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Concepts: Altcoins

Ozier Zarouq Khan
Ozier Zarouq Khan 29 June 2021

Altcoins are ‘Alternative coins’ — that is, alternatives to the dominant Bitcoin, still in the running to become the Hoover of digital assets.

That’s really all that defines an altcoin, but the term is more often used for low-volume, low market cap coins that are thought to have potential. Confusingly it’s also used for assets like Dogecoin that aren’t seriously thought to have potential at all.

What is an altcoin?

Altcoins are defined by what they aren’t — Bitcoin — rather than by what they are, so we’re talking about a fairly heterogeneous mixed bag. Some use different consensus algorithms, all have their own rules and their own dedicated communities (sometimes tiny, but always dedicated).

Bitcoin is by far the largest digital asset by market cap and price:

Market Capitilization of BTC and ETH

This doesn’t necessarily mean that Bitcoin delivers better returns, but it does underscore the point that BTC is the asset others define themselves against for a reason.

Often, altcoins owe their existence to a perceived shortcoming in the Bitcoin blockchain or coin. One thing altcoins all have in common is that they’re younger than Bitcoin, meaning they have had the chance to learn from the mistakes of an unwieldy PoW blockchain with a block time around 10 minutes. This isn’t caused solely by Proof of Work; Ethereum, one of the earliest and most successful altcoins, also uses PoW (for now) and its block time is around 13 seconds.

For example, Litecoin has a much lower block time than Bitcoin too; this, and the fact that it can be mined on ordinary computers, is what makes it ‘lite’; it requires less computing resources and can process payments much faster.

Some altcoins are true digital currencies with their own underlying blockchains, not tokens running on Ethereum or a similar substrate. Others are ERC-20 tokens, or smart contract-based coins running on another blockchain that allows similar functionality.

How do altcoins work?

Altcoins typically work more or less like Bitcoin: users buy them with fiat currency or with other digital assets, or (more rarely) get them in airdrops, earn them through DeFi, or mine them. They go to wallets with a private key, just like a Bitcoin wallet, and they operate on blockchains, decentralized immutable ledgers protected by cryptography.

The benefits of altcoins include faster transaction times, low transaction fees and the pressure they exert on the digital asset space as a whole through competition. Against that, you have to consider that prices are often even more volatile than BTC, and many altcoins can’t show Bitcoin’s two-steps-forward-one-step-back price progression. They’re also more prone to scams and fraud, at least in some cases, and can be more difficult to access if they’re not yet listed on mainstream exchanges.

Types of altcoins

Altcoins can be broken down into basic types, including:

Stablecoins

Stablecoins are distinguished from other digital assets by how they derive their value. They’re true coins, with their own blockchain, but they don’t derive their value from their consensus algorithm. Instead they’re pegged to a real-world asset like gold, fiat currencies or commodities and securities.

Mining-based altcoins

Mining-based altcoins work the way BTC does, deriving value from the mining process using cryptographic problem-solving and on-chain consensus to create new blocks and new coins. Typically, earlier altcoins rely on PoW algorithms similar to Bitcoin’s, though usually faster. Others use other methods of generating blocks and consensus, including methods that don’t technically constitute mining, as with the PoS-based Bitshares.

Security tokens

Security tokens are tokens that buyers purchase in the expectation of earning rewards in the future in the form of profits from the issuing company. They’re functionally the same as conventional securities, except that the security contract is represented on the blockchain. That has major advantages in terms of fungibility (tokens can be bought and traded immediately in a secondary market on exchanges) and security. But as always there is no solid guarantee of a return.

Utility tokens

Utility tokens are used to parcel out and account for services within a network; gas is Etheruem’s utility token, for instance. They don’t come with ownership, governance or profitability, but some can still be traded on exchanges.

The development of the altcoin market

The first altcoin was Namecoin. Developed on the Bitcoin codebase, capped at 21 million Namecoins and introduced in April 2011, Namecoin was built to counter a perceived issue typical of the concerns of early digital asset adopters: decentralization and censorship resistance. Namecoin allows users to have their own .bit domains.

Shortly afterwards, in October 2011, Litecoin emerged as the “silver to Bitcoin’s gold” — more suitable to smaller, more frequent transactions. Litecoin is capped at 84 million coins, four times the Bitcoin coin cap (for comparison purposes, there’s an 8:1 silver-gold ratio in terms of quantity, and a 50:1 ratio in terms of price). Currently, Litecoin is regarded as a worthwhile investment in its own right, though it’s not close to ruffling the feathers of the market-dominating Bitcoin.

From this point, the story of altcoins is one of explosive proliferation. In 2015, the best-performing altcoin, Ethereum, began commercial operation. Ethereum is a general-purpose blockchain that also functions as the substrate for a large number of token and stablecoin altcoins, as well as numerous DeFi and other decentralized business applications. Its native ETH token is the second-best performing digital asset, behind BTC.

The top 9 altcoins

1: Ethereum (ETH)

Ethereum is one of the most venerable and valuable altcoins, as well as one of the most productive projects out there. The native token is currently trading at $1,952, and Ethereum is also home to many token-based altcoins.

