin?

20 Apr 2024

Altcoins are generally defined as all cryptocurrencies other than Bitcoin (BTC). However, some people consider altcoins to be all cryptocurrencies other than Bitcoin and Ethereum (ETH) because most cryptocurrencies are forked from one of the two. Some altcoins use different consensus mechanisms to validate transactions, open new blocks, or attempt to distinguish themselves from Bitcoin and Ethereum by providing new or additional capabilities or purposes. Most altcoins are designed and released by developers with different visions or uses for their tokens or cryptocurrency. Learn more about altcoins and what makes them different from Bitcoin. KEY TAKEAWAYS The term altcoin refers to all cryptocurrencies other than Bitcoin (and for some people, Ethereum). There are tens of thousands of altcoins on the market. Altcoins come in several types based on what they were designed for. The future of altcoins is impossible to predict, but if the blockchain they were designed for continues to be used and developed, the altcoins will continue to exist. Altcoin Investopedia / Michela Buttignol Understanding Altcoins "Altcoin" is a combination of the two words "alternative" and "coin." The term generally includes all cryptocurrencies and tokens that are not Bitcoin. Altcoins belong to the blockchains for which they were explicitly designed. Many are forks—a splitting of a blockchain that is not compatible with the original chain—from Bitcoin and Ethereum. These forks generally have more than one reason for occurring. Most of the time, a group of developers disagree with others and leave to make their own coin. Many altcoins are used within their respective blockchains to accomplish something, such as ether, which is used in Ethereum to pay transaction fees. Some developers have created forks of Bitcoin and re-emerged as an attempt to compete with Bitcoin as a payment method, such as Bitcoin Cash. Others fork or are developed from scratch, attempting to create a blockchain and token that appeals to a specific industry or group, such as Ripple's attempt to attract the banking industry with a faster payment system. Dogecoin, the popular meme coin, was apparently created as somewhat of a joke. It forked from Litecoin, which itself forked from Bitcoin in 2011. Whatever the intent behind its creation, it was still designed to be a digital payment method. Altcoins attempt to improve upon the perceived limitations of whichever cryptocurrency and blockchain they are forked from or competing with. The first altcoin was Litecoin, forked from the Bitcoin blockchain in 2011. Litecoin uses a different proof-of-work (PoW) consensus mechanism than Bitcoin, called Scrypt (pronounced es-crypt), which is less energy-intensive and quicker than Bitcoin's SHA-256 PoW consensus mechanism. Ether is another altcoin. However, it did not fork from Bitcoin. It was designed by Vitalik Buterin, Dr. Gavin Wood, and a few others to support Ethereum, the world's largest blockchain-based scalable virtual machine. Ether (ETH) is used to pay network participants for the transaction validation work their machines do. Types of Altcoins Altcoins come in various flavors and categories. Here’s a brief summary of some of the types of altcoins and what they are intended to be used for. It is possible for an altcoin to fall into more than one category, such as TerraUSD, which was a stablecoin and utility token. Payment Token As the name implies, payment tokens are designed to be used as currency—to exchange value between parties. Bitcoin is the prime example of a payment token. Stablecoins Cryptocurrency trading and use have been marked by volatility since launch. Stablecoins aim to reduce this overall volatility by pegging their value to a basket of goods, such as fiat currencies, precious metals, or other cryptocurrencies. The basket is meant to act as a reserve to redeem holders if the cryptocurrency fails or faces problems. Price fluctuations for stablecoins are not meant to exceed a narrow range. Notable stablecoins include Tether's USDT, MakerDAO's DAI, and the USD Coin (USDC). In March 2021, payment processing giant Visa Inc. (V) announced that it would begin settling some transactions on its network in USDC over the Ethereum blockchain, with plans to roll out further settlement solutions. 1 Security Tokens Security tokens are tokenized assets offered on stock markets. Tokenization is the transfer of value from an asset to a token, which is then made available to investors. Any asset can be tokenized, such as real estate or stocks. For this to work, the asset must be secured and held. Otherwise, the tokens are worthless because they wouldn't represent anything. Security tokens are regulated by the Securities and Exchange Commission because they are designed to act as securities. In 2021, the Bitcoin wallet firm Exodus successfully completed a Securities and Exchange Commission-qualified Reg A+ token offering, allowing for $75 million shares of common stock to be converted to tokens on the Algorand blockchain. 2 This historic event was the first digital asset security to offer equity in a United States-based issuer. Utility Tokens Utility tokens are used to provide services within a network. For example, they might be used to purchase services, pay network fees, or redeem rewards. Filecoin, which is used to buy storage space on a network and secure the information, is an example of a utility token. 