There are thousands of crypto to choose from, but most people only pay attention to Bitcoin. Why so? How different are altcoins from Bitcoin and should we invest in them?
It's a given fact that almost every trader must've known of Bitcoin. Over the years, the famous digital currency has become a trendsetter in the market and is regarded as the standard crypto on many levels.
As Blockchain technology evolved, so did the number of coins available in the market. While Bitcoin still takes up most of the market, its alternatives are becoming more popular and getting more recognition. The market's competitive nature has pushed these alternatives to create something new and broaden the traders' choices.
As of January 2021, there are no less than 4,000 cryptocurrencies available. Such a long list of choices can be confusing at times, especially if you're new to crypto trading. With the market expanding every day, it's only natural for the alternative coins to emerge and compete with its predecessor. Some of the alternatives or altcoins even claim that they use better technology and can provide a better trading experience than Bitcoin. So what exactly are altcoins and should we invest in them?
What are Altcoins?
The term altcoins is derived from the words "alt" and "coins", which basically means alternative cryptos to Bitcoin. These coins were introduced after Bitcoin and often presented themselves as better alternatives to the dominating cryptocurrency. Both altcoins and Bitcoin are a form of digital currency, but each has slightly different rules. According to CoinMarketCap, altcoins currently make up nearly 40% of the whole cryptocurrency market.
Altcoin Vs. Bitcoin: How Different are They?
Originally, altcoins are designed to resolve some of the issues and limitations of Bitcoin. In other words, they were trying to fill the gaps that Bitcoin left. For example, Litecoin can be mined using common computer hardware, unlike Bitcoin that requires costly hardware to mine. Ripple and Dash are also trying to provide a better experience by facilitating faster transactions.
That is why altcoins may use different protocols and algorithms from Bitcoin. Over time, some of them managed to develop their own style and create a completely separate focus or purpose from Bitcoin. Ethereum is the perfect example as it aims to not only act as a digital currency but also as a platform that can process various forms of transactions via smart contracts.
By distinguishing themselves from the spotlight of Bitcoin, altcoins have created their own market. As a result, many traders may find that altcoins have competitive functions and great continuity, and thus can give them a better trading opportunity and provide a better environment for trading. Although the popularity of altcoin is still quite modest right now, it definitely has a big potential to compete with Bitcoin and create a broader way of trading with cryptocurrency.
The Pros and Cons of Altcoin
- Can resolve Bitcoin Issues
- Provide competition
- Low transaction fees
- Provide a wide selection of coins with different functions
- Extremely volatile value
- Smaller investment market than Bitcoin
- High risk of scams or frauds
- "Dead" altcoins can make traders lose money
Should We Invest in Altcoins?
Based on the explanation above, we can see that the main purpose of altcoins is to provide a new opportunity to gain profit and use better technology. However, investing in one should take proper consideration. According to Ben Weiss, the chief operating officer of CoinFlip, altcoins do offer a great chance of getting higher profit, but it actually comes with higher risks as well.
He took Dogecoin as an example. The cryptocurrency's value soared high in late January 2021 only because people started buying it, causing the altcoin to go viral. He points out that such condition can reverse as quickly as how it happens in the first place. Thus, he suggests that it's better to invest in something that you really believe to be profitable in the long term rather than just following the trend and risking a lot of money when the wave fades out.
Now the real question is how do we know if it's a good investment? The answer is simple: you can't. Ryan George, the chief marketing officer at Docupace, even said that you should be wary of anyone who has a definitive answer to the question. However, keep in mind that investing is not the same as gambling, so there are a few things that you can do to minimize the risks and trade logically.
First, given the inevitable high volatility of altcoins and risk of scams, it's vital to make sure the security level of your trading. If you're investing in a regulated exchange like the NYSE and Nasdaq, then you'll get several layers of protection that have been proven to be safe for many years. Some initial coin offerings are also under the US SEC's protection, but remember that many are not.
Even those under the SEC's regulation can still pose fraud against its clients. The chairman of SEC himself, Jay Clayton, wrote in 2017 that traders' funds could quickly travel overseas without the trader's knowledge. Therefore, risks can be amplified, including the risk that the SEC may not be able to manage effectively.
"There are many, many players in the altcoin space, and (it's) nearly impossible to understand what is true (and) what's the risk. 'Unregulated' is just another way to say not for the typical retail investor."
Second, it's important to understand the altcoins that you're about to invest in. As there are thousands of altcoins at the moment, it is impossible to know every single one since each has different features and rules. For this reason, Weiss suggested that it's best to only invest in an altcoin that you really understand and believe through and through. Make sure to find out who is behind the coin and its value proposition before you invest. With proper research, Weiss believed it's possible to find an altcoin that worth the money and effort.
"A worthwhile altcoin to invest in should provide a service that you believe is unique to that particular token. If you're looking for a safer investment but want to get involved with altcoins, start with the top five or ten coins by market capitalization, like Ethereum or Litecoin."
Altcoins are good alternatives to crypto traders interested in diversifying their portfolios. Some altcoins claim that they are the "better versions" of Bitcoin and able to resolve Bitcoin's problems and limitations. Other than that, the new technology and methods that were introduced by altcoins can also be seen as a huge potential to reshape modern finance.
See Also: 4 Ways to Trade Cryptocurrencies
However, considering that it is still relatively new and the market cap is not as big as Bitcoin, it is important for traders to research before investing in them. The risk of investing in altcoins is still higher than Bitcoin, so make sure to understand that first and know how to manage it. One good solution is to try trading them in a demo account to see if you can adapt to the market fluctuation.