Ethereum has a market cap of $223,492,525,546.94, a trading volume of $32,877,067,497.58, and a per-token price of $1,919.2. (All statistics and prices are correct as of June 22, 2021.)

2: Litecoin (LTC)

Created by ex-Google engineer Charlie Lee, Litecoin is designed to allow mining by consumer-grade GPUs rather than the massive professional rigs required for Bitcoin, and has much faster transaction rates. Partly because of this, Litecoin has a small but growing market of merchants accepting it as payment.

Litecoin has a market cap of $8,396,729,923.98, a trading volume of $2,976,265,261.76, and a per-token price of $125.79.

3: Cardano (ADA)

Created by a panel of engineers and mathematicians, including Charles Hoskinspn, ex-of Ethereum’s founding committee, Cardano was the first blockchain to be referred to as the “Ethereum killer”, though this turned out to be premature. The Cardano blockchain has ambitions to become a world financial hub, but currently struggles to find significant user base. It remains one of the most successful and interesting altcoins.

Cardano has a market cap of $37,417,586,951, trading volume of $4,382,788,838, and per-token price of $1.17.

4: Polkadot (DOT)

Polkadot is aimed at interoperability between different blockchains, using bridge and relay chains to achieve rapid transactions across custom blockchains it calls parachains as well as other chains like Ethereum. Users can create their own custom blockchains on Polkadot as well as their own decentralized applications and tokens.

Polkadot has a market cap of $14,932,041,349, trading volume of $2,400,777,250, and per-token price of $15.65.

5: Bitcoin Cash (BCH)

BCH is one of the earliest and most successful hard forks of the original Bitcoin blockchain. Bitcoin Cash is designed to work more or less the same as Bitcoin but considerably faster, thanks to larger block sizes (8mb vs 1mb) and other technical alterations. It’s faster and more likely to be used as a currency, but it’s also popular with investors.

Bitcoin Cash has a market cap of $8,361,781,352, trading volume of $2,119,348,082, and per-token price of $445.60.

6: Stellar (XLM)

Stellar is designed to connect financial institutions to permit large transactions to take place securely and rapidly. There’s definitely a clear market need for this, based on the high fees and slow reaction times of the traditional financial sector, but Stellar is open to anyone and permits cross-border, currency-agnostic transactions for consumers too.

Stellar has a market cap of $5,524,434,52, a trading volume of $729,034,029, and a per-token price of $0.239.

7: Binance Coin (BNB)

Binance is the largest digital asset exchange in the world, and has its own coin for paying the fees associated with trading on the Binance exchange. Binance Coin began life as an ERC-20 token before transitioning to its own mainnet, now the substrate for the Binance exchange.

Binance Coin has a market cap of $41,229,847,506, a trading volume of $3,045,470,473, and a per-token price of $268.82.

8: Tether (USDT)

Tether is one of the first and most successful stablecoins, tied 1:1 to the price of the US dollar. One of its main uses is in transferring money more quickly between fiat currencies and digital assets, but its price stability also makes it an attractive safe haven investment.

Tether has a market cap of $61,769,643,434, a trading volume of $88,590,498,577 and a per-token price (always) of $1.00.

9: Ripple (XRP)

Ripple is a global payments system for institutions and businesses, offering on-demand liquidity and rapid settling. It has its own token on its own chain, XRP, for making payments, and it’s one of the best-known and most successful altcoins.

Ripple XRP has a market cap of $27,130,982,622, a trading volume of $4,164,737,319, and a per-token price of $0.5884.

The future of altcoins

Altcoins are sometimes compared to the bank notes issued by a network of smaller US banks at the state, county and town level before the 1929 crash. There was an enormous variety in notes, but each bank had only a small reserve of actual value (gold), and when this was fractionally banked there was a persistent risk of collapse. In time, banks consolidated and the power to issue currency was arrogated to the Treasury Department and Mint.

Will altcoins follow a similar trajectory, with consolidation and centralization replacing the hundreds and thousands of “small bank” altcoins currently available? It seems unlikely. There are several crucial differences that make the analogy flawed. First, each digital asset is its own “currency”, where the small banks all issue dollars, nominally interchangeable on a 1:1 basis. Second, these dollars had a basic value: gold reserves. It was a want of gold reserves which did for individual small banks. But this isn’t the case with modern stablecoins. And it’s not the case with mining or other algorithmically-based altcoins either.

What’s more likely is that a small number of digital assets will function as reserve assets (essentially “digital gold”) while a larger number will be used for transactions and speculation. This process is already quite well-developed and will probably continue along similar lines, with ETH and a few other altcoins tracking BTC price rises and falls while DeFi hunts for, and drives the creation of, new arenas. In other words, altcoins are here to stay and represent a major opportunity.

Disclaimer:

Disclaimer: This publication is general in nature and is not intended to constitute any professional advice or an offer or solicitation to buy or sell any financial or investment products. You should seek separate professional advice before taking any action in relation to the matters dealt with in this publication. Please note our full disclaimer here.

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