Understanding Altcoin: Definition, Types, Where to Buy

Peter Zoltan
| Editor:
April 9, 2024
8 min read

Bitcoin might reign as the king of crypto, but it's far from the only player in the game. The world of cryptocurrency is teeming with thousands of alternative coins, known as altcoins. These digital assets offer a fascinating array of possibilities—from unique technologies and niche use cases to the potential for explosive growth. If you're ready to venture beyond Bitcoin, this guide will break down the basics of altcoins. We'll explore what they are, how they differ from Bitcoin, and the potential benefits and risks to consider they bring to the market. 

Ethereum (ETH) is undoubtedly the leading alt-coin with a market capitalization that exceeds $400 billion. Source: Ethereum

Definition and Origin of Altcoins

Altcoin, a term that stands for "alternative to Bitcoin," refers to any cryptocurrency that is not Bitcoin. Altcoins were created to address perceived limitations of Bitcoin such as transaction speed, mining algorithm, or the ability to mine them profitably. They can offer features and functionalities beyond simply being a digital currency, such as smart contracts or proof-of-stake algorithms.

Many argue that the first real altcoin, Namecoin, was launched in April 2011. Developed as a decentralized Domain Name System (DNS), Namecoin made internet censorship very difficult. Since then, the altcoin market has grown exponentially, with thousands of altcoins now in existence, including prominent ones like Ethereum, Ripple, and Litecoin.

Differentiating Altcoins from Bitcoin

While altcoins are built using Bitcoin's open-source codebase with variations to the underlying protocol, they can differ significantly from Bitcoin in terms of their features and functionalities. For instance, some altcoins use a different proof-of-work algorithm, which changes the way new coins are mined and how transactions are processed.

Another key difference lies in their volatility. Altcoins are generally more volatile than Bitcoin, making them a riskier investment with potentially higher returns. This heightened volatility can be attributed to their lower liquidity, speculative nature, and market sentiment swings.

Altcoins have also gained ground in recent years due to increased innovation in the crypto space and the rise of decentralized finance (DeFi). They often serve not just as digital currencies but as the backbone for a variety of applications and services in the burgeoning world of DeFi.

In understanding the altcoin market, it's crucial to note that while altcoins present new opportunities, they also come with unique risks and challenges. Therefore, thorough research and due diligence are imperative for anyone considering an altcoin investment. As the crypto space continues to evolve, the altcoin market is likely to remain a dynamic and significant part of the cryptocurrency ecosystem.

Popular Altcoins in the Market

Bitcoin may have been the pioneer in the dynamic world of cryptocurrencies, but numerous other digital currencies, known as altcoins (alternative coins), have emerged and gained popularity. Each altcoin offers unique features and use cases beyond being a digital currency.

Ethereum: The Smart Contract Pioneer

One of the most well-known altcoins is Ethereum. Its distinction lies in its introduction of smart contract functionality, allowing for the creation of decentralized applications (or dApps) on its platform. 

Ethereum's smart contracts are self-executing contracts where the terms of the agreement are written into code, allowing for transparent, trusted transactions and agreements to be carried out without the need for a central authority, legal system, or external enforcement mechanism. This innovative approach has positioned Ethereum as a leading altcoin in the market.

Ripple, Litecoin, Cardano, and Others

Beyond Ethereum, there are several other altcoins that have carved out a niche in the cryptocurrency market. Ripple (XRP), for instance, is recognized for its digital payment protocol more than its cryptocurrency. It's a technology that allows for quick, direct money transfer between two parties, making it a favorite among financial institutions and money transfer services.

Litecoin (LTC), another popular altcoin, was one of the first cryptocurrencies to come after Bitcoin. It offers faster transaction confirmation times and a different hashing algorithm. It's often considered the silver to Bitcoin's gold.

Cardano (ADA) is another noteworthy altcoin that aims to create a better version of Bitcoin with features like peer-to-peer transactions and enabling developers to build applications on its network.

Other emerging altcoins like Solana (SOL), Dogecoin (DOGE), and Shiba Inu Coin (SHIB) are also gaining traction due to their unique offerings and the increasing interest in the altcoin market.

While Bitcoin remains the most well-known cryptocurrency, these altcoins offer a range of different features and use cases, reflecting the diverse applications of blockchain technology. Understanding these altcoins and their unique propositions can provide a broader view of the crypto market and its potential.

Features of Altcoins

Altcoins, or alternative cryptocurrencies, are known for their diverse features and functionalities. These unique characteristics differentiate them from Bitcoin, the first cryptocurrency, and offer investors a wide variety of options in the crypto market.

