Even if they do not understand exactly how it works, most people are at least familiar with Bitcoin. However, once you start getting involved with the cryptocurrency, you may be surprised to learn that there are actually hundreds of types of cryptocurrencies known as altcoins. The Altcoins are an intriguing facet of the cryptocurrency landscape, but they are not for everyone. Altcoin newcomers often have many questions, and this guide will provide a brief description of altcoins to help beginners decide whether or not to invest in them as part of their cryptocurrency portfolio.
¿What are Altcoins and why do they matter?
The word “altcoin” is an abbreviation of “Bitcoin alternative” and, therefore, describes all cryptocurrencies, except Bitcoin. Altcoins are known as Bitcoin alternatives because, at least to some extent, most altcoins expect to replace or improve at least one bitcoin component.
There are hundreds of altcoins (KoinMarketCoin appears on the 478 list at the time this guide was written) and more appear every day. Most altcoins are little more than Bitcoin clones, changing only minor features such as the speed of transactions, the distribution method or the hash algorithm. Most of these coins do not survive for long. An exception is Litecoin, which was one of the first altcoins. In addition to using a hash algorithm different from Bitcoin, Litecoin has a much larger number of currency units. For this reason, Litecoin has described itself as “silver for Bitcoin gold”.
However, some altcoins innovate by experimenting with useful functions that Bitcoin does not offer. For example, Darkcoin hopes to provide a platform for completely anonymous transactions, BitShares describes itself as “a fair version of Wall Street” and Ripple serves as a protocol that users can use to make payments between currencies with ease. Some altcoin ecosystems, such as CounterParty and Mastercoin, even use the Bitcoin blockchain to secure their platform.
Many Bitcoin enthusiasts argue that altcoins are completely unnecessary and will not succeed because they can not compete with the infrastructure that Bitcoin offers. However, altcoins play an important role. Decentralization is one of Bitcoin’s most prominent objectives, and altcoins further decentralizes the cryptocurrency community. In addition, altcoins allows developers to experiment with unique features. While it is true that Bitcoin can copy these features if the developers or the community want it, the altcoins in full operation are much better “cryptocurrency labs” than the Bitcoin testnet. Finally, Altcoins gives Bitcoin healthy competition. Altcoins provides cryptocurrency users with alternative options and forces Bitcoin developers to remain active and continue to innovate. If users do not feel that Bitcoin satisfies their digital desires, they can adopt an altcoin.
¿Should I invest in Altcoins?
Because of the way in which the recent cryptocurrency was invented and how quickly the landscape changes, all investments in cryptocurrencies carry a great risk. Even Bitcoin, by far the most stable cryptocurrency, exhibits price volatility on a regular basis.
In comparison, however, altcoins are exponentially more volatile. Because they have such low market limits (the total value of all currencies combined), the altcoins markets are very prone to price manipulation. The wealthy merchants, colloquially called “whales”, often inject large amounts of capital in low-priced currencies to generate exaggerations and cause the price to skyrocket. Once the price has risen considerably, whales sell their coins in bags with huge profits, hurting many credulous investors in the process. This method is known as “pump and landfill”. This not only hurts the greedy merchants who did not take the time to do their homework, but often turns out to be the breath of the short life of an altcoin.
To avoid losing all your money in a pump and landfill, focus on long-term investments in currencies that you believe have immense potential and exhibit overall health. In general, healthy altcoins have strong communities, exhibit high liquidity and have developers that proactively improve the source code of the currency (although it is not necessary, many users also prefer developers to reveal their true identity). CoinGecko’s comprehensive coin metric analysis algorithm statistically analyzes these three important factors and classifies currencies according to overall strength.
¿Where can I get Altcoins?
As with Bitcoin, there are a variety of ways to get altcoins. The most basic way to get altcoins is to accept them as payment for goods or services. If you are interested in doing so, place an ad that shows your skill set on a cryptocurrency work board.
You can also exchange altcoins in cryptocurrency exchanges. Most exchanges use Bitcoin as an intermediary (although some include fiat pairs), so if you do not have bitcoins, you will have to buy some before you can switch to altcoins. Some of the most trafficked exchanges include BTER, Bittrex, MintPal, Cryptsy and BTC38 (Chinese only).
Many altcoin communities also sponsor gifts to increase the exposure of their currencies and attract new users to join their communities. This is a great way to acquire coins if you have few funds or do not have marketable skills.