For years Bitcoin was the only game in town. But developers sought other forms of utility for blockchain technology, and in 2011 altcoins were born.
Altcoins encompass all other kinds of cryptocurrencies. They are different from Bitcoin in some ways, but they also have many similarities. For example, some use a different method to produce blocks and others implement new capabilities like smart contracts.
Now, there are over 10,000 different types of cryptocurrencies (altcoins). These types of coins made up nearly 60% of the total cryptocurrency market as of November 2021. All cryptocurrencies were derived from Bitcoin and tend to move in the same direction as it does. But analysts say that as these cryptocurrencies mature, and new markets open up for them, their prices will be able to move independently from Bitcoin's trading signals. We’re not there yet but I see a day in the not-too-distant future where this becomes a reality.
There are many types of altcoins, including:
Ethereum (ETH) and Binance Coin (BNB) were the largest altcoins by market capitalization as of November 2021.
The first altcoin, called Namecoin, was created in 2011 — two years after Bitcoin. And its purpose was simply to replace the domain name system in a decentralized way.
Later that same year Litecoin was launched. It utilized memory-intensive mining as a means of validating the blockchain whereas Bitcoin used a computational method. The puzzles that make up its blockchain are memory-intensive, meaning they require more powerful hardware like GPUs. Litecoin has a much larger supply of coins and a higher transaction speed than Bitcoin as well.
Peercoin, launched towards the end of 2012, was the first cryptocurrency to utilize proof-of-stake mining. Proof-of-stake does not require any computational work but instead makes transactions utilizing the coins owned by each individual miner. This would later be expanded upon with the introduction of Ethereum.
Dogecoin was born in 2013 and is technically very similar to Bitcoin and Litecoin being proof-of-work. A big difference is Dogecoin’s explicit intention to be ‘fun’ and not taken too seriously. It was released at a time when people were making tons of money speculating on new cryptocurrencies.
Dogecoin combines ease of use and low transaction fees with a lighthearted and fun attitude. It is a favorite of Elon Musk.
Ethereum, often dubbed the "king" of altcoins, maintains its position as the second-largest cryptocurrency by market capitalization, which now surpasses $400 billion. Launched on July 30, 2015, by Vitalik Buterin, Ethereum revolutionized the blockchain space by introducing the concept of 'smart contracts,' enabling the development of decentralized applications (dApps) across its network. Unlike traditional financial systems prone to resisting innovation, Ethereum's platform fosters a decentralized finance (DeFi) ecosystem. This ecosystem allows users to engage in financial activities such as lending and borrowing without intermediaries like banks, potentially offering superior interest rates compared to conventional markets.
Ethereum originally operated on a Proof of Work (PoW) consensus mechanism, similar to that of Bitcoin, wherein miners would solve complex mathematical puzzles using computational power to validate transactions and create new blocks. However, this process was energy-intensive, leading to concerns about sustainability and environmental impact.
Recognizing these challenges, Ethereum transitioned to a Proof of Stake (PoS) model with its Ethereum 2.0 upgrade. In PoS, validators are chosen to create new blocks based on the number of coins they hold and are willing to "stake" as collateral. This shift not only drastically reduces the energy consumption by eliminating the need for computational competition but also aims to improve security and scalability by incentivizing validators through economic means rather than computational power battles.
The Ethereum 2.0 update, often referred to as "Serenity," is a multi-phase upgrade aimed at addressing the network's scalability, security, and sustainability. Initial phases involve the introduction of the Beacon Chain, which implements the Proof of Stake (PoS) consensus mechanism, laying the groundwork for future upgrades.
Subsequent stages will see the rollout of shard chains, designed to distribute the computational and storage workload across 64 new chains, thereby alleviating the current strain on the network. This will significantly enhance the network's capacity to process transactions and host dApps. Additionally, the transition to PoS from PoW is a vital step towards reducing Ethereum's carbon footprint, making it a more environmentally friendly blockchain. This evolution marks Ethereum's commitment to maintaining its leadership in the blockchain space, responding to the critical demands of scalability, sustainability, and security.
Ethereum and an ever-growing list of new blockchains have unique tokens. They are also called non-fungible tokens (NFTs).
These are special because each one is completely unique. They have been used for collectibles, digital art, sports memorabilia, virtual real estate, and in-game items.
