While Bitcoin is the most famous cryptocurrency, many alternative coins or ‘altcoins’ have cropped up in recent years.
The first altcoins launched more than 10 years ago, and, by now, there are thousands of them. Early altcoins aimed at improving aspects of Bitcoin such as transaction speeds or energy efficiency. More recent altcoins serve a variety of purposes depending on the goals of the developers.
There is quite a bit you should know before you start investing. If you want to invest in altcoins the right way, here is a quick guide that can help.
How to Get Started with Altcoins - Quick Guide
- Research your altcoins – You should consider investing in altcoins if you're going to make crypto part of your portfolio and you have time to spend researching them.
- Define your strategy – Trading lets you speculate on the price movement, dealing lets you take direct ownership of the altcoins;
- Take your position – create an account with us to start trading some of the most popular altcoins.
What is an Altcoin?
Altcoins can be defined as any cryptocurrency other than Bitcoin (BTC). This name of altcoin comes from the fact that Bitcoin is the original cryptocurrency, and all other coins are considered alternative coins. Some people believe altcoins are all cryptocurrencies, other than Bitcoin (BTC) or Ethereum (ETH), because many cryptocurrencies are created to be like these two.
Many of these altcoins were created from modified Bitcoin through a process called a hard fork. BTC is the "gold standard" for cryptocurrency and has brought a revolution to finance. Because of its first-mover advantage, it has been the most stable balance among cryptocurrencies based on blockchain technology. To address the technical and practical problems that Bitcoin faces, alternative cryptocurrencies were created.
However, each altcoin is unique, even though they share some commonalities. Altcoins may use different consensus mechanisms to validate transactions or create new blocks on the blockchain. They also attempt to differentiate themselves from Bitcoin or Ethereum by offering new capabilities or purposes, such as transaction speed and energy efficiency. Altcoins are often created and released by developers with different visions for their tokens or cryptocurrency. In most cases, developers' goal for their altcoins is to serve various purposes.
Types of altcoins
Altcoins can be classified based on their function and utility. The type of altcoin depends on how it works and what its purpose is. Here are the main types of cryptocurrencies you'll find when researching altcoins.
- Payment token
- Security token
- Utility token
- Meme coins
- Mining-based coins
- Governance tokens
Stablecoins are cryptocurrencies that are designed to track the price of a regulated national currency, such as the US dollar. In fact, most stablecoins are pegged to the US dollar. Stablecoins use different mechanisms to maintain their value, and some may have a bank account that backs up every stablecoin issued on the blockchain. While price fluctuations aren’t desired, they do happen, and the coin's issuer will try to correct any price fluctuations.
Since stablecoins aren’t expected to increase in value, they are not recommended as cryptocurrency investments. Stablecoins are used to save or send money. You can also earn interest by lending stablecoins out or stacking them on certain financial protocols.
Payment tokens, as the name suggests, are meant to be used as currency and exchange value between parties. Payment tokens can be used as an alternative method of payment. Payment tokens are not legal tender, and they are not backed or backed by governments. Their primary purpose is to serve as a decentralized platform for buying and selling services and goods without the need for traditional intermediaries.
Security tokens represent tokenized assets that are traded on stock exchanges. Tokenization refers to the conversion of an asset's value to a token that is made available to investors. Tokenization can be done for any asset, including stocks and real estate. To make this work, the asset must first be secured and then held. The tokens would be worthless if they weren’t tied to an asset. Because security tokens can be used to purchase securities, they are subject to regulation by the SEC (Securities and Exchange Commission) in the US and other financial authorities in different jurisdictions.
Exodus, a Bitcoin wallet company, has successfully completed a Securities and Exchange Commission-qualified Reg A+ token offering in 2021. This allowed for 75 million shares of common stock, which could be converted into tokens on Algorand's blockchain. This historic event was significant because it was the first time that digital asset security offered equity to a U.S.-based issuer.
The top security tokens today are Exodus, INX tokens, and Overstock tokens.
Utility tokens can be used to offer services within a blockchain network. They can be used to pay network fees or redeem rewards, as well as to buy services.
