What are Altcoins? An Exposure
What Are Altcoins?
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Altcoins are cryptocurrencies other than Bitcoin (BTCUSD). They share characteristics with Bitcoin but are also different in other ways. For example, some altcoins use a different consensus mechanism to produce blocks or validate transactions. Or they distinguish themselves from Bitcoin by providing new or additional capabilities, such as smart contracts or low price volatility.
As of November 2021, there are over 14,000 cryptocurrencies. According to CoinMarketCap, Bitcoin and Ether alone accounted for nearly 60% of the total cryptocurrency market in November 2021.1 So-called altcoins made up the rest. Because they are often derived from Bitcoin, altcoin price movements tend to mimic Bitcoin's trajectory. However, analysts say the maturity of cryptocurrency investing ecosystems and the development of new markets for these coins will make price movements for altcoins independent of Bitcoin's trading signals.
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Understanding Altcoins
"Altcoin" is a combination of the two words "alternative" and "coin" and includes all alternatives to Bitcoin. The basic framework for Bitcoin and altcoins is similar. Thus, they share code and function like peer-to-peer systems or like a giant computer capable of processing large amounts of data and transactions at the same time. In some instances, altcoins also aspire to become the next Bitcoin by becoming an inexpensive method for digital transactions.
But there are also several differences between Bitcoin and altcoins. Bitcoin is among the first iterations of a cryptocurrency, and its philosophy and design set the benchmark for the development of other coins. However, its implementation has several shortcomings. For example, proof of work (PoW)—the consensus mechanism used to create blocks—is energy-intensive and time-consuming. Bitcoin's smart contract capabilities are also limited.
Following its introduction in 2009, Bitcoin became the first widely adopted application of proof of work (PoW).2 PoW forms the basis of many other cryptocurrencies as well, allowing for secure, decentralized consensus.
Altcoins improve upon Bitcoin's perceived limitations to establish a competitive advantage. Several altcoins use the proof of stake (PoS) consensus method to minimize energy consumption and the time required to create blocks and validate new transactions.
Ether, for example, the world’s second-biggest cryptocurrency by market cap, is used as gas (or payment for transaction costs) in smart contracts on the Ethereum blockchain. As the much-anticipated launch of Ethereum 2.0 has demonstrated, altcoins generally address the traditional critiques of Bitcoin, like scalability and sustainability.3
By distinguishing themselves from Bitcoin in this manner, altcoins have created a market for themselves. In turn, this has attracted investors who see potential in them as alternatives to Bitcoin. The investors expect to profit as altcoins garner more traction and users and appreciate in price.