What is Altcoin?
Altcoins (ALT), short for alternative coins, refer to all cryptocurrencies apart from Bitcoin. They earned this name because they serve as alternatives to both Bitcoin and conventional fiat currencies.
The emergence of the first altcoins dates back to 2011, and since then, their number has grown exponentially, reaching into the thousands. Initially, these alternative coins were developed with the aim of enhancing various aspects of Bitcoin, such as transaction speeds or energy efficiency. However, more recent altcoins have been created to fulfill a diverse range of purposes, depending on the objectives set by their developers.
Given the significant presence of altcoins in the market, it’s imperative for every cryptocurrency investor to grasp their functioning. By delving into the realm of ALTs, investors can gain insights into their utility, advantages, disadvantages, and much more.
How does Altcoin work?
Altcoins (ALT) leverage the foundational blockchain technology introduced by Bitcoin, but they do not uniformly adopt Bitcoin’s Proof-of-Work (PoW) consensus model. In the PoW framework, nodes within the blockchain network compete to solve complex algorithmic puzzles periodically to validate new cryptocurrency transactions and earn rewards. While some altcoins, such as Litecoin and Dogecoin (DOGE), utilize PoW through the process of “crypto mining,” numerous other altcoins employ alternative consensus mechanisms. One prominent example is the Proof-of-Stake (PoS) algorithm, where nodes stake the cryptocurrency native to the blockchain, locking it in virtual vaults to verify transactions and earn rewards.
Prominent PoS altcoins include Ethereum, Polkadot (DOT), and Solana (SOL). As long as an ALT utilizes blockchain technology to facilitate decentralized peer-to-peer (P2P) transactions, it qualifies as a cryptocurrency.
Altcoins (ALT) typically fall into one of two categories: coins or tokens. Coins represent cryptocurrencies integrated into their blockchain’s protocol, while tokens are additional projects built on top of a coin’s blockchain. For instance, Litecoin qualifies as a coin because transactions occur exclusively within Litecoin’s proprietary network. Conversely, tokens like Chainlink’s LINK exist on platforms such as Ethereum rather than operating within a distinct “Chainlink blockchain.” Therefore, despite the “coin” designation in the term “altcoin,” tokens also meet the criteria of Altcoins as they serve as alternatives to Bitcoin.
Difference between Altcoins and Bitcoins:
The primary distinction between Bitcoin and altcoins lies in the mining process, often referred to as proof of stake. In this case, an investor’s mining power is determined by the total quantity of digital currency they possess.
While altcoins may serve unique purposes and offer specific services, Bitcoin is predominantly considered a store of value.
Due to Bitcoin‘s high price, altcoins are often positioned as a more accessible option. As their costs remain within users’ purchasing power, altcoins are perceived as a cost-effective alternative.
Cryptocurrencies like altcoins are ushering in a paradigm shift that offers a more secure and safe method for conducting transactions, contrasting with Bitcoin’s susceptibility to fraud and scams.
Although altcoins are relatively new, their volatility can lead to significant price fluctuations, whereas Bitcoin experiences less volatility. However, it’s important to note that the cryptocurrency industry as a whole is characterized by volatility.
Similarities between Altcoins and Bitcoins:
Both Bitcoin and altcoins exhibit volatility, as cryptocurrencies are primarily regarded as a speculative asset class. Despite this volatility, they share several similarities. Both Bitcoin and altcoins operate on peer-to-peer systems and can be utilized as mediums of exchange for online transactions, enabling the purchase of goods and services.
Investors interested in purchasing Bitcoin or altcoins typically require a digital wallet to buy, trade, or store their assets securely. Furthermore, because both types of cryptocurrencies are decentralized, transactions occur directly between users without the need for a central authority or third party to oversee transactions or manage the respective Bitcoin or altcoin networks.
