What is an Altcoin? An Alternative to Bitcoin and its Flaws
What is an altcoin? Let’s start from the beginning. Shortly after the 2008 financial crisis, a new digital currency was introduced to the world via a white paper sent to a mailing list of a cypherpunk community. It was known as bitcoin. It was built on top of a new technology known as the blockchain and is regarded by many as the best thing to happen since the invention of the internet and sliced bread.
Bitcoin was the first of many and like all ‘firsts,’ it has several major flaws or what others simply considered to be drawbacks. Its functionality was limited and is very slow due to scalability issues. The currency also went on to be very successful and laid a solid foundation for the early birds to create spinoffs to serve as practical alternatives.
These newly created digital assets are based on bitcoin and its technology. They are known as altcoins. An altcoin simply means an alternative to bitcoin. There are currently over 2,000 altcoins in existence and some of them claim to be superior to the other. Whether this is true or not depends on a number of factors but the truth is that bitcoin is popular than most (if not all) of them.
In fact, many people use the word bitcoin to refer to cryptocurrency. According to CoinMarketCap, bitcoin accounts for more than 50 percent of the entire market capitalization. These altcoins are important despite bitcoin’s obvious monopoly in market dominance.
What is an altcoin and why was it created?
You would know what to say if somebody asked you “what is an altcoin?” The second and important part is why the world needs altcoins. There are a number of reasons why altcoins are created:
- Creating a new coin with different consensus rules
- Developing a new coin from scratch
- Bitcoin uses a lot of computing power. There is a need for alternatives that use less energy and more eco-friendly
- Bitcoin can be mined using ASIC miners. This promotes centralization to a certain degree and other coins are created so that people from all walks of life can actively take part in the mining process
- Bitcoin is nothing more than a form of electronic money. New coins have different utilities
- Major cryptocurrencies are also hard forked to create new crypto assets. Bitcoin has been forked several times. The bitcoin forks have been forked as well
- It’s easy for anyone to create their own coin
Bitcoin is the first of many. It would be wrong to expect too much from it. The original cryptocurrency is riddled by a number of challenges that certainly limits its functionality as a form of money.
- Bitcoin is slow and sometimes, there are a lot of unconfirmed transactions on the network. This eventually leads to high transaction fees
- Bitcoin is not scalable. It only allows 7 transactions per second (TPS) yet it needs to compete with payment solutions such as Visa that supports 24 TPS
- The original cryptocurrency is highly volatile and is not a stable store of value
- Bitcoin has diverted from its intended use case of being a method of payment. It has become a speculative asset and many people hold it long term with the aim of making a profit from it.
Are all altcoins worth a try
We have already highlighted that there are over 2,000 coins in the world. However, does the world need all of them? The answer is not as straightforward as one would hope but there are things to take note of.
The altcoins are different and each serves a different purpose. The likes of Ethereum and EOS are utility tokens that intend to achieve the same thing. This brings competition to the fold which could help to drive tech advancements and make blockchain more important than ever.
Ethereum, through its smart contracts, has made it easy for people to create and issue their own cryptocurrencies through a crowdfunding campaign known as an initial coin offering. This is a great way of raising capital and keeps innovation alive in the crypto industry.
But it is also the Pandora’s Box. It has allowed scam artists to target unsuspecting crypto speculators who blindly invest in doomed crypto projects.
Bitconnect, a cryptocurrency Ponzi scheme that pulled off an infamous exit scam in early 2018, is a constant reminder that not all altcoins are in it for the long haul. This calls for people to vet new cryptocurrency project before investing or being involved with them. The sector is still new and there is no prescribed formula to scrutinize new crypto projects but here are some tips.
White papers have become the de-facto method of introducing a new cryptocurrency project. The bitcoin white paper is only nine pages long. It is loaded with highly informative technical information.
When you read a project’s white paper, make sure that it is not written with the idea of selling its project but should explain the tech behind the altcoin.
What is the point of creating something new if it does not solve an existing problem or provide a better alternative to current solutions to a problem? Make sure that you understand the problem the new cryptocurrency project wants to achieve and how it intends to go about it.
It is also important to note if the project is providing a unique solution to the problem. People will not get excited over a new project that does the same thing that an existing project does without bringing anything new to the table.
Take your time to know the team behind a cryptocurrency project. It is much easier and safe to deal with a team with a proven track record in business or product development. Many crypto projects have faked the people behind them in order to hide their true identity.
The game of crypto is open to anyone. Make sure you separate true pioneers from scam artists.
Coins and tokens: are they the same?
Cryptocurrencies can either be coins or tokens. Coins such as bitcoins or Ethereum have their own blockchain protocols while tokens do not have their own blockchain networks.
Coins are designed to function as currency. This is what bitcoin was intentionally intended to do. Tokens, on the other hand, are a digital representation of real-world assets or stocks or function as a means of exchange within a given network.
The majority of tokens are utility tokens. They are mainly issued during an ICO. These tokens give investors access to a new network or service but in practical terms, they are mainly used to generate huge profits for them in the future.
The ICO model recently fell out of favor with authorities. Several ICO projects have run into legal troubles as they have been accused of offering unregistered securities. The has led to the development of what is known as a security token offering (STO). The tokens issued are called security tokens.
Security tokens represent a practical tradable asset and are mainly registered with the securities regulators. Their main disadvantage is that they are only open to accredited investors as required by the law. Utility tokens are open to all kinds of investors and the crypto revolution has been successful due to the collective effort of retail investors and speculators.
There is also what is known as a stablecoins. Stablecoins are mainly tied to the price of major fiat currencies such as the dollar, euro, pound, etc. and physical assets such as gold. One of the most popular and well-known stablecoin is Tether but it is clouded with controversies.
Stablecoins are exactly what their name suggests – stable coins. They are created to minimize the volatility associated with cryptocurrencies such as bitcoin.
The future of altcoins
The future of altcoins depends on a number of internal and external factors such as forks, the conduct of the founding team, regulatory landscape, and more. A number of altcoins will still be available in the future but it is anticipated that many will die as a result of the market’s cycle of boom and busts.
This is analogous to what happened during the dot.com bubble crash of the late 1990s. Many companies closed their doors but tech giants such as Amazon emerged. The same will likely happen for some of these altcoins.
In the short term, we will continue to see more altcoins entering the market. This can be through forks or crowdfunding exercises such as ICOs, STOs, or the increasingly popular initial coin exchanges (IEOs).