3 Ether (ETH) is also a utility token. It is designed to be used in the Ethereum blockchain and virtual machine to pay for transactions. The stablecoin USTerra uses utility tokens to attempt to maintain its peg to the dollar—which it lost on May 11, 2022—by minting and burning two utility tokens to create downward or upward pressure on its price. 4 Utility tokens can be purchased on exchanges and held, but they are meant to be used in the blockchain network to keep it functioning. Meme Coins As their name suggests, meme coins are inspired by a joke or a silly take on other well-known cryptocurrencies. They typically gain popularity quickly, often hyped online by prominent influencers or investors attempting to exploit short-term gains. Many refer to the sharp run-up in this type of altcoins during April and May 2021 as "meme coin season," with hundreds of these cryptocurrencies posting enormous percentage gains based on pure speculation. 5 An initial coin offering (ICO) is the cryptocurrency industry’s equivalent of an initial public offering (IPO). A company looking to raise money to create a new coin, app, or service launches an ICO to raise funds. Governance Tokens Governance tokens allow holders certain rights within a blockchain, such as voting for changes to protocols or having a say in the decisions of a decentralized autonomous organization (DAO). Because they are generally native to a private blockchain and used for blockchain purposes, they are utility tokens but have come to be accepted as a separate type because of their purpose. 6 Pros and Cons of Altcoins Pros Improve upon another cryptocurrency's weaknesses Higher survivability Thousands to choose from Cons Lower popularity and smaller market cap Less liquid than Bitcoin Difficult to determine use cases Many altcoins are scams or have lost developer and community interest Pros Explained Altcoins are "improved versions" of the cryptocurrency they derived from because they aim to plug perceived shortcomings. Altcoins with more utility have a better chance of surviving because they have uses, such as Ethereum's ether. Investors can choose from a wide variety of altcoins that perform different functions in the crypto economy. Cons Explained Altcoins have a smaller investment market compared to Bitcoin. Bitcoin has generally remained above 40% of the global cryptocurrency market since May 2021. 7 The altcoin market is characterized by fewer investors and less activity, resulting in thin liquidity. It is not always easy to distinguish between different altcoins and their respective use cases, making investment decisions even more complicated and confusing. Several "dead" altcoins ended up sinking investor dollars. Future of Altcoins Discussions about the future of altcoins and cryptocurrencies have a precedent in the circumstances that led to a federally issued dollar in the 19th century. Various forms of local currencies circulated in the United States. Each had unique characteristics and was backed by a different instrument. 8 Local banks were also issuing currency, sometimes backed by fictitious reserves. That diversity of currencies and financial instruments parallels the current situation in altcoin markets. There are thousands of altcoins available in the markets today, each claiming to serve a different purpose and market. The current state of affairs in the altcoin markets is unlikely to consolidate into a single cryptocurrency. But it is also likely that most of the thousands of altcoins listed in crypto markets will not survive. The altcoin market will likely coalesce around many altcoins—those with strong utility, use cases, and a solid blockchain purpose—which will dominate the markets. If you're looking to diversify within the cryptocurrency market, altcoins can be less expensive than Bitcoin. However, the cryptocurrency market, regardless of the type of coin, is young and volatile. Cryptocurrency is still finding its role in the global economy, so it's best to approach all cryptocurrencies cautiously. What Is the Best Altcoin to Invest in? The best altcoin to invest in depends on your financial situation, goals, risk tolerance, and the market's circumstances. It's best to speak to a financial advisor to help you decide which one is best for you. What Are the Top 3 Altcoins? By percentage of the market, the top three altcoins are ETH, USDT, and BNB. 7 Is It Better to Invest in Bitcoin or Altcoins? Which cryptocurrency is better is a subjective argument based on an investor's financial circumstances, investing goals, risk tolerance, and beliefs. You should talk to a professional financial advisor about investing in cryptocurrency before buying any. The Bottom Line Altcoins are any cryptocurrency that is not Bitcoin (or Ethereum). There are thousands of altcoins on the market, so it is difficult to tell which might be legitimate and which are not. It's best to read all of the documentation behind the cryptocurrency. If there is a purpose for the blockchain and token, it might be worth watching—if not, consider other coins or investments. If you're unsure, talk to a financial advisor familiar with cryptocurrencies to learn more about them. The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency. Compete Risk Free with $100,000 in Virtual Cash Put your trading skills to the test with our FREE Stock Simulator. Compete with thousands of Investopedia traders and trade your way to the top! Submit trades in a virtual environment before you start risking your own money. Practice trading strategies so that when you're ready to enter the real market, you've had the practice you need. Try our Stock Simulator today >>

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