The term “altcoin” is often used to describe cryptocurrencies other than Bitcoin. The word “altcoin” was created by combining “alternative” and “coin”, implying that they are cryptocurrencies considered an alternative to Bitcoin. So, what are altcoins? What is the difference between altcoins and Bitcoin? What benefits and limitations do they bring?
What are altcoins?
Altcoin stands for alternative coin , which is a term used to refer to any cryptocurrency other than BTC (Bitcoin). Altcoins are often seen as an alternative to BTC, the first cryptocurrency to be created and hold a “dominant” position in the crypto market.
Two of the first altcoins on the market were created through a fork from the Bitcoin blockchain, including:
- The first altcoin was Namecoin’s NMC coin, launched in April 2011.
- The second altcoin is Litecoin’s LTC coin, launched in October 2011.
Fork in blockchain means copying the source code of a blockchain or open source project, then modifying it to create a new blockchain or project.
Compare Altcoins and Bitcoins
The same point
Fundamentally, both Bitcoin and Altcoins are crypto assets with high volatility and instability (except stablecoins). Both have the following common characteristics:
- It is a peer-to-peer network system that can be used as a medium of exchange in digital transactions.
- To buy or store Bitcoin or altcoins, users need to use a cryptocurrency wallet.
- Both are built on decentralized blockchain technology, with no central organization controlling the network or executing transactions, instead, they are based on a distributed system of nodes.
Characteristics | Altcoin | Bitcoin |
Age | First appeared in 2011 | Appeared in 2009 |
Function | Multiple features and use cases | Store of value as a sustainable asset |
Technology | PoW, PoS, DPoS, PoA algorithms | PoW algorithm |
Ecosystem | Diverse products, easily scalable | Limited |
Differences
However, the differences between them will come from the following factors:
- Age: BTC, born in 2009, was the first cryptocurrency that marked the emergence of the cryptocurrency market. New altcoins were later built and developed based on the success of BTC.
- Function: While BTC is often held as a store of value, altcoins often have more use cases, serving as a test bed for new ideas, integrating blockchain into many sectors and activities. activities such as decentralized finance (DeFi), gaming, memes…
- Technology: The Bitcoin network uses the Proof-of-Work (PoW) consensus algorithm for the operation of the network. In contrast, altcoin projects have explored and developed many alternative algorithms for the blockchain consensus process, such as Proof-of-Stake (PoS), Delegated Proof-of-Stake (DPoS), Proof-of -Authority (PoA)…
Additionally, in the past, Bitcoin’s blockchain only functioned as a decentralized distributed ledger to record BTC transactions, was not capable of supporting smart contracts, and had no product ecosystem or project revolves around.
However, from February 2023 onwards, with the emergence of the Ordinal protocol and then the BRC-20 token standard, Bitcoin’s ecosystem began to expand with the emergence of NFT projects and other tokens. meme coin causes market fever. On the other hand, thanks to its programmable and smart contract-supporting architecture, blockchains or altcoin projects often possess large ecosystems with many diverse applications and products surrounding them.
What are the benefits of Altcoins?
Limit inflation
Aside from Bitcoin, most altcoins usually have a fixed total supply, which makes them often have a predetermined inflation rate that will gradually decrease to zero when the supply reaches its maximum level. When the total amount of coins issued to the market is constant, while the demand for that coin is increasing, this will lead to its value increasing and inflation will be controlled in the long term.
This is also an outstanding advantage of cryptocurrency compared to fiat money. Because fiat money has no limited supply and can easily be printed by Central Banks, this causes increased inflation and decreased value of fiat currency. The image below clearly demonstrates a significant increase in the dollar’s inflation rate, leading to its depreciation and reduction in purchasing power.
Diversify your investment portfolio
According to data from CoinMarketCap (here), there are currently more than 17,000 different altcoins on the market. This creates portfolio diversification opportunities for cryptocurrency market participants. By investing in a variety of altcoins, they can spread their risks and increase their chances of achieving profits in the market.
Additionally, altcoin projects often offer a variety of features, use cases, and technologies. In addition to having the opportunity to profit from price increases, altcoin holders also enjoy many special benefits that the project offers, such as voting rights, early access to services or products, receiving airdrop and many other incentives.
