Each alternative cryptocurrency, altcoin, has a unique history and user community. There are many altcoins, but not all of them are good for investment purposes. There is a possibility that some will prove beneficial and desirable for a variety of projects, which can, in the long run, result in a large price increase. However, some others may be useless or even fraudulent.
What exactly are altcoins? How do you decide which one to invest in? Read on if you want to find out!
What is an alternative currency?
Altcoin is a contraction of “alternative currency”. It’s refers to cryptocurrencies other than Bitcoin (BTC)-It’s as simple as that. If it’s not BTC, then it’s an altcoin. Ethereum, Cardano, Shiba Inu, Polkadot, Avalanche, Solana, and the thousands of other cryptocurrencies are altcoins.
Altcoins are usually created to achieve specific goals within their blockchain community. Some are used for transactional and payment purposes, much like Ether in the Ethereum ecosystem. Some cryptocurrencies, such as Trumpcoin and Bananacoin, were developed to collect donations for philanthropic causes.
The 6 types of altcoins
The thousands of altcoins in the cryptocurrency market can be classified into various groups. Although other variants exist, these are six of the most common altcoin types.
These tokens confer ownership rights to the company that owns them. Holding them gives the bearer the ability to acquire a certain number of shares in the company that is the legal owner of the token. Security tokens are considered securities by regulatory agencies, just like stocks, ETFs, bonds, and other types of securities.
According to Howey’s test, a token can be classified as a security or not if you answer “yes” to the following questions.
- Is there a monetary investment?
- Was the money invested in a joint venture?
- Did you expect to make a profit?
- Is the profit generated by the promoter or a third party?
Blockchain Capital, Tzero, 22x Fund, and Sia Funds are some examples of tokens classified as security tokens. Bitcoin, Ethereum, and many other alternative cryptocurrencies do not qualify as security tokens because there is no joint venture company, and no promoters or third parties claiming to profit from them.
These coins generally do not have a wide variety of use cases and are usually designed from a joke point of view. They usually become well known in a short period of time, thanks to the hype of the internet and the actions of crypto influencers. The two most widely used meme coins are Dogecoin and Shiba Inu.
Meme coins are not the best option if you are interested in making long-term investments or storing wealth. They are generally not considered serious projects and as a result do not usually have a strong developer community to help keep them safe and up to date.
They are also particularly prone to pump-and-dump schemes in which individual holders of large coins promote the coin and persuade others to buy and inflate the price in a short period before withdrawing their holdings from the market. You just have to look Elon Musk’s influence on the price of Dogecoin to see this in action.
Meme coins often require little starting capital, but can generate huge profits in a relatively short period of time. Therefore, you need to do a lot of research to understand any meme coin you want to invest in.
A stablecoin is a class of cryptocurrencies that aims to reduce the price volatility of cryptocurrencies. The value of a stablecoin is usually tied to other assets like fiat currencies (USD, EUR, GBP), commodities, or even other cryptocurrencies in the case of Wrapped Bitcoin.
Tether is one of the most popular stablecoins, but there are lots of alternative stablecoinsincluding USD Coin (USDC), Binance USD (BUSD), and Dai (DAI).
The most popular stablecoins are pegged to the US dollar (USD) and are designed to track its value. Stablecoins, as the name suggests, are not normally used for investment purposes because they are designed to be more stable. Instead, people save or send money with them. This is not to say that you cannot profit from stablecoins, as you can earn interest by lending them or participating in savings protocols available on their exchange.
Utility tokens are used as payment for services within a network. Network users transact while posting art, minting tokens, and conducting certain transactions within a network. During these transactions, utility tokens are how payments and settlements are made. Utility tokens are not regulatedand help maintain the internal economy within a blockchain ecosystem.
Some examples of utility tokens are Basic Attention Token (BAT), Chainlink (LINK), Zilliqa (ZIL), Binance Coin (BNB), and Aurora (AOA).
In addition to the regulatory challenge, another problem with utility tokens is that they can be expensive to spend depending on the activities within their blockchain.
Payment tokens are digital assets that allow crypto users to transact directly with each other in decentralized markets, avoiding the need for an intermediary as is usual in conventional banking and financial systems. The vast majority of cryptocurrencies, whether security or utility-based, fall into this category. However, not all utility tokens have the ability to function as payment tokens.
Examples include Bitcoin, Ethereum, Litecoin, Dash, Bitcoin Cash, and Monero, as well as various cryptocurrencies that can be used as payments in certain setups.
Governance token holders are granted particular privileges within a blockchain, such as voting on proposed changes to protocols or participating in the blockchain decision-making process. a decentralized autonomous organization (DAO). They are considered utility tokens; however, because they are typically native to a private blockchain and used for blockchain-related reasons, it has been common practice to recognize them as a distinct type of token.
The Maker token (MKR) is an example of a government token. Holders of this coin are given the power to vote on decisions made about the decentralized finance (DeFi) technology that DAI is based on.
What to consider before investing in an altcoin
Knowing what types of cryptocurrency tokens exist and what they are used for is not enough. It is important to consider other areas of research before choosing an alternative currency.
The crypto community is a group of people who share ideas and work together to improve the solidarity and unity of a blockchain. Community members include developers, analysts, token holders, and writers. They are responsible for educating and informing those in their immediate environment. The exchange of information about a cryptocurrency is critical to its wide adoption and innovation.
The actions of stakeholders or sponsors in disseminating information about a cryptocurrency contribute to its consistency and popularity. Social media platforms like Facebook, Twitter, Instagram, Telegram, and Discord have proven useful for such purposes. You should search the community of your preferred cryptocurrency to see how strong it is and if you are convinced enough to invest in it.
Blockchain Technology and the Consensus Algorithm
Understand the core technology of an altcoin, such as the blockchain type and consensus algorithm uses will help you understand how you stand out from your competitors. You can also spot new technologies that will add value to the industry.
The white paper of the project
If you want to invest in any cryptocurrency, you need to read the whitepaper first. This will not only help you understand the purpose of the cryptocurrency project and the technology behind it, but will also help you determine whether or not you have enough confidence in the project to invest in it.
The whitepaper associated with a cryptocurrency will usually include all the important information about that coin. It should include a detailed plan for the coin’s future growth and a strategy to ensure its value is maintained. Having a white paper gives the coin an air of professionalism and gives it the appearance of being more legitimate than it would otherwise be. Not understanding the goals of a project after reading the white paper could be a red flag to avoid investing in it.
However, while it is a useful indicator, it is not the be all and end all of legitimacy. During the ICO boom of 2017Numerous projects with well-written technical documents turned out to be absolute garbage.
Investing in a cryptocurrency that you have no prior knowledge of is not a good idea. A look at the coin’s price history will show you how it fluctuated over time, as well as its most consistent patterns. You can use this information to make predictions about the future in some cases.
Checking price history can also help you identify important market points such as support and resistance, key supply and demand levels, etc. Using the information obtained can help you make better trading and investment decisions.
How to make the right investments in Altcoin
Investing in altcoins may or may not be a good idea for you, depending on your knowledge of cryptocurrencies and your financial goals.
Cryptocurrency investors should always do their own research on altcoins before deciding whether or not to buy them. You should also keep in mind that it is riskier to invest in a new altcoin than an established one and please never invest more than you can afford to lose, especially in such volatile markets.
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