In the world of cryptocurrency and digital assets, Bitcoin (BTC) is king. It was the first cryptocurrency, and has by far the largest market capitalization (or market cap) of any single asset. On any given day, BTC trading represents the large majority of all crypto market activity.
However, that world is so much broader than just Bitcoin alone. In fact, there is a wide array of alternatives to Bitcoin, and these competing digital assets are called “alternative coins,” or altcoins for short. Depending on your investment priorities and interests, these altcoins can often represent a better option for your crypto portfolio than BTC for bringing in massive profits. However, many altcoins can turn out to be glorified scams built around elaborate hype machines.
In this article, we will outline the differences between Bitcoin and altcoins, thereby allowing you to better navigate the crypto sphere and make more sound investment decisions.
Let’s start with a basic explanation of what altcoins are.
What are Altcoins?
As we already mentioned, an altcoin is any cryptocurrency that’s an alternative to Bitcoin. But it is important to stress that all altcoins are more or less an attempt to improve upon the original model proposed and embodied by Bitcoin – each altcoin therefore borrows from and utilizes the same foundational technology. In this way, altcoins are somewhat like branches of a tree growing in different directions, while Bitcoin is the trunk common to them all.
The ‘foundational technology’ behind all this is blockchain, of course, as both Bitcoin and altcoins utilize blockchain technology and blockchain networks to facilitate transactions and trading activity.
Beyond this essential commonality, however, altcoins can vary extremely in their basic functionality and degree of liquidity, as well as in the wider investment community they represent.
Altcoins can also fall under different categories, based on the nature of the asset. There are several such categories, and we won’t get into all of them now. But one important example is stablecoins, whose price is directly pegged to specific fiat currencies (most often the U.S. dollar) in order to counter volatility and provide an alternative to high-risk, high-reward trading.
Accordingly, you shouldn’t think about altcoins in monolithic terms, but rather see each new coin you come across as a unique crypto asset with certain characteristics, pros, and cons. And just like there is no such thing as a purely ‘good’ or ‘bad’ type of asset on the stock market, there is no such thing in the crypto market either.
Some Top Altcoins
As mentioned above, there are literally thousands of altcoins, and new coins appear and disappear every day. But there are some altcoins that are clearly more widely traded and accepted than others. These includes:
As Bitcoin began to gain popularity in the early-to-mid 2010s, the developers of the above alternative coins wanted to create new options based on what they felt was missing from BTC.
Litecoin, for instance, has a larger supply than Bitcoin, and is able to complete transactions much faster to boot. It is deliberately crafted to have more liquidity and flexibility compared to BTC, similar to the relationship between silver (Litecoin) and gold (BTC) on the global commodities market.
Ethereum, meanwhile, not only allows its users to send crypto directly to one another, but also offers the ability to be used as a tool for app development on a self-contained blockchain network; new token generation is also possible on this network.
Cardano also offers peer-to-peer transactions and application construction, but utilizes a much more research-intensive approach in contrast to Ethereum’s entrepreneurial style.
Other Similarities Between Altcoins and Bitcoin
We’ve already touched on some important similarities between altcoins and Bitcoin, primarily the common use of blockchain. But there are two others to keep in mind.
One, all cryptocurrencies embrace, albeit to varying degrees, the concept of decentralized finance (aka DeFi). DeFi is a conceptual and technological innovation on the way global finance should operate. We have already written an entire article just about DeFi, but the basic idea is that financial transactions between two or more individuals should not require a centralized authority or middleman. Instead of a centralized ‘gatekeeper’ to verify and manage all transactions within a given market, advocates of DeFi argue that a community of users can collectively serve this purpose. DeFi’s advocates further argue for the increased internationalization of financial markets, greater egalitarianism in financial institutions, and deeper transactional transparency.