Unique Characteristics of Altcoins

Each altcoin comes with its own set of features that make it distinct from Bitcoin and other altcoins. These features often revolve around enhancing certain aspects of Bitcoin, such as transaction speed, mining algorithms, or proof-of-work schemes, or they may introduce completely new functionalities.

For instance, Ethereum, the second-largest virtual currency by market capitalization, introduced smart contracts to the crypto ecosystem. A smart contract is a self-executing contract with the terms of the agreement directly written into code, providing a secure, efficient, and transparent way of executing transactions.

Cardano, another popular altcoin, aims to create a better version of Bitcoin with features like fast peer-to-peer transactions and allowing developers to build applications on its network.

Some altcoins also adopt different consensus algorithms, such as the proof-of-stake (PoS) algorithm, which offers a more energy-efficient alternative to Bitcoin's proof-of-work (PoW) algorithm.

However, it's important to note that these unique features also bring unique risks. Altcoins can be riskier investments compared to Bitcoin due to their lower market capitalization and liquidity, making them more susceptible to price volatility.

Use Cases of Altcoins

The unique features of altcoins also enable a wide range of use cases, extending beyond the realm of digital currencies. Many altcoins are designed to serve specific purposes in various sectors, such as finance, supply chain management, healthcare, and more.

Ethereum, for instance, with its smart contract capabilities, has become a crucial part of the Decentralized Finance (DeFi) movement. It provides the underlying infrastructure for numerous DeFi applications, offering services like lending, borrowing, and yield farming. 

The Total Value Locked (TVL) in DeFi protocols is just under $90 billion as of writing in March 2024 which shows the sheer scale of this side of altcoins. 

Similarly, altcoins like Ripple (XRP) aim to revolutionize remittance by providing fast, low-cost international money transfers. Others, like VeChain (VET), are designed to enhance supply chain management by providing transparent, tamper-proof, and secure tracking of products from production to delivery.

In summary, altcoins offer an array of unique features and use cases, offering more than just an alternative to Bitcoin. They play a key role in expanding the possibilities of blockchain technology and opening up new avenues for innovation in various sectors. As such, they are an integral part of the ever-evolving cryptocurrency landscape.

Leading DeFi-compatible altcoins like Ethereum and Tron have seen TVL rise well above $80 billion in 2024. Source: DeFiLama

Investing in Altcoins

Like any investment, investing in altcoins comes with its own set of risks and rewards. Understanding these factors is crucial for anyone looking to enter the cryptocurrency market.

Risks and Rewards of Altcoin Investment

As alternative cryptocurrencies, altcoins can be riskier investments compared to Bitcoin due to their lower market capitalization and liquidity. This makes them susceptible to price volatility and can lead to significant financial losses if not managed properly.

On the other hand, the high-risk nature of altcoins also presents significant potential for rewards. The price of altcoins can increase rapidly in a short period, providing substantial returns on investment. This potential for high returns, coupled with the increasing interest in the cryptocurrency market, has attracted many investors to the altcoin space.

However, it's important to note that altcoins' prices can be influenced by various factors such as market speculation, regulatory developments, and technological advancements in the blockchain space. As such, investing in altcoins requires thorough research and a comprehensive understanding of the market dynamics.

Altcoins in the Crypto Market

As alternative cryptocurrencies, or altcoins, continue to evolve and innovate, they have grown to occupy a significant segment of the crypto market. This section will focus on the market capitalization of altcoins and their role in the rapidly expanding world of decentralized finance.

Market Capitalization of Altcoins

Market capitalization, often referred to as market cap, is a measure of the total value of a particular cryptocurrency in the market. It's calculated by multiplying the current price of the cryptocurrency by the total number of coins in circulation. 

The market capitalization of altcoins has seen substantial growth in recent years. In 2021, the collective market cap of altcoins surpassed $1 trillion, indicating their significant role in the cryptocurrency market, and in 2024, the market has briefly touched a new all-time high. 

The surge in market cap is largely due to the increased popularity of several altcoins. Cryptocurrencies such as Cardano, Solana, and Avalanche have attracted considerable interest from investors due to their unique features and potential use cases, which differ significantly from Bitcoin. If you plan to become one of these investors, make sure you find a SOL wallet (or a wallet for any other coin) that suits your needs.

However, it's important to note that these altcoins tend to be more volatile than Bitcoin, making them a riskier investment with potentially higher returns.

Solana’s market capitalization has surged to over $80 billion in 2024. Source: CoinGecko

Role of Altcoins in Decentralized Finance

Decentralized finance, or DeFi, is an innovative financial system built on blockchain technology that operates without the need for intermediaries like banks or payment processors. Altcoins play a pivotal role in DeFi, as many of them offer features and functionalities beyond simply being a digital currency.

