An altcoin is a cryptocurrency, or virtual currency, that is not Bitcoin. Each altcoin operates according to its own rules.
Find out more so that you can decide whether to invest in altcoins.
What Are Altcoins?
Altcoins are alternatives to Bitcoin—hence, their name is a blend of the words "alternative" and "Bitcoins."
Altcoins are cryptocurrencies that use a technology called "blockchain" that allows secure peer-to-peer transactions. They build on the success of Bitcoin by slightly changing the rules to appeal to different users. More than 900 altcoins have been created.
How Do Altcoins Work?
Generally speaking, altcoins work much like the original Bitcoin. Using a private key, you can send a payment from your digital wallet to another user's wallet. There is a blockchain, or recording ledger, where the transactions are permanently and publicly recorded, so exchanges can't be altered or denied after the fact.
The blockchain is secured by mathematics proofs which confirm transactions in blocks. Some cryptocurrencies, like Bitcoin, require "proof-of-work," which is a cumbersome and energy-inefficient way to verify transactions.
Some altcoins, such as Ethereum, require "proof-of-stake" instead. Proof-of-stake verifies transactions via other accounts within the network, making it faster, simpler, and more energy-efficient.
Altcoins vs. Bitcoin
Altcoins don't all follow the same rules as Bitcoin. For example, while Bitcoin will only ever mine, or produce, bitcoins every 10 minutes, an altcoin called Litecoin will produce coins every 2.5 minutes, which makes Litecoin able to process payments faster. Litecoin will also produce 84 million Ltecoins, whereas Bitcoin will only produce 21 million bitcoins.
Litecoin also uses a different set of rules for mining than bitcoin. Whereas bitcoins require costly hardware to mine, Litecoins can be mined with common computer hardware.
Litecoin is just one of the thousands of altcoins on the market. Some altcoins stand out as popular alternatives to Bitcoin, although they don't reach Bitcoin's $100 billion market value. A few other examples of altcoins include:
Pros and Cons of Altcoins
Improve on Bitcoin's flaws
Low transaction fees
Value is very volatile
High potential for scams and fraud
- Improve on Bitcoin's flaws: Altcoins are generally designed to address a perceived shortcoming with the Bitcoin framework, whether it's speed, mining cost, or some other factor.
- Provide competition: By tweaking the rules under which Bitcoin operates, altcoin creators make space for new competitors to the Bitcoin system.
- Low transaction fees: One of the benefits of using altcoins as a payment method, in addition to the secure blockchain technology, is the relatively low transaction fee charged for each transaction.
- Value is very volatile: As an investment, altcoins are very new, and their value can change drastically.
- High potential for scams and fraud: Altcoins, as with Bitcoin, are frequently the subject of scams and other fraudulent schemes.
Types of Altcoins
Altcoins are sometimes projects from enthusiasts, and sometimes they are 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.
An altcoin will often change Bitcoin’s rules sufficiently to do something uniquely productive, and it may have a particular application.
Consider these different types of altcoins.
Stablecoins are altcoins that are designed to combat the volatility of cryptocurrency by tying their value to an underlying index, commodity, or security. Tether is one example of a stablecoin; Libra is a stablecoin under development by Facebook.
Altcoins that function as digital tokens are supported by an underlying blockchain platform. For example, Tether can also be considered a digital token, as it is built on Ethereum and other blockchains.
Some investors seek to earn returns by exchanging altcoins with each other, too, but as an investment, it’s risky. Virtual currencies trade on unregulated exchanges, which leave you vulnerable to price manipulation, fraud, and other risks.
Are Altcoins a Good Investment?
Whether altcoins are a good investment for you depends on your understanding of cryptocurrency and your investing goals. Altcoins can carry substantial risk—some moreso than others. Before investing in any altcoins, be sure to do your research, just as you would when choosing to invest in any traditional security.
How to Get Started Investing in Altcoins
There are many cryptocurrency exchanges available online, and it can be easy to get started with investing in altcoins. Some popular exchanges include Coinbase, Binance, eToro, Kraken, and Gemini.
After researching your options, create an account with your chosen crypto exchange. You will have to enter your personal information and provide a funding method for your account. Once you are set up, you can begin investing in altcoins.
- Altcoins are alternatives to Bitcoin.
- Altcoins are forms of digital currency, or cryptocurrency, each with its own set of rules.
- Altcoins are very new, and their values can be very volatile.