What are Altcoins? How Exactly Do They Work?
Ever since the revolutionary technology of Blockchain emerged in the world, various industries, including traditional finance, have been undergoing a rapid transformation. The advent of cryptocurrencies has completely changed the game. With the advent of Bitcoin, people have been hooked on the idea of the currency being decentralized. However, it is advised that individuals willing to invest in cryptocurrencies shall educate themselves about Altcoins as well.
The term Altcoins is basically derived from the simple fact that these coins exist as an alternative to Bitcoin, the first-ever cryptocurrency to be introduced in the market. Altcoins are also considered as an alternative to traditional fiat currencies.
Initially, altcoins were launched back in the year 2011, and ever since then, thousands of altcoins have been introduced in the market. During the initial days, the purpose of altcoins was to enhance the functionalities of Bitcoin, including its transaction speed and energy efficiency. Nowadays, they serve a whole new range of activities which often depend on how they are developed.
It is an undeniable fact that altcoins have emerged as a significant player in the cryptocurrency market, and this is exactly why individuals and investors must develop a sound understanding of the subject.
The different types of Altcoins
There is a wide variety of altcoins that are usually found in the market nowadays. These include coins that are based on staking, government coins, mining-based coins, and stablecoins. The most prominent categories of altcoins are as follows:
Mining-based - These are cryptocurrencies that primarily use a method known as mining in order to validate and verify the transactions taking place on the respective blockchains. The process of mining also helps to add more coins on top of the supply that is already in existence. The primary task of the miners is to solve certain mathematical problems using specialized mining equipment. In return for the work that they put in, the miners are rewarded in the form of crypto coins. For instance, Bitcoin miners receive Bitcoins in exchange for the work they do.
Stablecoins - These belong to a group of cryptocurrencies whose primary purpose is to keep track of the price of a similar asset. Some of the most well known coins in the market are pegged to the US dollar, and their job is to mimic the value of the dollar. The issuer of these coins will be able to take the necessary steps when the prices fluctuate.
Stablecoins may not be the best choice for investing in. The simple reason behind it is that they are meant to maintain the same valuation as that of the USD. These are mostly used for the purpose of savings or when it comes to lending. One can even earn interest from them through some protocols that allow it.
Governance - Governance tokens allow the holders to vote accordingly in order to reshape the vision of the whole project and the direction in which it is headed. This aspect of governance tokens allows the project to become entirely decentralized in character where the project is completely devoid of a central authority and where everyone can enjoy an equal position.
Staking-based - Similar to mining, these cryptocurrencies use the method of staking for the purpose of adding more coins to the supply and also for verifying and validating. The holders have the option of staking the coins. This implies that they are simply pledging the coins for transaction processing.
Let us look at the Pros and Cons of Altcoins.
Pros:
Altcoins have the potential to offer excellent returns
They have made significant improvements on issues related to Bitcoin
There is a wide variety of altcoins existing in the market, and they offer a wide array of services and advantages
Cons:
They lack the first mover ability like that of Bitcoin, or even if one can evaluate the market cap, then Bitcoin has surpassed all of them by miles.
There is a high probability of risks involved when it comes to investing in altcoins. This is because many of the altcoin projects turn out to be scams as well.
Some of these altcoins are only available on select exchanges, which makes them difficult to purchase.
Some of the prominent altcoin examples are as follows:
Ethereum (ETH) - Launched in 2015, Ethereum was the first altcoin that provided a programmable version of Blockchain that developers could use. Gradually Ethereum has emerged as the second-largest cryptocurrency in terms of market capitalization after Bitcoin.
Namecoin (NMC) - Launched in 2011, this was probably the first notable altcoin to be introduced in the market. Built on the same code as Bitcoin, it also shares a lot of similarities with Bitcoin. For instance, it also has a supply of 21 million coins like that of Bitcoin.
USD Coin (USDC) - Launched in 2018, the value of stablecoin is pegged to that of the US dollar. A consortium by the name Centre is in charge of its governance, which also includes Global, Coinbase, Inc.
In conclusion: Is it a viable option to invest in altcoins?
If it is in the interest of individuals to make cryptocurrencies a part of their portfolio of investments, then altcoins are a great option. It also requires regular study and research before investing in them. Some altcoins provide a lot of benefits and use cases when compared to Bitcoin, and they are highly ambitious projects as well. Since many altcoins are not as popular as Bitcoin, chances are they may gather huge potential and value if they can hold their ground for a considerable period of time.
A notable downside of investing in the altcoin market is that it becomes a challenging task of choosing the perfect coin for investment. The reason is there are too many of them available in the market. As a result, for those willing to purchase altcoins, one should bear in mind the risk factor involved. Hence thorough research on the respective altcoin blockchains is imperative before considering investing in them.
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