Bitcoin ushered in the era of cryptocurrency in 2009, and it quickly became the name whenever anyone talked about digital currencies. In fact, it dominated the fledgling scene so much that any other crypto was considered an “altcoin,” an alternative to Bitcoin. And that name stuck, although today there are literally thousands of competitors to the original digital currency.
Here are the basics on altcoins, which ones to watch this year, and whether altcoins will overtake Bitcoin.
What is an altcoin?
An altcoin is an alternative cryptocurrency to Bitcoin, which was itself the only cryptocurrency at one time. During its early years, Bitcoin so dominated the field that other rivals were set to the original cryptocurrency. It was Bitcoin – and everything else. So anything that wasn’t Bitcoin was, somewhat derisively, called altcoins or perhaps, even less charitably, sh*tcoins, in rhyme with the original digital currency.
Thus, altcoins are any cryptocurrency that is not Bitcoin. In the early years of cryptocurrency, this kind of definition made a lot of sense, since Bitcoin took up most of the market’s attention and competitors made up dozens or even hundreds of alternative coins. These days, experts put the number of individual cryptocurrencies at over 10,000, so it makes less sense than ever to define the field of crypto as “Bitcoin and everything else.”
That said, Bitcoin remains the largest cryptocurrency, with a market capitalization — the value of the total number of coins in existence — more than double the second-largest player, Ethereum, according to CoinMarketCap.com. And the size of other players drops quickly from there.
Types of altcoins
With literally thousands of cryptocurrencies in existence, speculators looking for altcoins are spoiled for choice. But so many deals unite around the biggest players and those with some of the best technical specifications, such as fast transaction times.
Mining Based Coins
Mining-based coins are mined into circulation by computer networks that solve complex mathematical problems that often require a lot of energy. The largest cryptocurrency in the world – Bitcoin – is a mining-based coin, but so are many altcoins.
Stablecoins are a kind of cryptocurrency whose value is pegged to that of another asset, usually the US dollar. Stablecoins track the underlying asset, trying to keep the price of the coin equivalent to the currency. Often, stablecoins are backed by assets such as real dollars (although often bonds and other assets) giving a stablecoin a real currency basis. Examples of stablecoins include Tether and USD Coin.
A security token is a kind of coin that represents a fractional interest in another asset. For example, a work of art may have security tokens that split ownership of that asset and validate its ownership. Or a company can have its ownership represented by security tokens. This type of token can therefore make it possible to securitize more traditional assets.
Memecoins are a kind of cryptocurrency that has caught on with the public, perhaps via social media or tweets from celebrities such as Tesla CEO Elon Musk. Memecoins often look like a lottery, with their price rising very quickly and then falling precipitously. Popular memecoins include Dogecoin and Shiba Inu.
Here are the ten largest cryptocurrencies, as of January 28, according to CoinMarketCap:
- Binance Coin
- USD Coin
Of course, these rankings can fluctuate as each currency mines new coins and the price of the currency rises or falls, often with significant volatility. Here are more details on the top cryptocurrencies by size.
What to consider before buying altcoins
If anything could be even riskier than investing in the handful of cryptocurrencies, it would be buying relatively unknown altcoins. Here are a few things to consider before diving into altcoins hoping for a lottery-like payout:
- Cryptocurrency is driven entirely by sentiment. Since cryptocurrency is not backed by the assets or cash flows of an underlying company like a stock is, it is only driven by sentiment. Sentiment can swing from extravagantly optimistic to depressingly pessimistic, meaning altcoins rely on traders being or becoming more optimistic to drive their prices higher.
- Investors rally around the most popular coins. Because cryptocurrency is driven by sentiment, investors are congregating around the most popular coins, focusing on Bitcoin, Ethereum, and a relative handful of others. While every now and then an altcoin breaks out – Dogecoin or Shiba Inu being purebred examples – literally thousands more remain unknown. This means that if an altcoin enters the niche, it may never come back into favor, costing you most, if not all, of your investment.
- Do you have money you can afford to lose? Given the kind of extreme risk altcoins have as well as their volatility, it’s important to consider whether you’re only betting money you can afford to lose. Cryptocurrency and other financial markets are not places where you invest your rent money or other funds you need.
- Focus on the technical capacity of an altcoin. If you are looking to invest in an altcoin, study its technical capability. Some altcoins such as Solana have skyrocketed because they offer high functionality at low cost, for example. The characteristics of a cryptocurrency can help keep it at the forefront of the public imagination and therefore make it an attractive trading vehicle that traders can muster.
When buying highly speculative assets such as cryptocurrency, it is important to understand that you could lose your entire investment. At a minimum, traders should expect extreme volatility, as the market saw in early 2022.
At the end of the line
With literally thousands of them, altcoins continue to grow in popularity. While no coin is able to topple Bitcoin’s position as the premier cryptocurrency (yet), altcoins as a whole are expected to continue to eat away at market share from the leader, even if the “cake of cryptocurrency” total continues to grow.