The term “altcoin” refers to any cryptocurrency that is not Bitcoin. Among the most popular altcoins are Polkadot (DOT), Ripple (XRP), Cardano (ADA) and many others. These projects promise a variety of innovative features, from smart contracts to improved transaction speeds.
The difference between altcoins and bitcoin
Bitcoin (BTC) was the first decentralized cryptocurrency, launched in 2009 by Satoshi Nakamoto – a pseudonym for a person or group whose real identity remains unknown. The main purpose of its creation was to allow direct, peer-to-peer digital payments to be made without depending on financial intermediaries (such as banks or governments).
Altcoins are all the other cryptocurrencies that have emerged since Bitcoin, created to provide diverse functionalities, from platforms for decentralized applications to currencies linked to real assets.
Types of altcoins
Altcoins vary widely in structure, purpose and utility. Below are some of the most common tokens:
Payment tokens
Payment tokens are created for use in financial transactions, often in more centralized systems. Examples include Ripple and Stellar.
Utility tokens
These are used for specific functionality such as paying for gas on blockchain platforms. Think of Ethereum as an outstanding example.
Governance tokens
Used to vote decisions in blockchain projects. Holders of such tokens directly influence the fee structure or the direction of project development.
Memecoins
Cryptocurrencies like Dogecoin or Shiba Inu were originally created as jokes, but they have caught the attention of investors and have gathered large communities.
Stablecoins
Stablecoins retain their value relative to fiat currencies such as the dollar. They are less speculative and more widely used for saving.
Layer 1 and Layer 2 protocols
These improve the scalability and performance of underlying blockchains. For example, Solana and Arbitrum facilitate faster and cheaper transactions.
Real-world tokenized assets (RWAs)
This category brings tangible assets, such as real estate or bonds, onto the blockchain for visibility and liquidity. Innovative projects like Centrifuge are leaders in this segment.
The benefits of altcoins
1. Extensive functionality and innovation
Bitcoin is great as a store of value or payment method, but many altcoins are built for much more. Altcoins like Ethereum are turning the blockchain into a platform for smart contracts and decentralized applications (dApps ). They also underpin growing sectors like DeFi and blockchain gaming.
Example:
- Ethereum offers the ability to develop applications on its main chain.
- Polygon offers scalable solutions for developers.
- Axie Infinity has created an ecosystem dedicated to blockchain-based games.
In short, altcoins open up a universe of possibilities beyond simple transactions.
2. Low transaction speeds and costs
One of the disadvantages of Bitcoin is its limited scalability, which leads to high fees and long transaction processing times. In contrast, altcoins are designed to be much faster and more efficient.
Notable examples include:
- Litecoin offers transactions four times faster than bitcoin.
- Solana can process up to 65,000 transactions per second.
- Stellar is ideal for fast and cheap international transfers.
This makes them suitable for frequent use or applications requiring high throughput.
3. Accelerated growth potential
Altcoins, especially those with a smaller market capitalization, often offer spectacular growth potential. Although they come with higher risk, innovative projects that capture interest can bring impressive returns.
Examples:
- Shiba Inu ‘s explosive growth in 2021.
- Avalanche ‘s growing popularity due to short transaction completion times.
Investors who identify these pearls can benefit significantly, provided they do careful analysis.
4. Portfolio diversification
Diversification is one of the most important strategies to minimize investment risk. Because the performance of altcoins is not always directly correlated with that of Bitcoin, they can provide opportunities for gains even in a correcting market.
The diversification advantage:
- Risk balancing by including multiple types of crypto assets.
- Access to specific niches such as privacy (Monero) or decentralized governance (makerDAO).
A well-structured portfolio can bring long-term stability and opportunities at key moments.
5. Increased energy efficiency
Bitcoin’s high energy consumption, caused by the Proof-of-Work (PoW) mechanism, attracts criticism. In contrast, many altcoins adopt more sustainable systems such as Proof-of-Stake (PoS).
Energy-efficient examples:
- Cardano operates on a full PoS protocol.
- Tezos emphasizes saving resources, making it ideal for the environmentally conscious.
These alternatives help reduce the carbon footprint and promote sustainable blockchain technology.
6. Specialized use cases
Altcoins are not just general platforms. Many are designed to solve specific problems or support separate niches:
- Monero and Zcash improve transaction privacy.
- Chainlink connects blockchain to the real world using external data.
- Enjin supports gaming communities and ecosystems.
The diversity of use cases means there’s a solution for almost any challenge imaginable.
Disadvantages of altcoins
1. Extreme volatility
Altcoins are notorious for their dramatic price fluctuations. Unlike Bitcoin, which has a relatively greater degree of stability, many altcoins can experience price swings of 20% or more in a single day. This can be particularly risky for new investors or those who cannot constantly monitor the market.
2. Lack of liquidity
Why does liquidity matter? Low liquidity means you will have difficulty finding a buyer at the asking price. In addition, large trades can lead to ‘price slippage’, which means you’ll get a lower price than you want for your coins. Lesser-known altcoins often suffer from low liquidity. In other words, it can be difficult to buy or sell them quickly, especially if the market is saturated or inactive. Practical tip: check the daily trading volume of an altcoin before investing.
3. Risk of rug pull and scams
The altcoin space has become fertile ground for “rug pull” schemes, where developers abandon the project and disappear with investors’ funds. This is one of the biggest risks facing altcoin investors. How can you protect yourself?
- Check out the team behind the project (transparency is key).
- Look for independent technical audits of smart contracts.
4. Bitcoin addiction
Even though altcoins bring diversity, most of them still track their price movements according to bitcoin. If bitcoin falls, altcoins tend to follow the same direction, often with more dramatic variations. Basically, the success or failure of Bitcoin has a strong impact on altcoins. This makes diversification less efficient than it first appears.
5. Risk of failed projects
Many altcoins fail or are abandoned due to intense competition, lack of adoption, unrealized promises or insufficient funding. This means you can lose all the capital invested. A recent study revealed that over 90% of altcoins launched in the last 5 years are no longer active in the markets.
Whether you are looking to expand your digital portfolio by acquiring altcoins with growth potential or make a profit by strategically selling them, the Abarai platform offers you a secure environment, an intuitive interface and the ability to make secure and instant transactions!