In practical terms, this means all cryptocurrencies, whether Bitcoin or altcoins, are inherently community-based (there are chatrooms and more or less closed-off marketplaces), decentralized (there’s no ‘local branch’ you can go to), and, more often than not, completely anonymous (you’re often going to be transacting with people only identifiable by a unique serial number).
In this sense, they are collectively different than many other asset markets, and you need to keep this in mind when considering whether and how to invest.
Two, all cryptocurrencies, even Bitcoin, have a relatively short history. Even the successful ones have only been around for five-to-ten years. As such, the wider economy hasn’t quite figured out exactly how it feels about these new assets. They are generally unproven, and whether they can survive a major and sustained period of decline (as the current bear market perhaps represents) is unclear.
This does not necessarily disqualify cryptocurrencies as legitimate and worthwhile, but you need to be aware that these are still financial innovations in a state of flux and change.
Differences Between Altcoins and Bitcoin
With that being said, there are some fundamental differences between altcoins and Bitcoin.
First and foremost, Bitcoin has better investment security and fundamentals. It has become so large in the broader financial market – tied to emerging government policies and fueling self-sustaining industries – that it is almost too big to fail; prices may drop substantially, but the BTC market now has its own inertia pushing it forward and keeping it afloat. Every altcoin, in contrast, carries a high probability that it will either fade into irrelevance or disappear altogether.
Additionally, Bitcoin is more widely integrated into private and public markets. You can find Bitcoin ATMs across an increasing number of countries, for example, and you can use BTC as a store of value and medium of exchange much easier than with most altcoins. Indeed, most altcoins are still generally a purely financial instrument, whereas Bitcoin has a wider range of applications and uses.
Furthermore, most major governments are starting to craft specific and explicit regulations (as well as regulatory advice) to manage everything from the trade of Bitcoin to the tax policy on your Bitcoin profits. Altcoins, however, are more or less cut out from this high degree of integration, so you might have a harder time getting your bank or insurance provider to recognize your altcoin portfolio. This should change eventually, of course, but that’s the current reality.
Lastly, while it might seem like Bitcoin is clearly superior, all the same factors listed above also explain why Bitcoin can no longer reach the meteoric growth rates sometimes seen with altcoins. As an asset, BTC has largely matured and stabilized, so if you want 1,000% returns or more, you might want to look into altcoins.
Things to keep in mind when investing in Altcoins
We’ve already touched on some information relevant for how you should approach altcoin investment. But there are a couple other points that bear mention.
One is that the price of altcoins is generally tied to the price of Bitcoin. When Bitcoin rises, altcoins tend to rise, and when Bitcoin falls, so too do most altcoins.
Moreover, as time goes on, the altcoin ecosystem is only becoming more diverse and differentiated. There are coins tailored to almost every investment strategy and degree of risk, with prices typically ranging from less than a cent to thousands of dollars. This can be intimidating to some, but it also means there is more opportunity for tremendous profit in the altcoin sphere if you know how to identify a fundamentally strong coin.
The most successful altcoins see prices that skyrocket by hundreds or thousands of percentage points and then stabilize as the asset becomes more widely accepted. For example, Ethereum, the most widely traded altcoin, has risen in value by around 13,650% over its six-year lifespan.
As we’ve seen, though, altcoins are not a sure thing, and they can experience even more volatility than BTC or other types of digital assets. Sticking with the example of ETH, over the past year and a half, the price has gone from a high of around $3,900 USD down to $1,830, then way back up to $4,650 before declining to a low of $995.
And it is important to always remember that some altcoins can be fraudulent, products of hype and manipulation rather than legitimate investment instruments. It is up to you to always do your research and only invest as much as you are comfortable losing.
And there you have it, a discussion on the fundamentals of altcoins and the differences and similarities between them and Bitcoin. With the above information in hand you should be better equipped to deal with and profit from the cryptocurrency market as a whole. And even if you don’t invest in crypto yourself, you now have a better understanding of the complicated and fascinating financial innovation that some altcoins bring to the world.
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