DeutschAfter the rapid rise of Bitcoin – the first cryptocurrency – on the markets, altcoins have emerged as an alternative. With such an increase in interest in the cryptocurrency exchange, questions such as what altcoins are, how they work and how to buy them have also become a great curiosity. CoinPro.ch gets to the bottom of the matter and takes a closer look at the altcoins.
What are Altcoins?
The term altcoins is an abbreviation for alternative coins. Now the only question that remains is who or what the altcoins are actually supposed to be an alternative to. The answer is clear, namely to the leading cryptocurrency, i.e. the Bitcoin. Therefore, basically all cryptocurrencies that were created after Bitcoin are automatically alternative coins, i.e. altcoins.
How Do Altcoins Work?
The term “altcoin” or “alternative coin” is based on the idea that Bitcoin is considered the original cryptocurrency. Altcoins aim to replace Bitcoin. However, the basic structures of most altcoins and Bitcoin are similar. Altcoins also work with consensus mechanisms such as Proof of Work or Proof of Stake. However, not every altcoin has its own blockchain. Many altcoins are tokens that are created on existing blockchains. Most of these altcoins are cryptocurrencies that were created on the Ethereum blockchain (ETH) in the ERC-20 token standard.
Altcoins derived from Bitcoin offer a similar mining process, which is often based on Bitcoin’s “Proof of Work” (PoW) algorithm. However, there are several other cryptocurrencies that are experimenting with methods to achieve an alternative consensus algorithm within different blockchain networks. The Proof of Stake consensus algorithm is the most common alternative to Proof of Work. Other notable examples include the Delegated Proof of Stake, Proof of Burn, Proof of Authority, and Delayed Proof of Work consensus algorithms.
The main purpose of altcoins is to overcome the various limitations of Bitcoin (BTC) technology. Ethereum (ETH), the largest altcoin, for example, was founded to enable the creation of blockchain-based smart contracts. Stable coins such as Tether (USDT) have emerged as a solution to Bitcoin’s price volatility.
The Largest Altcoins in 2023
Also in 2023, the largest altcoins to date are cryptocurrencies such as Ethereum (ETH), Ripple (XRP) or Cardano (ADA). Many cryptocurrencies have already become established here. However, there can be rapid changes, especially between places 7 and 10 of the largest altcoins in a bull market. On our overview page you will find the prices of the largest altcoins.
Overview of Types of Altcoins
The most important types of altcoins include mining-based cryptocurrencies, stablecoins, security tokens and utility tokens. There are many more types of tokens. Depending on their functionality and consensus mechanisms, altcoins fall into different categories. However, it is possible for an altcoin to fall into more than one category.
Mining-based Altcoins
As the name suggests, these are mining-based altcoins. Most mining-based altcoins use Proof-of-Work (PoW), a method in which systems generate new coins by solving difficult problems to create blocks. Examples of mining-based altcoins are Litecoin, Monero and Zcash. At the beginning of 2020, most of the leading altcoins fell into the category of mining-based currencies. The alternative to mining-based altcoins are pre-minted coins. Such coins are not generated by an algorithm, but are distributed before they are listed on the cryptocurrency markets. Ripple’s XRP is an example of a pre-minted coin.
Stablecoins
Cryptocurrencies have been volatile from the start. Stablecoins aim to reduce this overall volatility by pegging their value to a basket of products such as fiat currencies, precious metals or other cryptocurrencies. The basket is intended to act as a backup to save the owners in case the cryptocurrency fails or problems arise. It is supported by mechanisms that ensure that price fluctuations for stablecoins remain within a narrow range. It is a dollar-backed coin. Other examples of stablecoins are USDC and MakerDAO.
Smart Contract Altcoins
A smart contract is a type of self-executing contract in which the terms of the agreement between buyer and seller are written directly into lines of code. This code and the agreements contained in the contract reside on a distributed and decentralized blockchain network. The code that defines the smart contract controls the execution of the contract, and the transactions contained in the smart contract are traceable and irreversible, like all transactions on the blockchain.
Smart contracts enable the execution of trustworthy transactions and agreements between different and anonymous parties without the need for a central authority, legal system or external application. Cryptocurrencies from platforms that enable the creation of smart contracts are called Smart Contract Altcoins. Ethereum (ETH), Cardano (ADA) or Polkadot (DOT) are well-known smart contract coins, among others.
