A cryptocurrency is a digital currency that keeps records of balances and transactions on a distributed ledger, which is most commonly in the form of a blockchain.,
Cryptocurrencies enable peer-to-peer transactions between participants across the globe on a 24/7 basis.
A distributed ledger is a database with no central administrator that is maintained by a network of nodes. In permissionless distributed ledgers, anyone is able to join the network and operate a node. In permissioned distributed ledgers, the ability to operate a node is reserved for a pre-approved group of entities.
How does cryptocurrency work?
Cryptocurrency works through networks of nodes that are constantly communicating with each other to stay updated about the current state of the ledger. With permissionless cryptocurrencies, a node can be operated by anyone, provided they have the necessary technical knowledge, computer hardware and bandwidth.
However, not all cryptocurrencies work in the same way. While all cryptocurrencies leverage cryptographic methods to some extent (hence the name), we can now find a number of different cryptocurrency designs that all have their own strengths and weaknesses.
The two major categories of cryptocurrencies are Proof-of-Work and Proof-of-Stake. Proof-of-Work coins use mining, while Proof-of-Stake coins use staking to achieve consensus about the state of the ledger.
In order to send and receive cryptocurrency, you need a cryptocurrency wallet. A cryptocurrency wallet is a software that manages private and public keys. In the case of Bitcoin, as long as you control the private key necessary to transact with your BTC, you can send your BTC to anyone in the world for any reason.
You know about Bitcoin, but there are thousands of other cryptocurrencies. It’s time to talk about altcoins.
As cryptocurrencies continue to take off in both tech and finance, every now and then new altcoins are launched to compete with Bitcoin in the cryptocurrency market.
But what is an altcoin, and how does it compare to a mainstream cryptocurrency such as Bitcoin?
What Is An Altcoin?
The “alt” in altcoin means “alternative.” In very simple terms, an altcoin refers to any cryptocurrency that is not Bitcoin. As with a regular crypto, altcoins use blockchain technology in its transactions.
The number of altcoins in the market is unclear: some reports say that there are as many as 5,000 altcoins in existence. Regardless, what we do know is that these altcoins make up approximately 40 percent of the cryptocurrency market.
How Do Altcoins Work?
Altcoins are pretty much identical to Bitcoins in terms of technology. As cryptocurrencies, they use blockchain technology, form part of a decentralized network, and are transferable from one crypto wallet to another.
However, in terms of energy consumption, many altcoins use less energy compared to Bitcoin. For example, Litecoin, one of the more well-known altcoins, records a per-transaction energy efficiency of 18.5 kilowatt-hours (KWh), whereas Bitcoin needs 707 KWh.
Bitcoin, the most successful cryptocurrency, comes at a heavy environmental cost.
An altcoin that is no longer popular and is no longer favored by investors is called a “shitcoin”. This term can also refer to altcoins that serve no particular purpose and lacks the proper security technology required by cryptocurrencies.
Pros and Cons of Altcoins
Altcoins generally aim to address the technological shortcomings of Bitcoin.
Certain altcoins are built for specific purposes in different sectors, such as Enterprise Ethereum, which is used in real estate, healthcare, logistics, and transportation. Transaction fees for altcoins are also comparatively lower compared to Bitcoin, though this is dependent on network usage.
In the investment world, the existence of hundreds of altcoins in the cryptocurrency market also means that they are able to counter the dominance of Bitcoin and contribute to market competition.
Moreover, many people invest in altcoins to diversify their investment portfolio, and a lot of investors view altcoins as safety nets to fall back on in case Bitcoin loses its value one day.
Despite the edge that they have as niche cryptocurrencies, altcoins do have their disadvantages. Due to the niche status of many altcoins, they are extremely volatile and risky investments. The lack of infrastructure behind some altcoins also means that anyone who trades with altcoins are more vulnerable to scams.
To address the volatility issues, another class of cryptocurrency evolved: stablecoins. The value of a stablecoin is pegged to a real world asset, like US dollars or gold, and most issue new currency at a 1:1 ratio.
Examples of Altcoins
There are thousands of altcoins in existence. Here are some more well-known ones.
- Ethereum: The most popular alternative to Bitcoin, Ethereum is used to “codify, decentralize, secure, and trade just about anything.” To give you an idea of how popular Ethereum is, the crypto is on Microsoft Azure as a Blockchain-as-a-Service offering.
- Litecoin: Litecoin was released on GitHub as an open-source software project by Charlie Lee, an ex-Google employee. Litecoin is known for its fast block process time, capable of processing a block every 2.5 minutes compared to Bitcoin’s ten minutes.
- Cardano: Cardano is a decentralized proof-of-stake blockchain with strong foundations in smart contracts and decentralized applications (dapps), with applications in identity management and tracibility.
What’s Your Favorite Altcoin?
The abundance of altcoins show that the cryptocurrency market is very much alive and in demand, and there is more to crypto than Bitcoin. Before you decide to invest in altcoins, make sure you conduct proper due diligence, because like any investment, altcoins pose a significant risk.