Ether (ETH) is the most famous utility token, and it can be used on the Ethereum blockchain to pay transaction fees. Another example of a utility token is Filecoin. It is used to purchase storage space on a network and secure information.
Another proof-of-stake (PoS) blockchain may also require users to stake their crypto to secure the chain. The staking process is also required to verify transactions. Stakers are incentivized to participate in the staking process by receiving rewards in return.
You can purchase utility tokens on crypto exchanges and keep them as a long-term investment. However, they are intended to be used in the blockchain network to maintain its functioning.
Meme coins are considered jokes, and investors didn’t use to see them as a wise investment. The first meme coin created was Dogecoin (DOGE), but over time the coin started to be used more, and investors started speculating. As was the case with DOGE, meme coins are often popularized quickly by investors or prominent online influencers looking to make short-term profits.
Many refer to this sharp rise in altcoins of this type during April and May 2021, as the "meme coin season," with hundreds of these cryptocurrencies reporting huge percentage gains based solely on speculation.
The top meme coins today are Dogecoin (DOGE), Shiba Inu (SHIB), and Dogelon Mars (ELON).
These cryptocurrencies use a process called mining to verify transactions and add coins to the supply. To solve mathematical equations, miners use their hardware. The first miner who solves the equation wins the right to verify transactions and earn a reward. These crypto rewards are given to miners who verify blocks to incentivize them to participate in securing the network. Without the miners, the blockchain wouldn’t exist.
Bitcoin is the top mining-based cryptocurrency. Some say that this type of blockchain transforms energy into crypto, and it is a way to store energy, which otherwise wouldn’t be able to be stored. However, crypto mining has a downside – it consumes a lot of energy. That’s why Bitcoin has also received a lot of criticism from environmental activists, including Elon Musk. To make the mining process profitable, the miner needs to find the balance between the electricity bill and the received crypto rewards. When the crypto price drops, mining becomes unprofitable for some miners, and they shut down their mining equipment.
The top mining-based coins are Bitcoin (BTC), Litecoin (LTC), and Monero (XMR).
Governance tokens and cryptocurrencies grant holders the right to vote on the future direction of the project. These tokens can be used to vote on and create proposals for the cryptocurrency’s project. The cryptocurrency is a decentralized project because all holders can have a say and no central authority makes decisions.
Usually, governance tokens are also utility tokens because they can be used to create blockchain applications on a private blockchain. However, they have been accepted as a distinct type due to their purpose.
Most popular altcoins
The first altcoin was launched in 2011, and it is called Litecoin (LTC). Today we have thousands, and altcoins make up a large part of the crypto market. Here are just a few of the most popular altcoins today, according to their market cap:
- Ethereum (ETH) was released in July 2015 and was the first cryptocurrency to provide a programmable Blockchain for developers. It quickly rose to be the second-largest cryptocurrency after Bitcoin (BTC).
- Tether (USDT) is a stablecoin that is most used for money transfers. USDT was created by Tether Limited Inc., and it was launched in 2014. Tether Limited is owned and managed by iFinex Inc. in Hong Kong, which also owns the Bitfinex cryptocurrency exchange.
- USD Coin (USDC) was released in September 2018. It is a stablecoin, and it is pegged to the U.S. Dollar. It is created by Circle company, which includes members from the famous cryptocurrency exchange Coinbase Global (COIN).
- BNB Coin (BNB) is the coin of the BNB Chain created by the Binance crypto exchange. BNB was initially launched on the Ethereum blockchain but later migrated to the Binance Smart Chain, now called BNB Chain. Holders can benefit from discounted fees on the Binance exchange.
- XRP (XRP) is a cryptocurrency issued by Ripple Labs company. XRP is used for international money transfers and benefits from fast blockchain transactions which are confirmed in seconds with little cost.
Pros and Cons
As with any type of investment, altcoins present both positive and negative sides. Some of the reasons why some may choose altcoins over Bitcoin is that they don’t all follow the same price trend. Some altcoins tend to improve when other cryptos start to drop. Since there are so many altcoins to choose from, altcoins stand a better chance of survival in the long run.