For instance, some altcoins are designed to support smart contracts — self-executing contracts with the terms of the agreement directly written into lines of code. These smart contracts enable the creation of decentralized applications (dApps), which are integral to many DeFi platforms.

Other altcoins introduce new consensus algorithms like proof-of-stake, which offers enhanced efficiency and security compared to Bitcoin's proof-of-work algorithm. Yet other altcoins focus on improving scalability, privacy, or interoperability among different blockchains.

In conclusion, altcoins contribute to the diversity and innovation in the crypto market. Their rising market cap reflects their growing acceptance among investors. Meanwhile, their pivotal role in DeFi showcases the potential of blockchain technology beyond mere digital currencies. As the crypto market continues to evolve, altcoins will undoubtedly continue to shape its future trajectory in significant ways.

Altcoins: A Technical Perspective

To understand the world of alternative cryptocurrencies or altcoins, it's essential to delve into the technical aspects that define their existence and functionality. This includes their relationship with blockchain technology and the concept of forking in the creation of new altcoins.

Altcoins and Blockchain Technology

Altcoins are largely based on blockchain technology, much like Bitcoin. However, they often incorporate unique features or use cases that distinguish them from Bitcoin. For instance, Ethereum introduced the concept of smart contracts, enabling more complex transactions and applications on its platform.

Despite these innovations, altcoins fundamentally differ from Bitcoin in one significant aspect: decentralization. Bitcoin was the first to introduce a fully decentralized digital currency, a feature that many altcoins lack. This centralization makes them more akin to traditional fiat money, and it impacts their value and functionality. For example, the stock-to-flow model, which works well for Bitcoin, doesn't apply to many altcoins due to their centralized nature.

Despite claims of technical innovation, many altcoins fail to attract real users or solve actual problems. Additionally, the ease with which altcoins can be forked and technically cloned suggests that technical features alone do not drive their value. Instead, factors such as effective marketing and branding often play a more significant role in most but not all altcoin success stories. 

Forking and Creation of New Altcoins

Altcoins can emerge from two primary processes: forking an existing blockchain or creating a new cryptocurrency from scratch. Forking involves creating a new blockchain that shares a common history with the original blockchain up to a certain point, after which it diverges. This results in a new cryptocurrency with unique features while maintaining some characteristics of the original blockchain.

An example of this is Litecoin, which was essentially a clone of Bitcoin with a few minor tweaks. Despite its technical similarities to Bitcoin, Litecoin was able to establish itself as a successful altcoin, largely thanks to better branding and a catchy slogan ("Silver to Bitcoin's gold").

In contrast, creating a new cryptocurrency from scratch allows more freedom in implementing unique features and functionalities. However, this also requires more time and resources, and the resulting altcoin may face more challenges in gaining acceptance and users.

The years following the Bitcoin bubble in 2013 saw the emergence of a new wave of altcoins, such as Mastercoin, Counterparty, and Ethereum. These altcoins aimed to serve as platforms for launching new tokens, and they played a significant role in the growing trend of ICOs (Initial Coin Offerings) and token presales.

Understanding the technical aspects of altcoins, including their relationship with blockchain technology and the process of forking, is crucial for anyone interested in the world of alternative cryptocurrencies. While technical innovation can be a selling point for altcoins, other factors, such as effective marketing, contribute significantly to their success.

Regulatory Considerations for Altcoins

Initial coin offerings (ICOs) have been a popular way for new altcoins to raise money. However, many ICOs have been fraudulent, leading to regulatory scrutiny in some jurisdictions. Altcoins can be riskier investments compared to Bitcoin due to their lower market capitalization and liquidity, making them susceptible to price volatility.

Various factors, such as market speculation, regulatory developments, and technological advancements in the blockchain space, can influence altcoins' prices. As such, the future of altcoins is not without its challenges. Regulatory considerations continue to play a significant role in the development and adoption of altcoins.

Final Thoughts on Altcoins

Altcoins offer high-risk, high-reward opportunities, and despite the memes, some projects have real-world problem-solving potential. While some altcoins may fade away, others – like Ethereum, Solana, and even the meme-inspired Dogecoin – have carved out significant niches and gained loyal followings. 

The key to navigating this space is research. Look beyond the hype into a project's fundamentals, team, roadmap, tokenomics, and community. Cryptocurrency markets are inherently volatile, and altcoins more so than Bitcoin, but plenty of gems can be found among the thousands of low-rent meme projects. 

Disclaimer: The information provided in this blog is for informational purposes only and does not constitute financial advice. Cryptocurrency markets are highly volatile; always conduct thorough research and invest at your own risk.

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