Altcoins are digital currencies other than Bitcoin (BTCUSD). They have some features in common with Bitcoin, but they are very different from Bitcoin in other ways. For example, some altcoins use a different consensus mechanism to generate blocks or validate transactions. Altcoins differentiate themselves from Bitcoin by offering new or additional features, such as smart contracts or low price volatility.
As of October 2021, there are more than 12,000 digital currencies. According to CoinMarketCap, altcoins accounted for almost 60% of the total cryptocurrency market in October 2021. Because they are derived from Bitcoin, the price movements of altcoins tend to mimic the path of Bitcoin. However, analysts say the maturation of cryptocurrency investment ecosystems and the development of new markets for these coins will make altcoin price changes independent of bitcoin price movements.
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Key points about altcoins
- The term altcoin refers to all digital currencies other than Bitcoin.
- By October 2021, altcoins accounted for almost 60% of the total cryptocurrency market with more than 12,000 cryptocurrencies.
- Some of the main types of altcoins include mining-based cryptocurrencies, stablecoins, security tokens, and utility tokens.
- Altcoins may in the future only include mining-based cryptocurrencies other than Bitcoin, as their use is growing as technology advances.
- Ethereum and Binance Coin were the largest altcoins by market capitalization as of October 2021.
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Familiarity with altcoins
“Altcoin” is a combination of the two words alt meaning “alternative” and coin meaning “coin” and includes all alternatives to Bitcoin. The basic framework of Bitcoin and altcoins is similar. Therefore, they use a common code and act as peer systems or as a giant computer capable of processing large amounts of data and transactions simultaneously. In some cases, altcoins aspire to become the next Bitcoin by becoming a cheap way to do digital transactions.
But there are differences between Bitcoin and altcoins. For example, Bitcoin is one of the first digital currencies, and the philosophy behind its design is a standard for the development of other coins. However, its implementation has problems. For example, proof-of-work (PoW) – the consensus mechanism used to create blocks – is energy-intensive and time-consuming. And also the capabilities of the Bitcoin smart contract are also limited.
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After its introduction in 2009, Bitcoin became the first widespread use of the Proof of Work (PoW) mechanism. PoW forms the basis of many other digital currencies as well, enabling secure and decentralized consensus.
Continue familiarization with altcoins
Altcoins improve upon the limitations created by Bitcoin to create a competitive advantage. Several altcoins use a proof-of-stake (PoS) consensus method to minimize the energy consumption and time required to create blocks and validate new transactions. Another example is Ethereum (ETHUSD), the world’s second largest cryptocurrency by market capitalization, which is used as gas (or payment for transaction fees) in smart contracts on Ethereum.
Altcoins also address traditional criticisms against Bitcoin. For example, stablecoins have very little price volatility compared to Bitcoin. And it makes them an ideal vehicle for daily transactions.
By differentiating themselves from Bitcoin in these ways, altcoins have created a market for themselves. In turn, this has attracted investors who see potential in them as an alternative to Bitcoin. Investors expect to profit as altcoins attract more users and increase in price.
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Types of altcoins
Altcoins have different categories depending on their functionality and consensus mechanisms. Here’s a quick summary of some of the highlights:
Note that an altcoin may fall into more than one category.
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As their name suggests, they are altcoins that are based on mining and are collected by mining. Most mining-based altcoins use Proof-of-Work (PoW), a method in which systems generate new coins by solving hard problems to create blocks. Examples of mining-based altcoins include Litecoin (LTCUSD), Monero (XMRUSD), and Zcash (ZECUSD). Alternative to mining-based altcoins are pre-mined coins. Such coins are not algorithmically generated, but distributed before they are listed on cryptocurrency markets. An example of a pre-mined XRP coin is Ripple (XRPUSD).
The trading and use of digital currencies has been accompanied by price fluctuations since its launch. Stablecoins aim to reduce this volatility by tying their value to a basket of commodities, such as fiat currencies, precious metals, or other digital currencies. This portfolio is considered as a reserve for redeeming the holders in case the digital currency fails or gets into trouble. Price fluctuations for stablecoins should not exceed a narrow range.
Security tokens are similar to securities that are traded on stock markets, except that they are digital in origin. Security tokens are similar to traditional stocks, and often promise ownership to shareholders or dividend payments to holders. The prospect of price increases for such tokens is a big attraction for investors to invest in them. Security tokens are usually offered to investors through initial coin offerings (ICOs).
As their name suggests, memecoins are inspired by a joke or silly take on other popular cryptocurrencies. They usually gain popularity within a short period of time, often promoted online by prominent cryptocurrency influencers and retail investors trying to capitalize on short-term gains.
For example, Tesla Inc. (TSLA) CEO and cryptocurrency enthusiast Elon Musk regularly sends out cryptic tweets about leading meme coins Dogecoin (DOGEUSD) and Shiba Inu, often causing significant price swings. In October 2021, Shiba surged 91% in a 24-hour period after Musk tweeted a picture of his pet Shiba puppy Floki.
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The future of altcoins
It is unlikely that the current situation in the altcoin markets will consolidate into a single digital currency. But there is also the possibility that the majority of the more than 1,800 altcoins listed on crypto markets will not survive. It is likely that in the future the altcoin market will consolidate around a set of altcoins – those with more applications and uses – that will dominate the market.
For investors looking for diversification in the crypto markets, altcoins are an inexpensive way to expand their horizons beyond Bitcoin. Rallies in the digital currency markets have generated returns many times the returns generated by Bitcoin. But there are risks in altcoin investment, the most important of which is the lack of regulations. Maturing cryptocurrency markets will likely introduce more complexity and capital into the industry, paving the way for less regulation and volatility.
If you are interested in the digital currency market, you should know that trading and activity in this market requires information and trading strategies. To get training and tested and successful strategies in this market, you can see Mohammad Famurian’s digital currency intelligence course.
Frequently Asked Questions
What is altcoin?
Another category of digital currency is said to be based on blockchain technology and launched after Bitcoin. This model of digital currency is not used for fraud purposes and has good value.
Can altcoins be converted into real money?
Yes, these digital assets are the same as Bitcoin and can be converted into real money.
Are altcoins reliable?
Altcoins are encrypted using blockchain technology and have high security and are not easily hacked.
How to buy altcoins?
All kinds of altcoins can be bought through mining and exchanges.
Can altcoins be used in everyday transactions?
Yes, using altcoins, you can buy from various online stores and pay for real altcoins.
Is the transaction cost of altcoins high?
No, compared to other payment methods, this payment method costs less; But network transaction costs should not be ignored.