The first NFT project was Etheria, which was deployed to the network in October 2015. This was demonstrated live at DEVCON1 in November of that year.
Ethereum's non-fungible tokens (NFTs) are used for many things but art sets are extremely popular. Virtual real estate is another use for these unique assets that can be used in video games to purchase land or houses while also being an investment opportunity if held long enough. These assets can easily increase by 10x or more according to a recent Forbes Magazine list which counts down how many millions each artist has made so far.
In 2021, Christie's sold a digital image with an NFT by Beeple for $69.3 million, making him the third-most valuable artist of all time according to Forbes Magazine.
Decentralized finance (DeFi) is an exciting new use case for Ethereum. It offers traditional financial instruments in a decentralized architecture, outside of companies' and governments' control — such as money market funds that let users earn interest.
Decentralized apps are typically accessed through Web3-enabled browsers like MetaMask; this allows you to interact with the blockchain directly from your browser without any additional plugins or applications. Many DApps can connect together forming complex services that were never before possible — all while being free from reliance on third parties such as banks, who don’t always have our best interests at heart.
A plethora of new DeFi platforms have been popping up recently, with notable examples including MakerDAO and Compound. Uniswap is a decentralized exchange for tokens on Ethereum that has grown from $20 million in liquidity to over $1 billion thanks largely to investment into various protocols such as wrapping certain assets like Bitcoin or gold with synthetic versions so they can be traded seamlessly anywhere.
Some people get paid for helping to keep the blockchain running. They help validate transactions and earn money as a reward. This process is called "staking." People who do this need to have a minimum-required balance of a specific cryptocurrency.
When the minimum balance is met, a node deposits that amount of cryptocurrency into an online network as security.
The size of their stake increases with every successful block they forge. It is used to win rewards later on in proof-of-stake chains.
Staking is a great way to earn yields in a low interest rate environment. Depending on the coin these rewards can be as great as 30%+!
Examples of commonly staked cryptocurrencies:
Altcoins can be divided into various categories based on their functionality and consensus mechanisms. Below are some of the key differences.
Cryptocurrencies have been marked by volatility since their release. Stablecoins aim to reduce this overall risk by pegging their value with a reserve that is meant as insurance for those who hold it, such as fiat currencies or precious metals. Stablecoin prices are forbidden from fluctuating more than a narrow range so you can feel safe investing your money in these coins without worrying about the wild fluctuations in the cryptocurrency market.
Top stablecoins include Tether's USDT, USD Coin (USDC) and MakerDAO's DAI.
Mining-based altcoins are mined into existence. Most mining-based cryptocurrencies use Proof-of-Work, the method by which systems generate new coins through solving difficult problems in creating blocks for their blockchain networks. Examples include Litecoin and Monero among many others.
Security tokens are digital versions of traditional stocks that hold the promise of ownership or dividends. This prospect is enough to attract investors looking at an appreciation in price, but there's also other benefits like being able to trade them online through virtual exchanges without having any middlemen taking their cut. This makes these investments especially appealing during times where banks might be less willing to lend because they're not earning as much interest on loans due to changes in regulatory policy.
The utility of a token can affect its value. For example, Filecoin is used to rent unused hard drive space on the network and has helped contribute towards decentralized data sharing through blockchain technology. This makes it an important asset for any investor looking to invest in the cryptocurrency markets. However, they don’t pay out dividends like some security tokens do.
Memes are a fun way to invest in cryptocurrency. They're inspired by internet culture and the popularity of memes has been on an upswing recently, with many new coins emerging every day.
As their name suggests, these cryptocurrencies get their inspiration from jokes or silly takes of other well-known digital currencies. While there’s a lot of volatility, there's also a lot of serious investing going on in this market. Some of the largest gains in the cryptocurrency space in 2021 have been with meme coins.
Altcoins are good alternatives for cryptocurrency market investors interested in diversifying their portfolios. Though some, like Ethereum’s Ether, are recognizable by name; many of the more than 10,000 altcoins available still haven't made an impact yet. Altcoins have the potential to reshape modern finance and also deliver massive gains to early holders.
There's a lot of diversity in the cryptocurrency world. Bitcoin may be king, but you can still get your hands on alternatives like Ethereum, Litecoin and many others. Each has their own unique qualities that make them stand out as well as create utility.
The growth potential in this space is massive.
