Understanding Altcoins: A Complete Guide to Alternative Cryptocurrencies

What Are Altcoins?

Launched in 2009 by the pseudonymous programmer Satoshi Nakamoto, Bitcoin (BTC) is considered the first cryptocurrency by both crypto enthusiasts and the general public. Its underlying blockchain technology has drawn significant attention, with major tech giants like Amazon, Facebook, and Microsoft developing and selling blockchain-based products and services. The success of this pioneering cryptocurrency sparked the emergence of various alternative coins, commonly known as altcoins.

In simple terms, altcoins are any cryptocurrencies other than Bitcoin. For those wondering about the number of altcoins in the market, CoinMarketCap lists over 18,000 altcoins. Some of these aim to improve perceived shortcomings in the Bitcoin protocol, while others pursue entirely different objectives. This article provides a brief introduction to several popular altcoins, considerations for investing in altcoins, key differences from Bitcoin, and other essential information about altcoins.

Types of Altcoins

Altcoins can be categorized by their utility and consensus mechanisms. Keep in mind that some altcoins may fit into multiple categories. Below are several main cryptocurrency categories and their most prominent representatives:

Bitcoin Forks: Offshoots of the Original Protocol

Bitcoin forks are essentially changes or new rules added to the main protocol. Sometimes, the entire community agrees to these changes and fully transitions to the upgraded version. Other times, the community splits, creating new versions of Bitcoin.

This process can be visualized as a family tree. Each branch represents a unique individual or a different version of Bitcoin, while the trunk stands for the original base protocol—the ancestor from which all versions originate. Whenever a segment of the community adopts a new set of rules that others do not, a fork occurs.

There are over 100 Bitcoin fork projects, but Bitcoin Cash (BCH) is by far the most successful. BCH is an altcoin that seeks to address Bitcoin’s limitations. One major challenge for Bitcoin’s validation system and blockchain is the number and speed of transactions it can process.

Bitcoin’s theoretical block size is 4 megabytes, but in practice, it’s closer to 2 megabytes. Transactions are grouped into blocks, so block size directly determines how many transactions can be verified and added to the blockchain within a given timeframe. At present, Bitcoin processes about 7 transactions per second—a figure dwarfed by Visa’s average of 24,000 TPS. As Bitcoin’s user base grows, transaction delays and congestion have become more pronounced.

To address scalability concerns, some developers forked Bitcoin to create Bitcoin Cash in August 2017. The main upgrade was an increased block size of 8MB, resulting in much faster transaction speeds and lower fees. While BTC is now primarily used as digital gold (an investment asset or store of value), BCH positions itself as an efficient payment system.

In other words, as the name suggests, BCH is intended to function as easily as cash. Nevertheless, BCH faces its own challenges. Perhaps the greatest is low adoption and investor confidence. While crypto insiders may know BCH, it remains largely unknown outside the crypto community. With a small user base, the average block size mined on its blockchain is actually smaller than Bitcoin’s, meaning its central goal of enabling more transactions via larger blocks hasn’t truly been tested.

Additionally, other altcoins have emerged to challenge BCH’s ambition to become the go-to medium for daily transactions. Just as disagreements over Bitcoin’s direction led to BCH, disputes about BCH’s future produced another fork: Bitcoin SV (BSV). The sheer number of competitors, along with ongoing security and safety concerns, will likely constrain BCH’s success for the foreseeable future.

Mining-Based Altcoins: Independent Chains

Unlike Bitcoin forks, these altcoins operate on their own independent blockchains, though they still draw heavily from Bitcoin’s original protocol. They continue to rely on systems that generate new coins through mining, or solving complex mathematical puzzles.

Litecoin (LTC) was the first successful non-Bitcoin alternative and remains active today. At one point, it was widely recognized as the second most prominent cryptocurrency after BTC, but as of this writing, it has fallen to a still respectable 20th place by market capitalization.

