The word “altcoin” is an abbreviation of “Bitcoin alternative,” and thus describes every single cryptocurrency except for Bitcoin. Altcoins are referred to as Bitcoin alternatives because, at least to some extent, most altcoins hope to either replace or improve upon at least one Bitcoin component.
There are hundreds of altcoins (CoinMarketCap listed 1113 at the time this guide was written), and more appear each day. Most altcoins are little more than Bitcoin clones, changing only minor characteristics such as its transactions speed, distribution method, or hashing algorithm. Most of these coins do not survive for very long. One exception is Litecoin, which was one of the first altcoins. In addition to using a different hashing algorithm than Bitcoin, Litecoin has a much higher number of currency units. For this reason, Litecoin has branded itself as “silver to Bitcoin’s gold.”
The top 5 altcoins according to CoinMarketCapHowever, some altcoins innovate by experimenting with useful features Bitcoin does not offer. For example, Zcash hopes to provide a platform for completely anonymous transactions, NevCoin describes itself as “the simplified cryptocurrency,” and Ripple serves as a protocol users can employ to make inter-currency payments with ease.
Many Bitcoin enthusiasts argue that altcoins are completely unnecessary and will not succeed because they cannot rival the infrastructure Bitcoin boasts. However, altcoins serve an important role. Decentralization is one of Bitcoin’s most prominent goals, and altcoins further decentralize the cryptocurrency community. Moreover, altcoins allow developers to experiment with unique features. While it is true that Bitcoin can copy these features if the developers or community desires, fully-functioning altcoins are much better “cryptocurrency laboratories” than Bitcoin’s testnet. Finally, Altcoins give Bitcoin healthy competition. Altcoins give cryptocurrency users alternative options and forces Bitcoin’s developers to remain active and continue innovating. If users do not feel that Bitcoin satisfies their digital desires, they can adopt an altcoin. If enough users left Bitcoin for a particular altcoin, the Bitcoin developers would have to adopt the features the community desired or risk losing its place as the preeminent cryptocurrency.
Namecoin was the first altcoin. It seeks to decentralize the world of online identities.
What Was the First Altcoin?
Created in April 2011, Namecoin was the first altcoin. Although it also functions as a currency, Namecoin’s primary purpose is to decentralize domain-name registration, which ties into the decentralization of the internet. As its place among the top ten cryptocurrency market caps suggests, Namecoin has remained one of the most successful altcoins throughout its short lifespan.
Should I Invest in Altcoins?
Due to how recent cryptocurrency was invented and how rapidly the landscape changes, all cryptocurrency investments carry a great deal of risk.
Altcoins are exponentially more volatile than Bitcoin. Because they have such low market caps, altcoin markets are highly prone to price manipulation. Wealthy individuals place large amounts of capital into low-priced coins to build hype and cause the price to skyrocket, this is also done with groups of people pooling money together. Once the price has risen considerably, the traders sell their coins on an exchange at a massive profit, hurting many gullible investors in the process. This method is known as a “pump and dump.” Not only does this hurt greedy traders who did not take the time to do their homework, but it often proves to be the breath of an altcoin’s brief lifespan.
To avoid losing all your money in a pump and dump, focus on long-term investments in coins you believe have immense potential and exhibit overall health. Alternatively, you can attempt to profit off the start of a pump and dump if you time it correctly, however, this is extremely risky. Generally, healthy altcoins possess strong communities, exhibit high liquidity, and have developers who proactively improve the coin’s source code (though not necessary, many users also prefer developers who reveal their true identities). CoinGecko’s comprehensive coin metric analysis algorithm statistically analyzes these three important factors and ranks coins according to overall strength.
If you do choose to invest in altcoins, it is important to remember some basic tenets of investing. Avoid the hype that coin communities propagate. Investors have an agenda, so you should not take their word at face value. Only invest in coins you have researched. It is unwise to invest in something you do not understand. Making an ill-informed investment is the first step to losing your hard-earned money. Take the time to research the coins you are considering for long-term investments, and research day-trading before you attempt to become a high-volume, short-term trader. Most importantly, never invest more than you can afford to lose. Far too many people have lost their life savings by centralizing them in volatile investments.
Where Can I Obtain Altcoins?
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As with Bitcoin, there are a variety of ways to obtain altcoins. The most basic way to obtain altcoins is to accept them as payment for goods or services. You can mine altcoins with computer hardware. Most Altcoins are ASIC resistant, allowing for coins to be mined with GPU powered rigs. Interested in learning more about mining? Check out our guide here.
You can also trade for altcoins on cryptocurrency exchanges. Most exchanges use Bitcoin as an intermediary, so if you do not already own bitcoins you will need to buy some before you can trade for altcoins. Some of the most-trafficked exchanges include BTER, Bittrex, MintPal, Cryptsy, and BTC38(Chinese-only).