Promote innovative technology
In terms of technology, altcoin projects often introduce new technologies or upgrade existing technologies. Bitcoin has played a pioneering role in the cryptocurrency market, but there are still some limitations regarding scalability, speed and transaction costs. Altcoin projects (except meme coins) often aim to address these challenges of Bitcoin, through the implementation of new consensus algorithms, smart contract functionality, and security features, such as:
- Ethereum introduces the concept of smart contracts, allowing for automatic execution of contract terms without the need for control or reliance on a third party, thereby helping to minimize the risk of fraud.
- LayerZero introduces a cross-chain messaging protocol, most commonly used in bridges, that allows native tokens to be transferred from one chain to another quickly without having to use wrapped tokens. .
Along with technological advancement, altcoins also introduce innovative features for specific use cases that cannot be achieved with fiat money or Bitcoin, opening up new potentials in the fields of payments, finance, and finance. decentralized government (DeFi), and many other fields…
Helps users enter the crypto market more easily
Bitcoin and altcoins both offer cross-border transactions, allowing users to easily send and receive crypto assets around the world without having to go through traditional banking systems. However, altcoins are often seen as more accessible to the general public than Bitcoin because:
- There are lower transaction fees.
- Processing and transaction completion time is faster.
- Stronger community focus, with many projects encouraging the community to participate in management and contribute to project development.
These advantages not only make altcoins more attractive to investors, but also help reduce barriers for newcomers to the cryptocurrency market. Altcoins can be seen as an inevitable development step for the crypto market to move towards widespread acceptance.
Limitations of Altcoins
Large price fluctuations & lower liquidity
Altcoins often have a lower capitalization than BTC, increasing volatility and sometimes being difficult to predict, creating a high-risk investment channel. Practice shows that the price of altcoins can double or triple, or conversely, decrease by half or a third in just a few hours or days. In particular, this phenomenon often appears during altcoin season (or altcoin season), a period when altcoins simultaneously increase in price sharply, bringing profits from x2, x3 and even up to x10 in a few weeks. This volatility provides speculative opportunities for short-term investors, however, it should also be noted that high returns often come with risks, and investors should approach the market with caution, only Use idle capital (possibly lost). Furthermore, most altcoins typically have lower liquidity than Bitcoin, increasing the likelihood of facing high slippage when making or selling altcoin transactions.
Less security
As of January 26, 2024, the total capitalization of the cryptocurrency market reached 1.55 trillion USD, of which Bitcoin accounts for about 49.75% and altcoins account for 50.25% (according to CoinMarketCap statistics). This makes cryptocurrencies (especially altcoin projects) an attractive target for hackers. Along with the introduction of new technologies and features, altcoin projects will face issues related to the security of smart contracts, wallets and decentralized applications. In 2022 alone, there will be more than $2 billion in losses from hacks.
Not recognized by law
By 2024, legal recognition of crypto will still be a challenge in some countries. According to the Crypto Market Report in Vietnam, the acceptance and establishment of a legal framework for crypto is classified into three levels:
- Countries such as the US, Canada, Singapore, Japan, South Korea, UK, France and the majority of European countries recognize crypto as legal assets.
- China, Bangladesh, Pakistan and several other countries impose bans on crypto.
- Vietnam, Thailand, and Indonesia are in the group with mixed regulations, banning the use of crypto in payments but not banning individuals from owning crypto.
For countries that ban or partially ban, altcoin investors may face many legal risks related to compliance with cryptocurrency laws. For projects issuing altcoins, minimizing legal risks requires innovation while still complying with government and state agency regulations.
Altcoin classification
Altcoins can be classified into many types based on their characteristics, uses, and underlying technology, including:
- Stablecoin: A type of altcoin designed to maintain a stable value in the cryptocurrency market and minimize price fluctuations, through being linked (peg) to stable assets such as fiat money, gold, silver, or other altcoins. Popular stablecoins include Tether (USDT), Circle (USDC), Dai (DAI), Paxos Gold (PAXG), Frax (FRAX)…
- Mining-based coin: A type of altcoin that operates based on the process of mining or mining native coins to verify and process transactions. These are altcoins that use the Proof-of-Work (PoW) algorithm, such as Ethereum before The Merge event, Dogecoin, Litecoin, Siacoin…
- Staking-based coin: This type of altcoin operates based on staking coins on validators to verify and process transactions. These are altcoins that use algorithms related to Proof-of-Stake (PoS). Peercoin was the first altcoin to introduce the concept of staking, and this method became more popular due to its reduced energy usage compared to mining.
Users may already be familiar with stablecoins when entering the cryptocurrency market. Meanwhile, mining-based coin and staking-based coin are often less mentioned, because these two types of altcoins can also be divided into many different forms based on their specific functions and applications.