Like BCH, LTC emphasizes speed—Litecoin transactions are verified about four times faster than Bitcoin’s. Another major difference lies in its proof-of-work mechanism: Litecoin uses a simpler algorithm called Scrypt. As Bitcoin’s algorithm became more complex, mining required highly specialized equipment, putting it out of reach for average users. In contrast, most Litecoin mining can still be done with standard CPUs and GPUs, making LTC much more accessible. In many ways, Litecoin is a true “lighter” version of Bitcoin—many refer to Bitcoin and Litecoin as the gold and silver of crypto.

Ethereum (ETH) marked a major leap in the evolution of mining-based altcoins. Unlike LTC and many other alternatives, Ethereum introduced groundbreaking concepts and goals. Ethereum is a blockchain platform supporting smart contracts.

Smart contracts are essentially sets of conditions that, when met, automatically execute certain actions. They allow developers to create unique decentralized applications (DApps) running on the network. For example, financial services like lending and borrowing can be recreated and automated via smart contracts, eliminating third-party intermediaries.

Running these applications requires paying the network a computation fee in ether (ETH)—Ethereum’s native token and the fuel for its contracts. Ethereum isn’t trying to be another digital currency like Bitcoin; its goal is to leverage blockchain technology for a variety of decentralized, tamper-proof applications.

Ethereum currently uses the Proof-of-Work (PoW) consensus algorithm, which consumes computing power to validate transactions. However, Ethereum plans to migrate to Proof-of-Stake (PoS), where transactions are validated based on the amount of staked coins. This transition will make mining obsolete and reduce Ethereum’s energy consumption by 99%, addressing one of the blockchain’s biggest criticisms. To become a validator on Ethereum, users must stake 32 ETH.

Ethereum also has its own fork—Ethereum Classic (ETC)—the most prominent among them. In 2016, the original Ethereum DAO was hacked due to code vulnerabilities, resulting in a theft of 3.6 million ETH. A hard fork was executed to recover the stolen funds and address related issues.

Those who opposed the fork continued to support the pre-fork chain, now called Ethereum Classic. The crypto community remains concerned about this Ethereum fork’s security, especially after Ethereum Classic’s blockchain suffered 51% attacks in which hackers stole over $5 million in ETC in 2020.

Proof-of-Stake-Based Altcoins: An Alternative Consensus Mechanism

Proof-of-stake (PoS) offers an alternative consensus mechanism for transaction validation. In PoS systems, users stake their crypto to become validators. Validators perform tasks similar to miners: ordering transactions, creating new blocks, and verifying other validators’ block proposals.

Cardano (ADA) is the largest PoS network by staking and ranks seventh by market cap. Cardano now supports over 600 projects, covering a diverse range of features and sectors, including non-fungible tokens (NFTs), decentralized exchanges, decentralized finance (DeFi), and the Metaverse.

Unlike Ethereum, Cardano’s smart contracts are powered by ADA, its native token. Cardano uses the Ouroboros Proof-of-Stake protocol, which distributes network control across various stake pools. Users can run their own stake pools or delegate ADA to existing pools if they lack the technical skills to operate a node. Stakers earn rewards in line with the amount of ADA delegated.

Cardano builds on the foundation of Ethereum smart contracts but aims for greater scalability, enhanced performance, improved security, and higher energy efficiency. The project stands out for its rigorous code review and science-driven development.

Cardano relies on peer-reviewed research, publishing theories as scientific papers shared at conferences frequented by other researchers. This approach has drawn criticism within the crypto community, as the peer-review process is seen by some as a major factor slowing Cardano’s development and adoption.

Nonetheless, Cardano still offers long-term value as upgrades and new projects roll out. For example, the Cardano Hydra upgrade will substantially increase transaction processing speeds.

Stablecoins: Minimizing Volatility

These cryptocurrencies are designed to reduce and mitigate financial risk. Bitcoin and most altcoins are highly volatile and correlated. Bitcoin’s price can fluctuate dramatically within minutes or even seconds, and many altcoins follow suit. Stablecoins provide investors with protection from sharp price declines by offering alternatives that aren’t exposed to the same risks. Stablecoins are backed by less volatile assets such as commodities, fiat currencies, or carefully selected baskets of other cryptocurrencies.

