What Altcoin Actually Means
Bitcoin launched the cryptocurrency movement, but it was only the beginning. Thousands of cryptocurrencies have emerged since Bitcoin. Many attempt to fix issues, reach new users, or experiment with different concepts. They're known as "alternative coins," or altcoins.
There are many varieties of altcoins. Some altcoins function as programmable currencies within applications. Others attempt to maintain a consistent price for use as stable payments. Some altcoins focus on online community growth. Studying up on altcoins and their functions is one way to become more crypto savvy.
Altcoin literally means "alternative coin." The easiest way to define it is: any cryptocurrency that isn't Bitcoin. Some exclude Ethereum due to its massive size, but generally speaking "altcoins" refers to anything that's not BTC.
Why Altcoins Exist
Altcoins exist because developers and communities wanted to take actions which were not possible (or would require significant changes) on Bitcoin. Some of the key reasons for altcoins include:
- New functionality beyond payments. Bitcoin was built to be censorship-resistant digital cash. Altcoins take it a step further by building smart contracts, DeFi, NFTs, gaming, identity, asset tokenization or otherwise.
- Different technical trade-offs. Projects might care about transaction speed, cheaper costs, activity, security methodology, or consensus mechanisms. These are all valuable choices based on what you're trying to do with your project and the user experience you want to provide.
- Experiments in governance and incentives. Altcoins tend to try new methods for community governance and growth funding mechanisms such as on-chain voting, DAO treasury, staking rewards, and liquidity mining incentives.
- Market demand (and speculation). Altcoins can simply bring nothing new in technology. They were created purely based on hype, memes or narratives creating short-term demand usually driven by a bull market.
How Altcoins Differ From Bitcoin
There's no set model for altcoins. Bitcoin and altcoins differ in these ways:
| Attribute | Bitcoin | Altcoins |
|---|---|---|
| Goal | Robust money resistant to censorship | Applications, finance, stable value, privacy, governance |
| Supply | 21 million hard cap | Other, larger, or infinite supplies |
| Network age | Longest uptime in crypto | Newly released to mature, or still in development |
| Price and liquidity | Highest liquidity, deepest markets | Typically lower liquidity, more price movement on large trades |
A Quick History of Early Altcoins
The "altcoin era" began shortly after Bitcoin. Litecoin emerged as one of the earliest popular altcoins by debuting in October 2011. It was marketed as a "lighter" version of Bitcoin that processed blocks faster due to decreased block times.
Years later Dogecoin was introduced in 2013. Although it was created as a joke internet currency, it became a worldwide brand through its community and online presence.
Smart contract platforms were next to have their moment. Ethereum's launch in 2015 demonstrated that blockchains could execute programs, rather than just handle payments.
The Main Types of Altcoins
Altcoins fall into multiple categories, and some coins can fit into multiple categories. Here are the main ones you should know:
Payment Tokens
These networks are intended to function as internet currencies, allowing people to transfer value to others. Litecoin is one such network. There are many payment networks focused on this area. Some strive to have the highest speed and lowest cost. Privacy is the goal of others.
Things to watch for: Payment coins require adoption. They could stagnate if there are not sufficient merchants, wallets, exchanges trading them.
Stablecoins
Stablecoins attempt to maintain a constant price value. They're often pegged to a fiat currency such as the U.S. dollar. They're typically used for trading assets, transferring funds, and cryptocurrency payments as they are less volatile than other coins.
Stablecoins are also starting to see increased usage for daily transactions. Visa doubled down on stablecoin settlement projects through testing pilots with USDC and banking institutions.
Risk warning: Stablecoins are not all created equal. Some are backed by cash or government bonds. Others are not and depend on algorithms and market mechanisms to maintain their peg.
UST, an algorithmic stablecoin that lost its price anchor during the Terra crash, is a perfect example of why "stable" is an objective, not a promise.
Utility Tokens
Utility tokens provide access to use or operate a network. Holders pay fees on the network, reward validators, or perform other functions on the blockchain with utility tokens. ETH is Ethereum's utility token which can be used to pay for network usage and staked to secure the network.
Utility tokens may gain value if the network proves useful. Utility tokens can also lose value if no one uses them anymore.
Governance Tokens
Governance tokens allow holders to vote on system changes like fees, spending, and upgrades. Governance tokens are commonly associated with DAOs where holders vote on proposals.
Reality check: Governance isn't always pretty. Votes can be controlled by whales or insiders. Sometimes only a handful of people vote.
Security Tokens
Security tokens are tokens that have characteristics of regular securities. This can be shares, profit participation rights or tokenized versions of real-world assets. Security tokens are normally subject to more stringent regulations. TLDR: If your token functions as an investment contract, it could be considered as such depending on where you are.
Meme Coins
Meme coins live and die by the internet. They can achieve widespread popularity and pump hard with crazy volatility based purely on community size.
Dogecoin is the most notable example. Started as a meme, people rallied around it to become a prominent asset.
Key risks: Meme coins can go up very fast. But they can also plummet down even faster. Most of them are solely used for speculation.
Layer Ones and Layer Twos
"Layer 1" (L1) blockchains like Ethereum, Solana, Avalanche are base networks that host app ecosystems. "Layer 2" (L2) solutions are built atop L1 chains, particularly Ethereum, to help them scale and reduce fees. Many L2s use rollups.
It's important because a lot of new cryptocurrency projects aim to scale networks and interoperability.
Benefits and Risks of Altcoins
Altcoins aren't inherently superior or inferior to Bitcoin. They're just different tools with different advantages and disadvantages.
Possible Benefits
- Innovation. Many new ideas, such as smart contracts, DeFi, and rollups, began with altcoins.
- Purpose-built. Altcoins have a purpose, whether it be payments, stable value, privacy or tokenized assets.
- Upside. Low market cap coins can experience high volatility meaning rapid increases in price.
Key Risks
- Increased volatility. Lower cap coins can experience wild price swings due to investor sentiment and market activity.
- Reduced liquidity. These coins can be difficult to buy or sell for their true value, especially during periods of fast market movement.
- Fraud and dead coins. Some coins are produced solely for the purpose of generating hype and may have no legitimate long-term application.
- Conceptual difficulty. Tokenomics, release timing, voting mechanisms, risk profiles etc tend to be more complicated than most new people assume.
What Is Altcoin Season
"Altcoin season" is an informal term referring to periods when alternative cryptocurrencies, particularly smaller ones, are outperforming Bitcoin. Altcoin seasons tend to occur when market sentiment is positive and investors are feeling risk-on. This is also season for crypto-scams, so extra research is advised.
How to Evaluate an Altcoin
If you are learning about altcoins or thinking about investing, these questions can help:
- What problem does it solve, and for whom?
- Is the token necessary, or is it bolted on?
- Who builds it, and is development active?
- How is the token supply distributed (tokenomics)?
- What are the biggest risks (technical, regulatory, market)?
- Does it have real users, or mostly hype?
The Bottom Line
Altcoins are everything in crypto that isn't Bitcoin. They range from critical infrastructure to financial experiments, niche use cases, and social fads. Many push blockchain technology forward. But only some will survive.
If you treat altcoins as experiments and invest in them wisely with research, caution and proper risk management you'll know the market far better than the person staring at price charts.
