Bitcoin vs Altcoins: How are they different?
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The popularity of Bitcoin and altcoins last year has gotten many people interested in digital currencies. But How to determine the best choice for you? We have seen the rise of cryptocurrencies other than Bitcoin, with newer tokens offering more and more features.
According to Arcane Research,
“Bitcoin’s performance has been dwarfed by the incredible altcoin growth this year. 2021 has felt like a continuous all-season, only taking a breather during the summer months. This all-season has seen several short-lasting bull runs in various parts of the markets as traders have rotated through the narratives.”
The research firm has further said that while Bitcoin has beaten the stock market by a landslide, we are also seeing other cryptocurrencies overtaking it or, at least, coming very close to something like that.
With such a big buzz, we must have a look at what altcoins are, how they differ from Bitcoin, and how good of an investment they are.
Table of Contents
Understanding Altcoins
We use the term “altcoin” to refer to any type of cryptocurrency that isn’t Bitcoin. While Bitcoin is also a cryptocurrency, it stands alone, apart from all the other digital currencies. There are a few reasons for this.
First, Bitcoin is much better known in comparison to other cryptocurrencies. Moreover, it was the first crypto coin to come into existence. It serves as the pioneer of the crypto industry and, for this reason, it has a place of its own. All other cryptocurrencies were built after Bitcoin’s success. It essentially paved the way for them.
Altcoin is a term made from a combination of alternative and coin, given that people see altcoins as alternatives to Bitcoin. It is essentially an umbrella term that is used to describe all cryptocurrencies other than Bitcoin.
How Is Bitcoin Different from Altcoin?
It is important to keep in mind that alternative currencies use Bitcoin’s blockchain system as their underlying technology. Therefore, Bitcoin still remains the first decentralized digital currency.
The basic frameworks of Bitcoin and altcoins are similar. They function like peer-to-peer systems. Or, in simple words, they rely on large computers that can process large amounts of data and transactions.
As of January 2022, there were over 16,000 cryptocurrencies in circulation. For most altcoin creators, the goal is to build a system that will address the limitations of Bitcoin.
For example, Bitcoin still relies on the proof of work (PoW) system. This system is extremely energy-intensive. Altcoins serve to solve this problem by using a consensus that minimizes energy consumption and the overall time required.
Altcoins aim to set themselves apart by providing people with an inexpensive transaction alternative to Bitcoin, along with other features that Bitcoin lacks.
How are they Different from Bitcoin?
As mentioned earlier, the basic frameworks for altcoins and Bitcoins are largely similar. There are, however, a few differences between the two.
Here, we must address the fact that altcoins are built on the success of Bitcoin. The goal of Bitcoin was to decentralize the world of finance and offer greater levels of anonymity to its users. It aimed to give power back to the people by making the system transparent and public.
One of the primary differences between Bitcoin and altcoins is that Bitcoins are used as a form of payment. Altcoins, meanwhile, can also be used as governance tokens or stable assets. These tokens serve purposes that are very different to those of Bitcoins.
Another major difference is the use of DeFi. A popular example of DeFi is the NFT.
Almost all Defi projects are based on alternative currencies and their blockchains, such as the Ethereum blockchain. This makes Bitcoin very limited in terms of new projects it can produce.
Bitcoin has wide usage when it comes to investment institutions. These institutions buy billions worth of Bitcoins as investments. Conversely, altcoin prices are largely determined by smaller firms and retail investors.
Further reading: What Is Fintech In Simple Terms
Types of Altcoins
There are several different types of altcoins. They all work differently from each other and have different purposes. Read on below to find out the most common types of altcoins that exist.
1) Stablecoins
As the name suggests, stablecoins aim to reduce the volatility of cryptocurrencies. They do this by following the price of another asset, such as the U.S. dollar or precious metals.
Stablecoins attempt to mimic the value of the asset they are following. If the price of the asset fluctuates, the investor of the coin can then take steps to stop any damage from happening before the coin dips.
Popular stablecoins include Tether’s USDT and the USD Coin.
2) Mining-based Altcoins
These altcoins use a process called mining. Mining is done to verify transactions and add more coins to the supply.
To mine, participants (miners) have to solve mathematical equations. The first miner to solve the equation verifies the block of the transaction. They then get crypto awards based on this verification.
3) Meme Coins
Meme coins are exactly what the name suggests. These are coins inspired by popular meme culture. So, basically, they come into existence as a result of a silly joke.
Meme coins are extremely volatile since they gain popularity in an extremely short period of time. And then people move on to the next thing.
A good example is that of Dogecoin , which gained immense popularity following Elon Musk’s tweet.
4) Utility Tokens
People can use utility tokens to access services within a network. For example, you can use them to pay network fees, redeem awards, or make purchases. Filecoin is an example of a utility token. You can purchase storage space on a network using Filecoin.
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Bitcoin vs Altcoins: Which is the Better Investment?
Bitcoin is currently the most purchased and traded cryptocurrency. It has a market capitalization of $1.2 trillion, more than 60% of the total market capital of cryptocurrencies.
In general, it has better investing fundamentals than most other altcoins. Its daily trading volume is over $30 billion. This makes it a highly liquid asset.
With altcoins, there is a possibility they may simply fade away forever. Bitcoin, on the other hand, has stood the test of time.
Usually, when Bitcoin goes up, so do altcoins. Similarly, when it falls, altcoins tend to fall as well. But the rise and fall of altcoins is typically a lot more volatile than that of Bitcoin.
Phillippe Bekhazi, the CEO of XBTO, has this to say:
“As the price of Bitcoin rises to a certain point, money will flow from Bitcoin to altcoins. As the price of altcoins rises, it flows back to Bitcoin.”
He adds that crypto coins, especially smaller ones, have significant return potential on the initial investment. Solana is a good example of this occurrence. One year ago, a single Solana token was worth $2; now, it’s over $200.
If you want to invest in altcoins, you need to look for one that is high in quality and is well-maintained. Investors should also seek out alternate currencies that show promise for the future in terms of utility. They should also consider the volatility of such currencies before investing.
For traders and investors who can handle risk, altcoins are a great way to invest. The volatility of the market can work in their favor and provide them with great returns if they make timed trades.
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Altcoin: Pros and Cons
PROS
- Altcoins aim to bridge the gaps the Bitcoin has not.
- They have the potential to become a medium for daily transactions.
- Some altcoins have already gained high valuations, such as Ethereum and Cardano (ADA).
- There is no shortage of altcoins, giving investors a lot of choice.
CONS
- They have a smaller investment market in comparison to Bitcoin.
- An altcoin can vanish at any time without warning.
- There is an absence of regulation resulting in thin liquidity and more volatility.
Further reading: Best Altcoins that will be Unstoppable in 2022
Final Takeaway: The Future of Altcoins
The cryptocurrency industry is evolving daily and so are altcoins. Having a variety of altcoins in the market can be advantageous as each one serves a different purpose.
Investors who want to diversify their investment portfolio have an inexpensive opportunity in altcoins. Altcoins provide a great avenue for them to expand beyond Bitcoin.
As with anything, there will always be risks with investing. But as cryptocurrencies mature and more regulations surround them, the situation is probably only going to get better from here.
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