What Are Altcoins?

Definition and Examples of Altcoins

Woman at a cafe checking altcoin value on her phone
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An altcoin is a cryptocurrency, or virtual currency, alternative to 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. They are cryptocurrencies that use a technology called blockchain that allows secure peer-to-peer transactions. Altcoins build on the success of Bitcoin by slightly changing the rules to appeal to different users.

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. In a cryptocurrency such as these, 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.

Altcoin 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. This makes Litecoin able to process payments faster. Litecoin will also produce 84 million litecoins, 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 cap. A few examples of altcoins include:

  • Ethereum
  • Ripple
  • Dash
  • Litecoin
  • NEM
  • Monero

Pros and Cons of Altcoins

Pros
  • Improve on Bitcoin's flaws

  • Provide competition

  • Low transaction fees

Cons
  • Value is very volatile

  • High potential for scams and fraud

Pros explained

  • 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 secure blockchain technology, is the relatively low transaction fees charged for each transaction.

Cons explained

  • 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 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 may have a particular application.

Some coins, such as solarcoin, have been designed as a ​unit of exchange for solar power production. Others, such as namecoin, have formed the basis for a new system of domain names on the Internet.

Consider these different types of altcoins.

Stablecoins

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.

Digital tokens

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 problems.

Key Takeaways

  • Altcoins are alternatives to Bitcoin.
  • Altcoins are a form of digital currency, or cryptocurrency, each with its own set of rules
  • Altcoins are very new and their prices can be very volatile.

Article Sources

  1. Bitcoin.org. "How Does Bitcoin Work?" Accessed June 14, 2020.

  2. U.S. Sentencing Commission. "Bitcoin Glossary: 2018 Annual National Seminar," Page 2. Accessed June 14, 2020.

  3. Bitcoin.org. "Frequently Asked Questions." Accessed June 14, 2020.

  4. Litecoin.org. "What Is Litecoin?" Accessed June 14, 2020.

  5. SEC.gov. "Economic and Non-Economic Trading In Bitcoin: Exploring the Real Spot Market For The World’s First Digital Commodity," Page 5. Accessed June 14, 2020.

  6. Texas Comptroller of Public Accounts. "Bitcoin and Beyond." Accessed June 14 2020.

  7. Texas State Securities Board. "Cryptocurrency Scams." Accessed June 14, 2020.

  8. Commodity Futures Trading Commission. "Summary Overview of Stablecoins and the Law Regarding Stablecoins," Page 7. Accessed June 14, 2020.

  9. Tether. "About Tether." Accessed June 14, 2020.

  10. Texas State Securities Board. "Virtually Risky." Accessed June 14, 2020.