What are altcoins? What are the benefits and drawbacks of Altcoins?

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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.

altcoin-la-gi Two of the first altcoins on the market were created through a fork from the Bitcoin blockchain, including:

  1. The first altcoin was Namecoin’s NMC coin, launched in April 2011.
  2. 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.

The purchasing power of the USD has decreased over the years because the inflation rate has increased - Howmuch 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.

altcoin-thuc-day-doi-new 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. altcoin-bien-dong-gia-texo 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). coin market capitalization 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:

  1. Countries such as the US, Canada, Singapore, Japan, South Korea, UK, France and the majority of European countries recognize crypto as legal assets.
  2. China, Bangladesh, Pakistan and several other countries impose bans on crypto.
  3. 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.

stablecoin 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.

Accordingly, altcoins are often classified into a number of common types that users often encounter in altcoin projects as follows:

  • Payment token: This is a unique form of altcoin, created as a digital currency with the purpose of being a means of exchanging value between parties and used in everyday transactions. For example: Ripple’s XRP token, Monero’s MNR token, Hedera’s HBAR token…
  • Governance token (Co-governance): An altcoin created to allow token holders to participate in governance-related issues of the protocol such as proposing, voting on new feature proposals, even change the administration system. For example: BNB token of BNB Chain, ETH token of Ethereum, MKR token of MakerDao…
  • Utility token: A type of altcoin designed to provide users with access to a specific product, service or function within the ecosystem of the project issuing the token. For example: Ninety Eight’s C98 token, 0x’s ZRX token, Augur’s REP token…
  • Security token: This type of altcoin represents ownership of securities assets in traditional markets such as stocks, bonds, ETFs, and options. This type of altcoin is often issued through Security Token Offering (STO) and complies with securities laws. For example: INX Token (INX), Overstock Token (OSTKO), Blockchain Capital (BCAP)…
  • Meme coin: Altcoin inspired by memes, jokes, and images on the internet. They were originally designed spontaneously, without any specific circumstances, and were often used for speculation. However, as the meme coin trend becomes more and more popular, a new piece of the puzzle is gradually appearing in the market called MemeFi (an economy revolving around meme coins). For example: Pepe coin (PEPE), Floki (FLOKI), Shiba Inu (SHIB)…

Investors often pay special attention to the functions of the tokens they are investing in, especially governance tokens and utility tokens, in order to take advantage of all the benefits from the process. Invest and hold tokens. In contrast, tokens such as payment tokens and security tokens are often rarely mentioned and do not yet have popularity in the cryptocurrency market.

When should you invest in Altcoin?

When deciding to enter the Altcoin market, it is important to clearly understand the concept of “Altcoin season” and how to identify it. Altcoin season is a golden period for Altcoin investors, named after this phenomenon as Altcoin season.

What is Altcoin Season?

Altcoin Season is a period when many Altcoins simultaneously experience a period of strong price increases, even with significant growth up to double or triple in value, and sometimes even increase tenfold. in a few weeks. A typical example is the Altcoin season in September 2017, when just buying a certain cryptocurrency during this period, investors’ assets skyrocketed.

altcoin season The cause of this phenomenon comes from a large concentration from the investment community, a simultaneous increase in interest in many Altcoins, and possibly due to positive events or rumors. To determine Altcoin season, investors often observe price charts, track market movements and evaluate market sentiment to get an overview of the general trend. Recognizing Altcoin season can help investors make smart decisions about when to buy and sell in the Altcoin market.

Signs of a new Altcoin season

An important sign of the bottoming of the cycle is when many Altcoins simultaneously experience a decline in price. All virtual currencies follow cycles, and after hitting a bottom, there is usually a subsequent period of growth.

When combined with other market factors, Altcoin bottoming could signal a recovery in price trend, even setting new records. Bitcoin plays a key role in determining the Altcoin cycle, accounting for over 60% of the market. Altcoin season usually begins when Bitcoin bottoms and begins to grow again. At that time, many investors will switch their attention from Bitcoin to Altcoin.

The “Bitcoin Dominance” index represents the “dominance” of Bitcoin in the market. When Bitcoin’s dominance decreases, this is a positive sign for the rise of Altcoins. The decrease in Bitcoin Dominance shows that Altcoins are dominating the market capitalization, signaling Altcoin season.

When Bitcoin Dominance decreases and total market value increases, this is a clear sign that Altcoins are about to enter historic breakout periods. In addition to technical indicators, it is important to monitor factors such as technological innovation, economic conditions and social information to better understand the growth potential of Altcoins. Acumen to investor psychology and behavior is also an important factor when evaluating Altcoin season. Hopefully through this article, Coin Shop has helped readers better understand Altcoin, wish you successful investing!