Commodity-backed stablecoins can be either fixed or redeemable for target commodities, such as gold, silver, or other precious metals. Digix Gold Tokens, for instance, are backed by gold. Holders should always be able to exchange these tokens for an equivalent value in gold. Commodity-backed stablecoins are also less susceptible to inflation, as it is much harder to increase the metal supply than it is for central banks to print more money.

TrueUSD, USD Tether (USDT), and USD Coin (USDC) are examples of stablecoins pegged to the US dollar. Their value should always be as close as possible to one dollar. To issue more tokens, companies must deposit an equivalent amount in USD reserves. However, USDT has faced criticism for its unwillingness or inability to provide audit reports verifying its reserves’ true value.

Crypto-backed stablecoins are typically collateralized by portfolios of other cryptocurrencies. Implementing such systems is more complex than fiat- or commodity-backed stablecoins because collateralization takes place on the blockchain using smart contracts. Achieving price stability requires additional instruments and incentives beyond collateral alone.

Altcoin Dominance: Market Dynamics

No comprehensive chart exists for overall altcoin dominance in the market. As a result, altcoin dominance is usually inferred by analyzing Bitcoin dominance. Traders compare Bitcoin’s market cap to the total cryptocurrency market cap; a sharp drop in Bitcoin dominance typically signals the arrival of “altcoin season.”

At the end of 2018, Bitcoin dominance fell below 37.5%, marking an altcoin season during which more than 20 altcoins reportedly doubled in value. The season ended as Bitcoin’s dominance recovered, reaching over 60% by mid-2019.

The most recent altcoin season arrived at the end of 2020, when Bitcoin dominance dropped to just above 40% and various altcoins (such as ETH and ADA) surged in value. This season reportedly ended in May 2021 as Bitcoin’s dominance rebounded, though it never fully returned to its previous highs and now fluctuates between 40% and 47.5%.

How to Buy Altcoins: A Practical Guide

To start trading or investing in altcoins, you’ll need to choose a cryptocurrency exchange platform. There are many platforms in the crypto sector, and it’s difficult to declare a single “best” place to buy altcoins, since each has unique advantages and drawbacks. Key factors include the range of supported assets, trading fees, trading volume, and security.

The best altcoin exchange platforms theoretically combine a broad asset selection, low trading fees, high trading volume, and strong security to protect your funds.

Before purchasing altcoins on an exchange, you’ll need to register an account with your email and password. After buying crypto with a credit card or bank transfer, your assets will appear in your wallet. You can then transfer them to a different crypto or altcoin wallet, such as MetaMask, to use funds within various ecosystems. A crypto wallet is an app that stores the keys allowing users to access and manage their digital assets.

If you don’t want to share personal information to buy assets on a centralized exchange, you can opt for a decentralized exchange. Note, however, that decentralized platforms may have lower trading volumes and market liquidity, making them more vulnerable to price swings—small trades can cause significant price changes.

If you want to access the crypto market without directly buying and holding cryptocurrency, you can invest in exchange-traded funds (ETFs). ETFs generally pose lower risk, tracking the value of underlying assets and trading on traditional exchanges. For example, an altcoin ETF would track the value of Ethereum.

Best Altcoins to Buy: Analysis & Recommendations

The current top 10 cryptocurrencies by market cap show Bitcoin (BTC) holding first place. Ethereum (ETH), the most popular altcoin, ranks second, with others like Cardano (ADA) and Solana (SOL) on the list.

If you’re considering investing in cryptocurrency, most of these top coins are relatively safer bets. These projects tend to have lower risk and more stable prices, although this also means users are less likely to see outsized gains.

Those with a higher risk appetite may opt for newer cryptocurrencies that haven’t experienced major price surges. These are inherently riskier, as price crashes and project failures are common in the crypto space.

With thorough research (DYOR), it’s possible to find the next 10x or even 100x coin. For instance, among the 10 best-performing coins in recent years, several altcoins such as Polygon (MATIC) have surged over 100x, while Solana (SOL) and Avalanche (AVAX) have also performed well, rising more than 10x. These projects remain relatively strong choices, as their user bases continue to grow—potentially fueling further price increases.

