Altcoins deep dive — how to find the right ones to invest
Altcoins stand for alternative-coins, in the meaning of any other cryptocurrencies than Bitcoin. They are derived from Bitcoin, so price tends to move in a similar direction as BTC does. This may change in the future once the cryptocurrency ecosystems mature.
However, they are not the same when it comes to the technical side of them. We differentiate between coins and tokens according to their utility. To make it extremely simple, imagine coins in the broadest sense mainly as a form to settle payments.
Mining-based coins
These altcoins are mined into their existence. They either generate new coins by creating new blocks or they are pre-mined, which means that they are distributed before being listed in any exchanges. I would say to be always cautious when it comes to pre-mined cryptocurrencies and investigate deeper in their tokenomics (we will discuss tokenomics more in detail in the future).
Stablecoins
Main reason for having stablecoins is to reduce market’s volatility. Stablecoins, as the name says, do not usually exceed a very low range of price movements. That is because their value is pegged to different assets — one of the most common example would be fiat currencies (as US dollar). You can also often encounter algorithmic stablecoins — their stability is controlled by an algorithm which also helps balance supply and demand of the asset. We will have a look at the importance of stablecoins in my next article.
But how we divide tokens themselves according to their purpose? There is a wide variety of contexts for how and for what we use them.
Security tokens
Security tokens (or equity tokens) could be compared with company shares traded in stock markets, except in the digital world. They often promise equity or a dividend payout. For this reason, they tend to be way more regulated by the government.
Utility tokens
These tokens are backed by different projects and are the most commonly known type of tokens. By getting the token, you are getting benefits for owning them, usually in the form of service within a network — from paying transaction fees to voting privileges about certain decisions within the ecosystem. Their price is depending on the scarcity of the tokens and also overall popularity of the project. That’s why you should always investigate before investing.
They can also be staked in order to get an annual percentage rate payout (in the future referred to as APR).
Payment tokens
Serve the same purpose as coins — to be used for payments. Golden rule here is to remember that technically all coins can be tokens, however, not all tokens can serve as coins.
Non-fungible tokens
At its very basic, non-fungible tokens are unique units of data stored on the blockchain. They have wide varieties of use — from art collectibles to using them as event tickets dropped directly to your digital wallet of choice. NFTs has become such an important booster to bring new users into the blockchain technology, that I will dedicate another article to discuss them in detail.
Now let’s address the question of whether to invest in altcoins. My answer would be yes. Altcoins exist to fix shortcomings of current existing digital market assets. They are trying to be a better and more functional version of Bitcoin, offering various different services and functions.
Since anyone with some computer skills and little bit of googling can create their own coin, it is extremely vital to do your own research before investing to avoid being dragged into scams and coins without any real value.
It’s really up to you, how much risk are you willing to handle. Extremely simplified — based on market capitalization, the biggest altcoins would be the safest to invest in. Lower the market cap, higher the risk, but higher risk also offers higher profits. Just make sure that what you invest into always has a roadmap and documents supporting their real use-case.
