Altcoins: A Basic Guide
There's a coin for everything in the cryptocurrency world
In the world of cryptocurrency, bitcoin isn't the only show in town. There are many alternative cryptocurrencies, commonly known as altcoins. These are electronic currencies with their own blockchains, miners, and wallets. But how do they work, and why do they exist?
Why Do We Need Altcoins?
As the first cryptocurrency, bitcoin has its own particular rules. For example:
- New coins are produced every 10 minutes on the bitcoin network.
- Bitcoin is mined using lots of computing power.
- Some dedicated computer chips can be specifically designed to mine bitcoin more quickly than others.
- There can only ever be 21 million bitcoins.
- Bitcoin is designed to be a form of electronic money and nothing else.
These are all conscious choices that were made when the bitcoin protocol was originally designed, but there's nothing that says those rules can't change.
The software development team that governs bitcoin is very conservative and doesn't like making drastic changes to bitcoins software, or the rules inside it. There are good reasons for this; bitcoin has a market capitalization in the billions of dollars, and many businesses now rely on it. Making too many changes could create problems for the people that depend on a cryptocurrency as popular as bitcoin.
Alternatives to Bitcoin
Instead, many people have taken the basic principles of cryptocurrency and developed their own versions, with different rules to suit their own needs. They form the altcoin community, and there are many of them.
One of the most popular is litecoin, a cryptocurrency that switched the rules to appeal to a different collection of people. Released almost three years after bitcoin, litecoin creates new coins every 2.5 minutes – four times faster than bitcoin - which means that transactions made using litecoin can be confirmed more quickly than in bitcoin.
Litecoin also uses a different set of rules from mining than bitcoin. It deliberately tried to exclude new kinds of mining equipment such as ASIC minors from having an unfair advantage over more generally available equipment such as the CPU in your computer. The idea was to keep things more egalitarian, and give everyone a chance, rather than favoring those people with the money to buy specialist equipment.
Not all altcoins have such laudable goals, though. There have been thousands of altcoins launched in the last few years, and many of them are scamcoins. These are altcoins designed purely to make a profit for their creators.
Typically, these coins will be announced on popular cryptocurrency forums with little warning. They will often have been pre-mined by their creators, meaning that they are sitting on a sizeable amount of the coin already.
Scamcoin creators try to gain the community's support for their altcoins, by encouraging them to use their computers to mine them. If they are able to find people to begin trading their scamcoin, then they can spread lots of buzz about their scamcoin to drive up its value. At this point, the creator will sell all their coins, exiting the market, and leaving the scamcoin to fizzle out, with no technical support.
This is known as a 'pump and dump' scheme and has become all too common in the altcoin world. Many altcoins are valid, though, and have real potential. How can you find them? Here are some things to look for.
A valid altcoin will often change bitcoin’s rules sufficiently to do something uniquely productive and may have a particular application. Some coins have been designed as a unit of exchange for solar power production, for example, while others have formed the basis for a new system of domain names on the Internet. If a coin is attempting to do something that adds technical value, it's a good sign.
A Solid Team
A good altcoin will have a solid team behind it. Beware of coins launched by people with no track record in the community, especially if they appear to have registered on forums very recently. Some of the best altcoins marshal communities of volunteers and advocates, many of whom will have been contributors to forums for awhile.
Some coins just inexplicably take off. One of the most notable was dogecoin, which was originally started as a joke. The coin, which uses a cute dog as its mascot, went viral, and everyone started buying it. At the time of writing in February 2015, it has a market capitalization of over $14 million.
Altcoins are sometimes projects from enthusiasts, and sometimes the basis for whole new businesses. They can even be more than coins, developing into entire new frameworks for everything from messaging applications to online marketplaces. Niche traders can make returns by exchanging altcoins with each other, too, although it’s a risky, high-risk business.
When considering involvement in an altcoin, be sure to do your background research and look for some of the above characteristics. Forewarned is forearmed.