Cryptocurrency isn’t only limited to Bitcoin. Learn more about altcoins and how you might find the next big one. 

One aspect of personal financial planning is ensuring you continue to grow wealth through investments. A current hot topic in the world of investments is cryptocurrency. However, don’t just think “Bitcoin” when someone mentions cryptocurrency. Instead, think also of altcoins.

Let’s explore what altcoins are about.

What are Altcoins?

Alternative + Coin = Altcoin

Any cryptocurrency that is not Bitcoin is referred to as an altcoin since these other coins were created as alternative coins to Bitcoin.

Coins can lose their status as “altcoins” as they become more developed. For example, since Ethereum is such an important part of the crypto world today, it is no longer often referred to as an altcoin. However, Ethereum-based ventures will undoubtedly be known as altcoins.

Altcoins are produced for a variety of reasons. Some are designed to address problems in the finance industry, while others may be targeted to disrupt specific industries or functions, such as fashion or supply chain management. Some altcoins are produced solely for amusement. Garlicoin, for instance, was made for no apparent reason.

Altcoins were developed after Bitcoin and regularly rise and fall in popularity. Altcoins account for about 40% of the entire cryptocurrency sector. With over 5,000 altcoins available, it’s fair to assume that the vast majority will never be able to materialize into something useful or have significant long-term returns.

Because there are so many altcoins, it isn’t easy to declare whether they are all good or all bad. Rather, make sure you do your homework and know exactly what you’re getting into before putting your hard-earned money at risk by investing in  the various altcoins available.

How are Altcoins Categorized?

When it comes to altcoins, you should be aware that there are many types and that certain altcoins can fall into more than one category.

These categories include:

  • Mining-based cryptocurrencies: Coins minted via a mining process, similar to Bitcoin, in which new coins are minted by solving complex math puzzles to unlock new blocks.
  • Stablecoins: Coins that are pegged to external currencies in a bid to reduce volatility.
  • Security Tokens: Digitally tokenized versions of conventional stock, security, and equity. These coins are linked to a company and are often distributed via initial coin offerings. These coins, like conventional stocks, usually pay a dividend or show a share in a company.
  • Utility Tokens: These coins are usually sold during an ICO and can be traded for services or goods.

Should You Invest In Altcoins?

As savings, cryptocurrencies have a certain allure. Some investors want to invest in altcoins because they believe in the project’s vision or the coin’s use case. Others may be interested in the project’s hype or big future achievements.

The allure of investing in an altcoin is, in general, the high-profit potential. Altcoins have a much smaller market cap than Bitcoin, but there may be significant gains.

When you invest in an altcoin, you might not always know where your money is going or who is on the other side of the exchange. All it takes is a fast Google search for “SEC and cryptocurrency” to see the never-ending stream of fraud and Ponzi scheme allegations.

Smaller capitalization coins should be avoided. While some coins are experimenting with blockchain technology, their small capitalization makes them susceptible to market manipulation and hacks.

The price per coin is not the same as the coin’s value when it comes to market capitalization. The market capitalization reflects the valuation. Low-cap coins have more potential for development than large-cap coins, but they can also be riskier.

Risks of Altcoins

  • High risk: Investing in altcoins is highly risky since most altcoins lose value over time. Altcoin prices are extremely volatile since they are almost entirely determined by demand and supply, which is independent of any real-world commodity or medium. This means that massive price swings are likely. 
  • More vulnerable to price manipulation: Altcoins are more vulnerable to price manipulation due to their limited market capitalization and trading volume, which means that small inflows and outflows of capital can have a big impact on the price.
  • Loss of functionality: When the technology that underpins altcoins becomes outdated or replaced, they will lose their value and become obsolete.
  • Lacking consumer protection: Unlike conventional banks, there are no official protections or insurances in place for cryptocurrency.
  • Regulatory issues: Since the asset class is so recent, governments and banks have yet to develop a monetary policy that is consistent with it. As a result, there’s always the possibility that their tax status, trade laws, or even legal status could change overnight.

Potential Rewards of Altcoins

The risk-reward tradeoff states that the greater the risk, the greater the possible reward. However, that is a major “if” because calculating the risk-reward tradeoff with altcoins is usually more difficult.

Overall, if you do your research well, you will be well compensated. It’s not unusual for altcoins to increase in value by more than 100 times in a matter of months. However, identifying the right projects that will develop rapidly in the future is difficult.

Conclusion

Be aware of your options when it comes to cryptocurrency, but at the same time, do your due diligence and understand more about what your altcoin of choice is about before delving into it. The potential for both profit and loss are in your hands.

 

What are your thoughts on altcoins?

 

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