In the world of cryptocurrency, Bitcoin is not the only one in town. There are many alternative cryptocurrencies, commonly known as altcoins.
When Bitcoin was invented in 2008, it was a fresh and revolutionary financial vehicle. The goal was to replace traditional banks and take the control over money from governments and give it back to individuals.
Currently, there are over 900 cryptocurrencies and the list keeps on growing, with each one of them trying to replicate Bitcoin and propose improvements.
But what is an altcoin and is there even a need for them?
What Is The Purpose Of Altcoins
Altcoin stands for an ‘alternative coin’ – any coins that can be a substitute or a replacement for Bitcoin.
Many altcoins are very similar to Bitcoin:
- They are created through a mining process
- They are based on a peer-to-peer network, hence they’re decentralised
- They aim to offer cheaper and more efficient way of making transactions and purchases on the internet
Altcoins have become extremely popular recently due to the rising price of Bitcoin and costly mining process. Bitcoin mining has become almost unaffordable for the majority, thus cryptocurrency enthusiasts have started turning into more economical options.
Even though altcoins resemble Bitcoin in the way they’re designed, most of them serve a different purpose than just being a financial tool.
The vast majority of altcoins doesn’t do anything special at all and they try to mimic Bitcoin with little tweaks. Some, on the other hand, have been designed with a purpose of becoming a worldwide computer and can be used as a platform for building decentralised applications (Ethereum).
Not all altcoins have been created with a serious purpose in mind… There are coins devoted to dogs (Dogecoin), spuds (Potatocoin) or Kanye West (Coinye).
Putting jokes aside, some altcoins also experiment with a code or new security features that could be later implemented to the Bitcoin protocol.
What Are The Most Popular Altcoins
Created in 2011, Namecoin was the first alternative to Bitcoin. Although it did function as a currency, its main purpose was to decentralise a domain-name registration.
Namecoin aimed to make the internet censorship more difficult and currently uses the .bit domain – it’s an alternative, decentralised DNS.
Inventing the first altcoin only encouraged developers to create more and work on advancing Bitcoin and cryptocurrency in general.
Below are examples of the most famous altcoins and how do they diverge from Bitcoin:
Perhaps one of the most famous altcoins is Litecoin, often described as ‘silver to Bitcoin’s gold’. Like most altcoins, Litecoin wasn’t created to replace Bitcoin. It was going to serve as an alternative, with more coins in circulation and improved security level.
It uses a different hashing algorithm to Bitcoin, resulting in faster transactions. There are also 84 billion Litecoins created as opposed to 21 million Bitcoins.
In many ways, Ripple is extremely similar to Bitcoin – it’s decentralised, math-based with a finite number of units. Its goal is not to replace Bitcoin but to enable people with any currency (including Bitcoin) around the world to access other currencies.
Another difference is in the mining process. Instead of using a ‘proof-of-work’, it uses a method called ‘consensus’ which doesn’t require as much computer power.
Ripple is also incomparably cheaper than Bitcoin – 1 XRP is less than $1. Again, Ripple outruns Bitcoin in circulations as there 100 billion Ripples expected to be produced.
It’s a peer-to-peer trading platform that uses a currency known as BitAssests. The creators of this cryptocurrency issued shares in a form of digital tokens.
These cryptotokens come in different currencies, such as BitUSD or BitEuro. Afterwards, they can be traded on the BitShares platform. Though, the platform is more focused on creating financial blockchains and smart contracts, rather than becoming a cryptocoin.
To a certain extent, BitShares carry more resemblance towards Ethereum than Bitcoin. Nonetheless, it’s a perfect example of an altcoin that can be used for more than just financial transactions.
How To Mine Altcoins
Mining Bitcoins have become way too expensive, especially for a hobbyist. Professionals miners have turned into expensive ASICs which aren’t affordable for Bitcoin enthusiasts.
There are two ways through which you can mine coins, otherwise known as ‘proof of work’:
- CPU (Central Processing Unit) – the slowest and least effective process
- GPU (Graphics Processing Unit) – requires a dedicated graphics processor
When we speak about Bitcoin mining, we mean constantly mining for the same currency and producing more coins into circulation.
In comparison, altcoin mining means switching on a regular basis between different altcoins. One day you might be mining Litecoin and the other Ripple and so on. Needless to say, there’s more work to be done and data to analyse if you try to mine different altcoins.
You will find multiple strategies online on how to mine altcoins, but the most effective two are daily and on the launch mining.
Mining altcoins on a daily basis is similar to trading cryptocurrencies on an exchange. You shouldn’t care about mining a particular altcoin and its potential, but which one will bring you more profits on that day.
Using websites like Coinwarz will show you a regularly updated list of the most profitable altcoins to mine. The calculations are based on a mix between mining difficulty and the coin’s price. The mining profitability is even more volatile than the altcoin price – it can go up and down the list on a daily basis.
This type of mining is all about making a profit from altcoins and it can become a full-time job. Staying on your toes and following the prices is the key.