Security Tokens
Security tokens are similar to securities traded on the stock exchange, except that they have a digital origin. They are therefore similar to traditional shares and usually promise the holders shares in the form of ownership or dividend payments. The possibility of a price increase in such tokens makes them attractive, so investors invest money in them. Security tokens are usually offered to investors via Initial Coin Offerings (ICOs).
Utility Tokens
Utility coins are used to provide services within a network. For example, they can be used to purchase services or redeem rewards. In contrast to security coins, no dividends or ownership shares are paid with utility coins. Filecoin, which can be used to purchase storage space in a network, is an example of a utility token.
Buy Altcoins
Altcoin trading is handled via various crypto exchanges. Its price is formed depending on the relationship between supply and demand on the market. Altcoins can be divided into small pieces. Instead of buying an altcoin, you can trade with smaller amounts, provided. In order to be able to buy and sell altcoins, you need a virtual wallet, i.e. a wallet for altcoins. We will go into this in more detail later in the text.
Buy Altcoins: Verification Necessary
There are various cryptocurrency exchanges around the world. After you have selected a secure crypto exchange of your choice, you must first register. For security reasons, identity verification is required to start trading.
Does it Make Sense to Buy Altcoins?
There is no doubt that cryptocurrencies have a certain appeal as an investment. Altcoins offer a serious opportunity, as they offer a much greater advantage in terms of percentage gain, on the other hand, the risks are also much higher. So it always depends on what your risk profile is and what risk you are willing to take.
In addition, it is also possible to generate altcoins through mining. However, not every altcoin is suitable for mining. Due to the very high costs, mining cryptocurrencies no longer yields as much profit as it did at the beginning of the introduction.
Safely Store Altcoins
If you have bought altcoins, there is a more important aspect that you should definitely pay attention to: Safe custody. There are basically four methods for storing cryptocurrencies. These are so-called “cold wallets”, “hot wallets”, “hardware wallets” and providers of custody services for cryptocurrencies.
Cold wallets store the private key offline – therefore most hardware wallets are also cold wallets. Hot wallets, on the other hand, work via mobile wallet applications or browser plugins that require an internet connection. The advantage is that you can keep your crypto assets under your own control with the private key you created, while you can buy and sell at any time. But since hot wallets are open to the world of the internet, it is important that users pay attention to fraudulent connections.
Lastly, there are the cryptocurrency exchanges or cryptocurrency banks that offer custody services for cryptocurrencies and keep your cryptocurrencies in your name in their own wallets. But there is always the risk that your cryptocurrencies will be stolen in the event of a cyber attack.
The most important point when managing wallets is to ensure the security of the private keys. The private key can be thought of as the PIN code of a bank card. This information is only intended for you and must not be passed on to third parties. In contrast to the banking system, there is no reminder function for these keys. Therefore, the recommendation: You should keep your private key safe and not share it with anyone.
What is the Altcoin Season?
In general, Bitcoin tends to lose some of its dominance in the crypto market to altcoins during the altcoin season. In other words, Bitcoin’s market capitalization falls compared to the total market capitalization of other cryptocurrencies on the market. Market capitalization is used relatively frequently to indicate the size of a crypto asset and is usually determined by multiplying the price of an asset by the circulating supply.
There are some calculations that attempt to determine the beginning and end of the altcoin season with percentages and numbers. However, you have to be very careful, as they lack an objective basis and can therefore be very misleading. If altcoins have become a hot topic, this is generally an indication that you are in the altcoin season.
It is almost impossible to say exactly what triggers the altcoin season. However, the generally accepted idea is that after a Bitcoin bull run (or at least after signs of one), investors tend to sell some of their BTC to realize their profits.
With some of these profits, they then buy altcoins, which of course can cause the prices of the various altcoins to rise. Since the volume of altcoins is lower than the volume of Bitcoin, the price movements (increase and decrease) can occur much faster with altcoins.
Conclusion – What You should Know about Altcoins
There are more than 20,000 altcoins that were originally created as an alternative to Bitcoin. In the meantime, however, many altcoins are not trying to improve Bitcoin at all, but are aiming at completely different use cases. However, this does not necessarily mean that you need every altcoin that wants to fulfill a different purpose.
Altcoins offer a great opportunity to generate high profits as an early investor. However, you should never invest more money than you are willing to lose. Because a total loss is always possible.
