What Is An Altcoin And Why It Matters To Understand Blockchain Business Models

An altcoin is a general term describing any cryptocurrency other than Bitcoin. Indeed, as Bitcoin started to evolve since its inception, back in 2009, many other cryptocurrencies sprouted due to philosophical differences with the Bitcoin protocol but also to cover wider use cases that the Bitcoin protocol could enable.

Understanding altcoin

Altcoins are cryptocurrency alternatives to Bitcoin using the same blockchain technology to enable secure peer-to-peer transactions. 

In terms of investment potential, altcoins are considered high risk. With over 5,000 Bitcoin alternatives in circulation, most will never generate a substantial return. They are also highly volatile and so are more attractive to certain investors because of potentially higher ROI.

Dogecoin is one such example of a volatile altcoin. The cryptocurrency soared in value during early 2021 for no other reason than an increase in buyers. As the price began to rise, more investors purchased Dogecoin and continued to fuel its popularity. Of course, altcoin prices can drop just as dramatically as investor sentiment shifts.

Some of the more successful altcoin currencies

The most successful altcoins are those offering some perceived benefit over Bitcoin.

Following is a look at a few of them:

  • Litecoin – compared to Bitcoins that are produced every 10 minutes, Litecoins are produced every 2.5 minutes. This makes payment processing more efficient. Litecoins can also be mined with common computer hardware – it does not require the costly hardware of Bitcoin mining.
  • Stablecoins – designed specifically to combat typical cryptocurrency volatility by tying their value to an underlying security, index, or commodity. Facebook-owned Diem is one such example of a stablecoin. 
  • Ether – running on the Ethereum network, Ether is currently the second-largest cryptocurrency by market cap behind Bitcoin. Unlike Bitcoin which serves primarily to be a store of value, Ether was developed to monetize Ethereum smart contracts and dApps.
  • Cardano – a proof-of-stake (PoS) cryptocurrency where the creator of the next block in the chain is chosen according to their wealth or holdings. Aside from providing decentralized financial services, Cardano seeks to provide solutions for chain inoperability, voter fraud, and legal contract tracing among other things.
  • Stellar Lumens – a cryptocurrency providing enterprise solutions on the open blockchain Stellar network. Stellar Lumens are utilized in large transactions between banks and investment firms that used to take several days and involve costly intermediaries. It also allows transactions across different currencies. 

Altcoin due diligence

In addition to volatility, some altcoins have been subject to fraud, malware, and scams.

Here is a list of questions to consider before purchasing any alternative Bitcoin cryptocurrency:

  • Who is issuing the altcoin and how are they deriving value from transactions? What is the background in the industry?
  • Can altcoin investment be bought and sold easily? Are there fees associated with selling?
  • Do financial statements exist? Has the altcoin provider been audited?
  • What legal protections exist in the event the network is compromised, hacked, and funds are stolen?
  • What are the specific rights of the investor?

Key takeaways:

Altcoin is a term given to any cryptocurrency other than Bitcoin. Most (but not all) use the same blockchain technology to provide secure peer-to-peer transactions.

Altcoins are generally developed to address shortfalls in Bitcoin. For example, Litecoin provides faster payment processing and stablecoins are tied to external assets to reduce volatility.

Many altcoin options have small market caps and are less regulated than some of the bigger players. This makes them vulnerable to fraud, malware, and scams.

Read Next: Proof-of-stakeProof-of-workBitcoinEthereumBlockchain.

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