Does it mean you have to change the mining altcoins every day? Not necessarily – certain altcoins will stay profitable for days but you have to be aware that the mining competition of these altcoins will increase, hence your profitability might drop.
Mining on the Launch
When Bitcoin was first released, there were only a few people mining it. The equipment was relatively cheap, the mining difficulty was low and computers could process more transactions.
Those who mined Bitcoin at the beginning made quite a profit and the same principle applies for any other altcoin. If you track all new altcoins and start mining straight away, you might be able to find the next cryptocurrency gold mine.
The vast majority of new altcoins is released via forums, thus it’s crucial to follow the Altcoin Announcement section and be the first one to get your hands on the new altcoin.
Bear in mind that creating an altcoin can take as little as an hour and plenty of announcements will be worthless. Developers often release projects to create hype for no reason, abandoning the project as soon as followers get excited.
What’s more – some altcoins are a pure scam, designed for investors to put their money and for miners to start using their computers to produce new ones. As soon as the altcoin’s price will go up, the creator will the market and leave the coin to dissolve itself.
This process is known as ‘pump-and-dump’ and it’s becoming worryingly popular in the altcoin community. Hence, mining on the launch can be a risky endeavour, you can win a lot but lose even more at the same time.
How To Choose a Good Altcoin
If there is an increasing number of scamcoins circulating around the network, is it even worth to pursue the investment?
There are two ways you can work around altcoins: you can either ignore them and focus on the biggest cryptocurrencies, but it will be much harder to make a profit. Or, you can take the risk and know when to exit the game.
There are few things you have to look out for while choosing a legitimate altcoin with a potential:
A valid altcoin will try to do something differently to Bitcoin. Even if it is only an improved security level, it’s already something.
Think of Ethereum, when it was first launched, it was revolutionary and progressive. You didn’t have to burrow yourself in details to know it was going to be a big thing.
Follow the same logic when looking for a new altcoin to invest in, think what’s new and fascinating about it.
A Reputable Team
The truth is, those who are about to invent a new cryptocoin have most likely been involved in the community for a while.
Don’t get fooled by people who suddenly appear on forums with a new altcoin – some of the best developers and altcoin founders have been volunteering in the community for a long time.
Do a thorough background check of the particular altcoin inventor before you decide to invest your money.
Altcoins can be both a project coming from an enthusiast and a basis for a whole new business. At first, it can be hard to determine whether a new altcoin is worth the investment, in particular, if you’re trying to do it by yourself.
If you were around the cryptocurrency network long enough, you probably remember the launch of Dogecoin in 2015. What was designed to be a joke, got picked by a community to an extent that it eventually turned into a new, profitable, cryptocurrency.
Without enough support and belief of the network, perhaps nobody would dare to invest in Dogecoin. Look at the network’s reaction and don’t be afraid to share your opinion and listen to others. The collective effort of the entire network is what’s beautiful about cryptocurrency, make the best out of it.
Where Can You Buy Altcoins
As with Bitcoin, there is a variety of ways to obtain altcoins. However, most exchanges offer altcoins in exchange for bitcoins. So sooner or later you will have to invest in Bitcoin.
The biggest exchanges that use Bitcoin as an intermediary are Poloniex and Bittrex. If you want to exchange fiat currency for altcoins then you should definitely check out Kraken which has a good reputation and one of the largest altcoin spectrum.
It’s never a good idea to leave any cryptocoins on an exchange, hence you have to create a wallet that supports specific altcoins. While you won’t have problems with getting one for Ethereum, Litecoin or Dash, finding one that can store lesser known altcoins might feel like a treasure hunt.
The most reliable hardware wallet that supports altcoins is Ledger Nano S but you will have to pay $70. In return, it’s the safest available wallet and can store multiple currencies, including altcoins.
If you prefer a desktop or mobile option, try Jaax. It’s free but doesn’t support as many altcoins.
Should You Invest In Altcoins
Due to a rapidly changing landscape of all cryptocurrencies, all investments can be risky. If you look at Bitcoin itself, it suffers from extreme price volatility, despite being the most stable cryptocurrency.
In comparison, altcoins are significantly cheaper than Bitcoin, hence the investment could start from a smaller amount. Though, the above mentioned ‘pump-and-dump’ scenario, can seriously manipulate the altcoins’ price.
The market is full of investors who are creating buzz around a specific altcoin, just to be able to sell it afterwards at a large profit. This, unfortunately, hurts not only inexperienced traders but it often proves a brief lifespan of an altcoin.
Therefore, trading altcoins might not be the best idea. Instead, focus on long-term investments in altcoins that you truly believe have potential. By doing your homework, and assessing the general health of an altcoin, you will have a clear overview of the altcoin’s liquidity and future.
Investing in altcoins has the same principles as fiat currency. Avoiding the hype and taking the time to do research helps to avoid ill-informed decisions. Thus, it prevents from losing your hard-earned money.
Understanding what is an altcoin and taking into consideration all its pros and cons it’s already the first step towards a successful investment. All you need is a bit more luck with timing, and to remember that forewarned is forearmed.