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TEMPO.CO, Jakarta - Since its creation in January 2009, Bitcoin has become the backbone of the cryptocurrency market—although some argue that the first digital currency may have emerged as early as 1990. Over the past few years, Bitcoin has gradually gained popularity, and other cryptocurrencies besides Bitcoin have started joining the market. The latter is what we call an “altcoin”.
Altcoins simply refer to any cryptocurrency other than Bitcoins. They aim to provide alternatives to Bitcoin, offering diverse features and potential advantages.
Let's take a look at what altcoins are, taken from Investopedia and Business Insider.
What is Altcoin?
Investopedia explains that the term “altcoin” is short for “alternative coin”. They basically serve as an alternative, including any cryptocurrency and token, to Bitcoin. However, some define altcoins as cryptocurrencies that are not Bitcoin and Ethereum.
The journey of altcoins began in 2011 with the introduction of Namecoin, the first altcoin to enter the market. According to Business Insider, Namecoin was created using the same blockchain engine and code as Bitcoin.
Following the emergence of Namecoin, a number of altcoins were released, including Ethereum, Chainlink, Aave, Stellar Lumens, Uniswap, PotCoin, and Litecoin.
Despite being collectively referred to as altcoins, these cryptocurrencies possess unique characteristics and serve distinct purposes. This is because, as Investopedia elaborates, most altcoins are designed with different visions.
They also use diverse consensus mechanisms to validate transactions, open new blocks, or simply distinguish themselves from Bitcoin (and Ethereum).
Differences Between Bitcoin and Altcoin
While Bitcoin remains the leader in the cryptocurrency space, altcoins have emerged to fill gaps and introduce new capabilities. Here are some major differences between Bitcoin and altcoins, as highlighted by CNBC and 101 Blockchains:
a. Purpose
Bitcoin, the pioneering cryptocurrency, was primarily designed as an alternative to traditional financial systems. It enables secure peer-to-peer transactions and anonymity.
In contrast, altcoins serve a diverse range of purposes. For instance, stablecoins are designed to minimize price volatility.
b. Technology
Bitcoin uses the Proof of Work (PoW) consensus algorithm to validate transactions and is powered by blockchain technology. In contrast, altcoins are built on different blockchain networks and can use different consensus algorithms, such as Proof of Stake and Proof of Authority.
c. Supply
Bitcoin, with its limited supply of 21 million coins, has established itself as a scarce digital asset. In contrast, the cryptocurrency market is teeming with thousands of altcoins, as reported by CNBC.
d. Popularity
Bitcoin is inarguably the most popular cryptocurrency, with a massive market capitalization of over US$1 trillion. Conversely, altcoins, as alternative digital currencies, are still striving to gain similar levels of market adoption and valuation.
Pros and Cons of Altcoins
Altcoins, while offering a diverse range of features and functionalities, come with their own set of advantages and drawbacks, depending on the currency and its intended purpose.
Pros of Altcoins:
- Altcoins, in general, are said to be the “improved versions” of cryptocurrency as they were initially built to address the shortcomings of other established cryptocurrencies.
- Altcoins boast a higher chance of survivability since they have more utilities.
- There is a sheer amount of altcoins you can choose from, offering a wide range of functions.
Cons of Altcoins:
- Altcoins are still considered to be less popular and have smaller market capitalizations.
- With fewer players and less activity in the market, altcoins have thin liquidity.
- Many altcoins are scams or have lost developer and community interest.
- Given the multitude of choices, it is hard to distinguish the specific uses of altcoins from one another.
Types of Altcoins
Altcoins come in various forms, with each type offering distinct functions. Citing Investopedia, here are some of the primary categories of altcoins:
a. Stablecoins
The primary function of stablecoins is to reduce volatility by pegging their value to another asset. Tether’s USDT and USD Coin (USDC) are among the notable examples of stablecoins.
b. Payment Token
Payment tokens are used as currency to exchange value between parties. Bitcoin is a type of payment token since it serves the same function.
c. Utility Tokens
These altcoins grant users access to services or products within a network. Filecoin, for instance, allows users to purchase storage space on a decentralized network.
d. Meme Coins
As the name implies, meme coins like Dogecoin and Shiba Inu are inspired by internet memes or cultural phenomena. They gain popularity rapidly and are typically utilized for short-term purposes.
e. Security Tokens
Regulated by the Securities and Exchange Commission, security tokens represent fundraising efforts/ownership or tokenized assets that are built to act as securities.
f. Governance Tokens
Governance tokens are considered to be utility tokens, but they specifically function to allow holders certain rights within a blockchain, like voting for changes to protocols.
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