What Are Altcoins? Exploring Cryptocurrencies Beyond Bitcoin
Introduction
For years, the word “cryptocurrency” was synonymous with one name: Bitcoin. It dominated the headlines and captured the public imagination as the original decentralized digital currency. However, in late 2017, the digital asset landscape has fundamentally transformed. A new and rapidly growing ecosystem of cryptocurrencies has emerged, collectively known as altcoins. This term, a simple contraction of “alternative coins,” refers to any cryptocurrency other than Bitcoin. This surge of new digital currencies has brought with it an incredible wave of innovation, but also a new layer of complexity, risk, and opportunity for investors. This guide will explore the diverse and often confusing world of altcoins, defining their purpose, categorizing their different types, and explaining the unique risks and rewards they present in today’s highly speculative market.
Defining an Altcoin and Its Purpose
An altcoin is simply an alternative cryptocurrency to Bitcoin. When Bitcoin was first created, it proved that a decentralized currency was possible. However, developers quickly identified what they saw as limitations in Bitcoin’s design. This led to the creation of new digital currencies with the goal of improving upon Bitcoin in some way. Early altcoins focused on technical improvements, such as faster transaction speeds or different consensus mechanisms.
As the crypto ecosystem has matured, the purpose of altcoins has evolved. Today, many altcoins are not just trying to be a better form of money. They are part of a broader trend to build decentralized applications and services. The altcoin itself often serves as a “utility token” or “platform token,” a crucial part of a larger technological ecosystem. It can be a means of paying for transactions on a network, a way to access a decentralized service, or a tool for participating in the governance of a new protocol. This shift from simple currency to functional utility is a key part of the altcoin revolution.
The Primary Categories of Altcoins
The altcoin market is not a single entity; it is a diverse collection of projects. To understand the space, it helps to categorize these projects based on their primary function.
Platform Tokens
These altcoins provide the underlying infrastructure for decentralized applications, or DApps. The most prominent example is Ethereum. Its native token, Ether (ETH), acts as the “gas” or transaction fee to power smart contracts and applications on the Ethereum network. Developers use the Ethereum platform to build all sorts of decentralized services, from financial applications to games. The value of a platform token is often tied to the activity and success of the applications built on its network.
Payment Coins
These altcoins were created with the specific goal of being a superior form of digital money for everyday use. They often focus on improving Bitcoin’s transaction speed, scalability, or privacy. Litecoin, for example, was one of the first and most well-known payment coins. It was designed to have faster block times and a larger coin supply than Bitcoin. Other payment coins have focused on features like lower transaction fees or a more user-friendly experience.
Privacy Coins
In a world of increasing digital surveillance, some altcoins focus entirely on providing anonymous transactions. While Bitcoin’s blockchain is public and its transactions are traceable, privacy coins use advanced cryptographic techniques to obscure the identity of senders and receivers. For example, Monero uses a technology called “ring signatures” to mix transactions with others, making them untraceable. Zcash uses a different technology called “zero-knowledge proofs” to verify transactions without revealing any information about the sender, receiver, or amount. These altcoins are built for users who prioritize anonymity.
Utility Tokens (The ICO Boom)
The most defining feature of the 2017 crypto market is the explosion of new altcoins through Initial Coin Offerings (ICOs). An ICO is a crowdfunding method where a new project raises money by selling a new digital token. This token, known as a utility token, gives users access to a specific service or product on a decentralized network. For example, a new decentralized cloud storage service might sell a utility token that users must use to pay for storage. The value of this token is theoretically tied to the demand for the service it powers. This model has allowed thousands of new projects to launch, but it has also fueled a massive amount of speculation and risk.
The Risks and Rewards of Investing in Altcoins
The altcoin market is a high-risk, high-reward environment. For an investor, it is crucial to understand the unique dynamics of this space.
The Rewards
The potential for explosive growth is the primary driver for many investors. Because many altcoins have a much smaller market capitalization than Bitcoin, they can experience massive percentage gains in a short period of time. A successful altcoin project can see its value multiply by ten, fifty, or even a hundred times. This kind of return is rare in traditional markets. For many, investing in altcoins is a venture capital-style bet on the future of a new technology.
The Risks
The risks, however, are immense.
- High Volatility: Altcoins are extremely volatile. Their prices can rise and fall by 20% or more in a single day. This volatility is a double-edged sword that can lead to significant financial loss.
- Lack of Utility: The value of many altcoins is based on speculation, not on real-world use. Many projects launched in the ICO boom have yet to deliver a working product. In fact, many will likely fail.
- Scams and Fraud: The unregulated nature of the altcoin market has attracted a large number of fraudulent projects and scams. These can range from simple “pump and dump” schemes, where a group of people artificially inflate a coin’s price before selling it, to outright fraudulent projects with no intention of delivering a product.
- Regulatory Uncertainty: Governments and regulators worldwide are still grappling with how to regulate cryptocurrencies and ICOs. This regulatory uncertainty creates a significant risk for investors. A government decision could have a massive impact on the value of a specific altcoin.
Bitcoin vs. Altcoins: The Broader View
The relationship between Bitcoin and altcoins is often a source of debate. Some see them as competitors, while others see them as complementary.
Bitcoin has a distinct advantage. It is the original cryptocurrency, with the largest and most secure network. This gives it a “first-mover advantage” and a powerful network effect. As a result, many investors see Bitcoin’s primary role as a store of value, a kind of “digital gold.” Its stability relative to altcoins makes it a better long-term holding.
Altcoins, by contrast, can be seen as the venture capital arm of the crypto ecosystem. They are where the bulk of the innovation and experimentation is happening. While many will fail, a few will likely succeed and could potentially reshape entire industries. For an investor, the choice between Bitcoin and altcoins is often a choice between a more conservative, long-term store of value and a high-risk, high-reward bet on a new technology. A well-diversified crypto portfolio might contain both.
Conclusion
The world of altcoins is a fascinating and diverse landscape. It is a place of rapid innovation, where developers are pushing the boundaries of what blockchain technology can do. They are building platforms, new payment systems, and decentralized applications that could one day become commonplace. However, the altcoin market in late 2017 is also an incredibly speculative and risky environment. While the potential for high returns is real, it is matched by the risk of total loss. For anyone considering investing in altcoins, the most important step is to do your research, understand the purpose of a project, and never invest more than you are willing to lose. This market is a marathon, not a sprint, and patience and discipline are the key to long-term success.