Pros of altcoins
Altcoins are created to fix the issues that other cryptos have. Some may be viewed as the improved versions of the cryptocurrency they derive from. Altcoins that have more utility are more likely to survive. Ether (ETH) is the best example. Investors can choose between thousands of altcoins, which perform different functions within the crypto economy.
Cons of Altcoins
Altcoins are less popular than Bitcoin in terms of investment. Bitcoin represents around 40% of the global cryptocurrency markets. Altcoin's market has a low number of investors and activity. This results in a lack of liquidity. It can be challenging to tell the difference between altcoins and to understand their use cases. This makes investment decisions more confusing. Many altcoins had already disappeared, which caused many investors to lose money.
How to invest in Altcoins
There are two ways to start investing in altcoins: speculating on their prices using CFDs or buying the assets in the hope they increase in value.
Trading altcoins using CFDs
A CFD is a contract in which you agree to exchange the difference in the price of a cryptocurrency from when you first open your position to when you close it. You are speculating on the market price rather than taking ownership of the altcoin. If you open a long position and the cryptocurrency or stock or ETF does increase in value, you’ll make a profit, but if it falls in price, you’ll make a loss – the opposite is true for a short position.
Before starting, you would need to open a CFD trading account.
This means that you take ownership of the altcoin outright, with the intention of holding it with a brokerage and profiting if it increases in value.
Before starting, you would need to open an account with a cryptocurrency exchange.
Each investor should research the available ways to invest in cryptocurrencies before deciding what’s the best option for their situation. Remember that altcoins are volatile assets. The general rule regarding crypto is that you shouldn’t invest more than you are willing to lose.
A popular way to get some exposure to altcoins and the technologies behind them is crypto-linked assets. These investment vehicles do not require investors to get involved in the blockchain space. Another advantage when investing in ETFs and crypto stocks is that you can also use U.S. Dollars instead of cryptocurrency.
Investing in Altcoins with CAPEX.com
- Choose which type of account you want to use. Your first concern should be your risk appetite and time horizon. If you want to buy and hold altcoin-linked stocks and ETFs, open an investing account. If you want to speculate on price movements (including falling prices) with zero commission and leverage, open a CFD trading account.
- Create an account. Regardless of your chosen account, you must register and complete the KYC process to verify your identity.
- Fund your account with fiat money. Before buying and trading any altcoins, you need to fund your exchange account with U.S. dollars, Euros, or other currencies.
- Select your altcoins. It’s time to decide on your first altcoin investment. We strongly recommend that you thoroughly research the crypto project offering altcoins. Of course, you may choose to invest in one or more altcoins.
- Place a buy order for your chosen altcoin. Follow the steps required by the trading platform to submit and complete a buy order for one or more altcoins.
When trading altcoins, the CFDs (contracts for difference) are stored in your account and are far more liquid. However, you should know that CFD trading is fast-moving and requires close monitoring. As a result, traders should be aware of the significant risks when trading CFDs. There are liquidity risks and margins you need to maintain; if you cannot cover reductions in values, your provider may close your position, and you'll have to meet the loss no matter what subsequently happens to the underlying asset.
Should you invest in altcoins?
If Bitcoin investing is something you already know how to do, then you might want to learn more about the crypto world. If you want to invest in altcoins and have the time to do so, you should start by researching the project offering the altcoin. These cryptos can be used in more ways than Bitcoin. Since altcoins aren’t as well-known, they may see higher price rises in the future.
Of course, investors need to be aware of all aspects of this investment. Altcoins have their own set of downsides. First, it can be difficult to choose the right altcoins because there are so many. Another issue is that altcoins pose a higher risk, and many smaller altcoins can be scam investments.
If you are determined to invest in altcoins, then fear not. Altcoins can be a good option for experienced cryptocurrency investors who are willing to do their research. However, crypto stocks and crypto ETFs can be a more risk-friendly and time-intensive investment. Some may offer dividends, a form of passive income that crypto coins do not offer. It is not advisable to take on too much risk. Altcoins should be a small portion of your overall investment portfolio.