Crypto 101

Altcoin: what is it and how do altcoins work?




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mysterious cryptocurrency altcoin Crypto Heroes

It seems that only very few people haven’t heard of Bitcoin yet. As the very first cryptocurrency (on the market since 2008), it has rightfully taken the place at the top of the crypto food chain. However, not many people know about the mysterious Altcoin. In this post, we will be discussing what Altcoins are and how they work.

Altcoin per definition

“Altcoin” quite simply means ALTernative to BitCOIN. Grouped under this term, there are hundreds of cryptocurrencies that simply aren’t Bitcoin.

Altcoins can differ from Bitcoin in a variety of ways:

  • economic method,
  • coin distribution method,
  • proof-of-work mining algorithms,
  • programming language,
  • hardware,

or there are any other changes done, however minor.

In fact, many altcoins are created as a result of “forks”. Fork altcoins are created in two ways:

  • a crypto project is duplicated and then started again, with a possibility to make changes this time;
  • a crypto project is split because the community disagrees on how it can/should be improved.

Other altcoins are usually launched in an ICO process.

Why are there so many altcoins?

In fact, most altcoins don’t even differ from Bitcoin much at all, because the aspects that are changed are not making the coin more useful in comparison. If just a minor aspect is tweaked in a useful-sounding way, an altcoin can be created too. For example, if the amount of coins is greater than that of Bitcoin, in economic terms that simply means that a single coin is worth less money.

As technically anyone can create an altcoin, many of them have fewer developers working on them, so the security can be compromised easier. Not to mention that most altcoins are ultimately less useful because they have smaller network effects.

Bitcoin is not perfect

However, Bitcoin is definitely not perfect, and the need for altcoins that would be able to change some aspects for the better would definitely be useful and interesting for investors. If we were to look at the very essence of altcoins, we would see that they serve the ultimate purpose to decentralize the system or utility that is defined by Bitcoin.

As Bitcoin grows, more and more problems are getting noticed because more and more people are effectively texting it by using in their own scenarios. Of course, the problems that people find with Bitcoin were not necessarily thought of at the point of time when Bitcoin was first designed and implemented. That is where altcoins provide a healthy competition to the first widely used-cryptocurrency, and address concerns over the long-term viability of Bitcoin.

For example, one of the biggest downsides of Bitcoin is just how much energy the “proof of work” requirement needs. A new verification method that is less costly is in high demand. People also wish for lower fees and faster processing times in connection to that.

Alternative coins illustration Crypto Heroes

Among a plethora of barely known altcoins, there are some that have made their way into the mainstream, more or less. Following is the list of most popular altcoins on the market today

  • Ether: this is the cryptocurrency that was generated by the Ethereum platform. For this reason, Ether is often also referred to as Ethereum. The Ethereum platform is a ledger technology which other companies can build on.
  • Ripple: this coin is actually owned by a private company. Although it is the company itself that is called Ripple (and its tokens are named XRP), they often call the currency Ripple too anyway. Some banks use Ripple for cross-border payments, but they’re basically just sending digital IOU rather than actually using the XRP tokens.
  • Litecoin: Litecoin was originally a fork of Bitcoin – i.e. this crypto was made upon the basis of Bitcoin with slight changes. Nevertheless, now it is a separate currency, despite the name. The architectural changes of Litecoin have lead to fast transaction speeds and low fees compared to Bitcoin.
  • Monero: This coin is designed to be secure and untraceable. Unlike with Bitcoin, transactions of Monero can’t be traced back to individual users.

But Altcoins are not perfect either?

Of course, the otherwise crypto landscape would be much more homogenous, if a perfect – or even a close to perfect- solution existed. At the moment, many altcoins use the same hashing algorithm that Bitcoin does, SHA-256 – and are essentially Bitcoin’s forks.

The second popularity place takes hashing algorithm called, which is used with Litecoin. Of course, there is a range of other hashing algorithms, specialized for other coins (such as X11, X13, X15, NIST5, and 100% POS). However, there is no guarantee that the technology, on which some altcoins are “run” are even Blockchain-based or are a trust network with a solid distribution.

Does it make sense to invest in altcoins?

Yes, it does – but always having done due diligence and checked the coin you are about to invest in thoroughly. Altcoins provide a way for investors to put money in a great project they believe in, or – to be fair – even for seasonal traders. The fact remains, that those who buy altcoin may actually expect good returns if the investors are committed and know the coin they invest in well.

Is there a future for altcoins?

Since their introduction, many altcoins have become widely recognized and accepted. This happened especially due to the hype that has been shaped around Bitcoin.

In the end, there is nothing so special about Bitcoin that it should be the default cryptocurrency. It has value because people believe in it and it the fact that what it gives has a lot of advantages. However, the tables could turn as soon as any new altcoin emerges, the advantages of which trump those of Bitcoin itself.

If we were to look at the very essence of altcoins, we would see that they serve the ultimate purpose to decentralize the system or utility that is defined by Bitcoin. And if there are enough people who switch to a revolutionary altcoin, even Bitcoin could be abandoned.