Top-performing cryptocurrencies over certain periods demonstrate that some projects have achieved substantial value growth. However, given crypto market volatility, it’s unclear if any coins on the list will maintain upward momentum. As such, traders and investors should perform due diligence and select coins with solid utility and reputable teams to avoid scams or rug pulls and potential losses.

Should You Buy Altcoins? Key Considerations

Bitcoin is widely regarded as a highly speculative asset with greater price volatility than traditional investments like bonds and stocks. Altcoins are even more volatile than Bitcoin and carry significantly higher risk. Users can lose substantial amounts of money very quickly, and most altcoins rarely recover following a price collapse. Therefore, it’s essential to conduct your own research (DYOR) and seek out top-quality projects or leading altcoins with strong fundamentals when investing.

On the other hand, altcoins can yield significant gains, particularly during “altcoin seasons” when various tokens and coins outperform Bitcoin. Altcoin season typically starts when Bitcoin’s market dominance falls as traders and investors exit BTC positions and take profits.

Although not a perfect measure, users can analyze Bitcoin dominance charts to assess market sentiment and determine whether Bitcoin or altcoins are leading the market. Ultimately, investors should weigh the pros and cons of altcoin investments. Treat altcoins as high-risk assets, and only invest money you’re prepared to lose.

Conclusion

With over 18,000 altcoins in existence, it’s impossible to cover them all. This article doesn’t aim to provide a comprehensive guide to every Bitcoin alternative, but instead summarizes some of the most notable projects in altcoin history. Many top 10 cryptocurrencies not mentioned here may be featured in future articles.

Nonetheless, the foundational knowledge and insights provided here should offer a strong starting point for exploring and researching other emerging or trending coins. Keep in mind, it’s difficult to identify the “best” altcoin to buy, since the crypto market remains relatively young compared to traditional markets. New and better projects could emerge in the future, surpassing today’s favorites.

FAQ

What are Altcoins? How are they different from Bitcoin?

Altcoins are all cryptocurrencies except Bitcoin. They are designed to improve on Bitcoin with more advanced technology. Bitcoin has a longer track record and greater market dominance, while altcoins offer faster innovation but come with higher price volatility.

Which are the most popular altcoins? What are Ethereum, Litecoin, and Ripple?

Popular altcoins include Ethereum, Ripple (XRP), and Litecoin. Ethereum supports smart contracts and decentralized applications. Ripple specializes in fast, low-cost cross-border payments. Litecoin offers faster transactions than Bitcoin.

How do you evaluate and choose which altcoin to invest in? What indicators should you consider?

Assess altcoins by reviewing market capitalization, project technology, and community support. Examine the whitepaper and the development team’s credibility. Pay attention to trading volume, liquidity, and the project’s long-term roadmap before making investment decisions.

What are the risks of investing in altcoins and how can you avoid them?

Risks include high price volatility, fraudulent projects, and low liquidity. To avoid these, conduct in-depth research before investing, diversify your portfolio, use reputable platforms, and never follow investment tips without verification.

Why do altcoin prices fluctuate more dramatically than Bitcoin?

Altcoins have smaller market capitalizations and less liquidity than Bitcoin, making their prices more sensitive to shifts in market sentiment and trading volume—and resulting in greater volatility.

Where can I buy and trade altcoins?

You can buy and trade altcoins on leading crypto exchanges. Simply create an account, verify your identity, select your desired altcoin, and complete the transaction using your preferred payment method to start investing.

What is the outlook for altcoins? Are they suitable for long-term investment?

Altcoins have strong prospects, driven by continuous technological innovation and growing market adoption. Long-term investments in projects with sound fundamentals could yield significant returns as the Web3 era continues to expand.

What are DeFi tokens and Layer 2 tokens? Are they considered altcoins?

DeFi tokens are issued by decentralized finance systems that enable financial transactions without intermediaries. Layer 2 tokens help scale blockchain networks and reduce transaction costs. Both are classified as altcoins, as they serve as Bitcoin alternatives.

How do you securely store and protect altcoins?

Use a hardware wallet or cold storage for maximum security. Safeguard your private keys, avoid storing them on online platforms, and maintain regular backups. Never share your access information with anyone.