Bitcoin is the pioneer and now the leading cryptocurrency around the world, but it is not alone in this industry. There are thousands of new digital currencies, called altcoins, that have come out in recent years. Their creation and entry to the network have some good implications, especially in the viability of the asset to be a good investment.
Apparently, this progress also means tight competition among all players in this competitive market. Investors may also be compelled to scrutinise each choice to determine the best platform. Register on Bitcoin Era to trade securely, guided by experts available 24/7 and to utilise beginner-friendly software. For some financial experts, the additional coins could practically broaden choices and might also make digital tradings more competitive for everyone.
However, there are pros and cons that investors should consider to know whether the rise of altcoins could be profitable. That’s because more choices don’t always mean the same thing for all network participants. Only when a proper analysis has been made that an investor can conclude whether these changes are indeed user-friendly.
For such a reason, understanding the purpose of altcoins joining the industry and what differentiates them from bitcoin can guide investors to make favourable decisions. If you’re one of these people, you can learn the essential facts on the subject in the following paragraphs.
Understanding Altcoins in Cryptocurrency Network
Altcoins are cryptocurrencies that have been created and introduced to the network after bitcoin. They are also called “alternative coins” in another term. These digital assets have something in common and only vary in certain aspects. For instance, there are altcoins that utilise a different consensus mechanism to produce blocks and validate transactions, while others may offer additional features such as smart contracts and low-price volatility. According to a report, there were almost 9,000 cryptocurrencies as of March 2021.
Bitcoin is said to be energy-intensive and time-consuming, and altcoins are trying to improve upon these former’s perceived limitations. They are using a different consensus method to reduce energy consumption and the processing time for creating blocks and validating new transactions. With newer features that differentiate them from bitcoin, altcoins have created a new market. There are now thousands of investors who see the potential of altcoins and expect to profit from them.
What are the Types of Altcoins?
Depending on functionalities and consensus mechanisms, altcoins come in various types and categories. The following are some of the most-preferred ones:
- Stablecoin – the issues about volatility of bitcoin have given rise to the creation of this altcoin. It primarily aims to minimise the volatility by pegging the value to a basket of goods, including precious metals, fiat currencies, and other digital assets. This basket is meant to function as a reserve to redeem holders if the cryptocurrency fails or encounters problems. When there are price fluctuations, they are not supposed to exceed a narrow range.
- Utility Token – this altcoin is used to provide services within the crypto network. For instance, it might be used to buy services or redeem rewards. However, to clarify some misconceptions, utility tokens cannot be utilised to pay out dividends or part with an ownership stake.
- Mining-Based – as the name indicates, this altcoin is produced from mining activities. This process would generally require users to solve highly complex mathematical problems to validate transactions and earn tokens. The alternative to this type of coin is the pre-mined coin that is not produced through an algorithm but is distributed before listing in the market.
- Security Token – this is essentially similar to securities traded in stock markets, except for their digital provenance. It also resembles traditional stocks and can promise equity through ownership and dividend payout to holders. Investors can get security tokens usually through initial coin offerings by the cryptocurrency platform.
Pros and Cons of Altcoins
Before investing in any altcoin, investors are encouraged to look at the pros and cons associated with its existence in the crypto network. The following enumerates some of the significant ones:
- Altcoins can be a good substitute for bitcoin because they meet the latter’s shortcomings.
- Altcoins can potentially achieve the main goal of bitcoin as a regular medium of exchange.
- More altcoins have become widely accepted among mainstream institutions, resulting in high valuations.
- Altcoins provide investors with more choices to perform various transactions in the digital economy.
- Altcoins currently have a smaller market compared to bitcoin.
- Altcoin market is characterised by fewer investors and thin liquidity due to the absence of regulation and defined criteria for investment.
- Investment decisions can be hard in altcoins because their types and use cases are not easy to distinguish.
- There were cases of failed altcoin investments in the past, which may be discouraging for new players.
Whether altcoins are good investments or not would largely depend on the trading strategies and other factors at play. It is generally favourable for investors to study the market and decide which cryptocurrency can generate more returns. Diversifying a cryptocurrency portfolio is also key to navigate success in such a highly volatile business environment.