7. Brief introduction to Altcoins

If there is something that we can affirm clearly since the arrival of Bitcoin is that it has opened a myriad of possibilities at the economic level that most of us couldn’t possible fathom until now.

Altcoin is the combination of words “alternatives” and “coins”, meaning that they are alternatives to the main currency (Bitcoin). They are created with different purposes and may have different ways of working despite being found in the same ecosystem.

All cryptocurrencies that aren’t Bitcoin are defined with this name, since a large part derives from this original both in its processes and in the processes behind it.

The development of these alternative currencies has been favored by the success of Bitcoin and its open source architecture. Most of these are built from ramifications or “forks” of the source code of this.

Because the BTC code is completely public and open, any person has access to it to understand its operation. This allowed the creation of currencies that may or may not use said code as a “base”, making changes in it to implement improvements or new functions that are related to the project to be developed.

With the sudden apogee of recent months, the number of people looking for smaller investments in virtual currencies has multiplied exponentially, giving them an incredible amount of options that until now they did not know existed.

These Altcoins have also become very important, because they have characteristics that even Bitcoin does not have, for example, the development of a special platform to perform completely anonymous transactions, another important difference could be the speed of the transactions and the algorithm that is used to solve the transaction blocks.

They use their own chain of blocks (blockchain), their own P2P network (Peer-to-Peer). Some altcoins also use a different mining algorithm of which the best known are the concepts Proof-of-Stake (POS) and Delegated Proof-of-Stake (DPoS).

A relevant fact is that only Bitcoin represents 35% of the current market (400 billion dollars), so the other 65% is covered by alternative currencies, that is, the altcoins.

Advantages and disadvantages

The main advantages that Altcoins bring to the cryptocurrency market are the following:

• Decentralization: These currencies do not depend on any monetary authority that controls their issuance and circulation. Therefore, they eliminate central banks from the process and decentralize any imaginable aspect in real life.

• Competition: As there is so much competition, all cryptocurrencies struggle to be the best, creating constant innovation in the cryptocurrency market.

• Innovation: Depending on your case, the currencies that really contribute are because they try to help decentralize any aspect that we can imagine from real life.

• Utility: Each Altcoin is designed for a different purpose or theme, thus trying to add value.

Main disadvantages:

• Liquidity: The liquidity of the majority of altcoins at the moment is negligible compared to Bitcoin.

• Volatility: Having such a small market, speculating to inflate its value is very easy.

• Risk: Some project leaders have offered a project and then abandoning it once they have been financed without any repercussions.

Importance of altcoins

The altcoins contribute constantly to decentralize the cryptocurrency community. Thanks to them, new functionalities are created every day that generate competition for Bitcoin and make its developers stay active and in continuous innovation.

You could say that altcoins work like laboratories and allow the cryptocurrency community to grow every day.

What is really important are those implementations of Altcoins that experiment with new functionalities or technical characteristics that could be incorporated in Bitcoin in the future or perhaps even give an advantage to new creations.

How many altcoins are there?

Actually, there are about 1600 altcoins listed.

ICOs

The altcoins are also used as a source of alternative financing for business projects related to technology and the development of new digital concepts. When a new project is born, what is known as “ICO” or “initial coin offer” is born. The developers of the project make available to the public a number of coins that they can buy and thus finance the projects.

A utility could be defined as “to allow future access to a company’s product or service. The defining characteristic of utility tokens is that they are not designed as investments; if properly structured, this feature exempts utility tokens them from federal laws governing securities”. An altcoin would be considered a security if it involves “an investment of money. And a common enterprise. With the expectation of profit, primarily from the efforts of others.”

The objective of an “ICO” is the same as that of an Initial Public Offering (IPO) in the stock market, only that in this case the securities/utilities that are delivered to the investor are altcoins.

Advantages? Risks?

In terms of investment or not in altcoins, we must always keep in mind the high volatility of the securities or utilities with which we operate. The price of the altcoins is usually more volatile than Bitcoin and investing in them is a challenge that only risk lovers can take on. Its price can vary in a high daily percentage because the markets are smaller than Bitcoin.

If it is already complicated to try to configure what can be the future of Bitcoin in the short, medium or long term, much more with currencies that have less support at a general level and of which less data is known.

In spite of how attractive it may seem at first, the promise repeated so many times these days consisting of investing now and earning thousands of euros or dollars in a short time, we must not lose sight of the enormously changing nature implicit in it.

It must be also mentioned that in many occasions you can get altcoins for free as a reason to promote the launch of a new cryptocurrency and related application. This is a good opportunity to get altcoins if you do not have a lot of capital to invest.

I will just finish this article with a quote from Mark Zuckerberg, words I fully agree with, the man once said:

The biggest risk is not taking any risk… In a world that keeps changing really quickly, the only strategy that is guaranteed to fail is not taking risks.