Altcoins: What They Are and How to Buy

Investing
Updated: 23rd Feb 2021
Written by Drew Cheneler
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With bitcoin nearing all-time highs and receiving vast media coverage, mass adoption of cryptocurrency is slowly playing out. That said, bitcoin (BTC) isn’t the only valuable cryptocurrency.

Keep reading to find out what altcoins are, how they work, and whether they are worthy of an investment.

What Are Altcoins?

Put simply, altcoins are alternative cryptocurrencies to bitcoin. Hence the clever combination of “alternative” and “coins” that forms the name, “altcoins.”

Powered by blockchain technology, altcoins were created to fill a void in the crypto industry and vary slightly from bitcoin. Depending on the parameters defined and purpose of the altcoin, they appeal to an entirely different audience.

However, there are a few commonalities between altcoins and bitcoin. Most altcoins allow for secure peer-to-peer transactions, use private keys, uphold the essence of privacy, and are relatively inexpensive.

Moreover, altcoins can be bought and sold on cryptocurrency exchanges, stored in crypto wallets, and utilize decentralized tokens.

How Do Altcoins Work?

Since altcoins utilize the same technology and philosophical framework as bitcoin, they behave relatively the same.

Altcoins use blockchain (a ledger) to publicly record transactions. They use private keys so users can still send a payment from one digital wallet to another.

But remember, altcoins are alternatives to bitcoin. This means they compete head-to-head against the first digital asset ever created.

Innovators create altcoins to improve BTC’s inefficiencies, such as the high transaction fees, scarcity, and massive amount of resources needed to successfully mine bitcoin.

Types of Altcoins

With over 5,000 cryptocurrencies available to consumers, it is paramount for crypto investors to know the different altcoins.

#1. Stablecoins

As we all know, bitcoin is one of the most volatile assets in the world. Thousand-dollar price fluctuations happen daily, as more and more consumers buy, sell, and speculate on bitcoin. Stablecoins are created to “stabilize” or mitigate volatility.

To do this, they value the coin to fiat currency, such as the U.S. Dollar, Pound, Euro, or gold.

Ultimately, what currency they use to value their coin is up to that specific altcoin’s creator. The currencies listed above are by far the most common amongst stablecoins.

Popular Stablecoins:

  • Tether (USDT)
  • USD Coin (USDC)
  • True USD (TUSD)
  • Binance USD (BUSD)

As cryptocurrency gains in popularity, ambitious brands are beginning to enter the space, such as Facebook. Although it hasn’t officially launched yet, Libra is a stablecoin entering the market in the near future.

#2. Mining-Based Altcoins

Besides buying bitcoin on a crypto exchange, the only other way to get bitcoin is by mining it.

However, mining bitcoin requires resources, technical understanding, and patience. Mining based altcoins fill this void. They re-open the flood gates and allow for everyday consumers to mine for cryptocurrency.

That said, mining for altcoins is similar to mining for bitcoin. It still requires you to solve complex problems to generate new coins and requires resources. By far, the most popular mining-based altcoin is Ethereum.

Popular Mining Based Altcoins:

  • Ethereum (ETH)
  • ZCash (ZEC)
  • Monero (XMR)

#3. Security Tokens

Security tokens are like stocks, but they leverage blockchain technology. They are often regulated by governing bodies and can represent multiple assets digitally, such as real estate, fixed income, and commodities.

Like taking a private company public through an initial public offering (IPO), security tokens debut through a process known as an initial coin offering (ICO).

#4. Utility Tokens

Utility tokens guarantee investors a service, much like a traditional utility company. A notable example is Filecoin.

Those who pay in cryptocurrency get access to the largest decentralized storage network, where they can privately store vital information.

Pros and Cons of Altcoins

Like all assets, there are advantages and disadvantages to altcoins. To bring clarity to altcoins, here are some pros and cons you need to consider.

Pros:

  • Affordable: As of writing this article, bitcoin is trading north of $31,000. Altcoins are more affordable. Depending on what altcoin you invest in, you will get a better bang for your buck.
  • Opportunity for Growth: Who knows, maybe the altcoin you invest in will rise above the rest and challenge bitcoin as the #1 cryptocurrency. This growth and speculation are what investors long for.
  • Diversification: Are you already invested in bitcoin or stocks? Investing in altcoins will further diversify your holdings.
  • Addresses Bitcoins Flaws: Bitcoin certainly isn’t perfect. Altcoins correct the flaws present in bitcoin.
  • Low Transaction Fees: Buying and selling altcoins doesn’t carry a high transaction fee like other assets. This is advantageous for those who are still learning about crypto.

Cons:

  • Volatility: Altcoins endure large price fluctuations. One day the coin could be trading at all-time highs, and the next day it could be entering a bear market. But volatility still exists in bitcoins, bonds, and stocks.
  • Low Liquidity: Depending on the coin, it may be hard to sell it later on down the road. In the world of investing, high liquidity is a good thing if you are looking to sell or buy more of the underlying asset.
  • Potential Scams: Since there is no regulation, cryptocurrency scams are prevalent. Only invest in established altcoins.

What Are the Most Popular and Best Altcoins?

Investing in altcoins comes with risk. Most altcoins are not well known, which means their liquidity is not nearly as high as bitcoins.

However, a few altcoins have emerged amongst a crowded pack and are rivaling bitcoin in popularity.

Here are the most popular and best altcoins for crypto investors.

  • Ethereum (ETH)
  • Litecoin (LTC)
  • IOTA (MIOTA)
  • Tezos (XTZ)

Like investing in stocks, you should only invest an amount of money you are willing to lose. Profits are never guaranteed, and volatility will be the norm as the world begins to accept and utilize cryptocurrency.

Where and How to Buy Altcoins

Investing in altcoins has never been easier. With the rise of secure crypto exchanges, buying and selling altcoins can happen from your mobile device or computer.

Here are the best crypto exchanges to buy altcoins.

#1. Coinbase

Coinbase is a San Francisco based crypto exchange that serves over 13.3+ million users. They provide you with a secure platform, low fees, and a diverse selection of supported altcoins.

Learn More: Coinbase Review

#2. Gemini

Touted as the most secure cryptocurrency exchange, Gemini is one of the newest exchanges to enter the market.

Founded by the Winklevoss Twins, this platform is easy-to-use, affordable, and secure.

Learn More: Gemini Review

#3. Robinhood

Love it or hate it, Robinhood is bringing cryptocurrency investing to the masses. This popular platform promises commission-free trading and a secure exchange.

Furthermore, Robinhood is a great place to set up shop if you also want to invest in stocks or blockchain ETFs.

When investing in altcoins, you need to review the asset’s liquidity (are people buying and selling the coin), who the creators are, and what purpose it serves in the broader crypto industry.

Unfortunately, altcoin scams exist. Thus, it is paramount you know the details about the underlying altcoin. The more research you do now, the better.

Learn More: Robinhood Review

Are Altcoins a Good Investment?

Depending on what altcoins you invest in, it can make you money. Why? Cryptocurrency is slowly but surely becoming accepted.

Across the United States, merchants and large corporations are augmenting their payment methods to include cryptocurrency transactions.

While all investments carry risk, blockchain technology and cryptocurrency are still in its earliest stages. But most people can agree on one thing. Blockchain is immensely powerful and underutilized.

And with Facebook showing interest in the broader crypto industry and developing their own stablecoin (Libra), one can only assume that the rest of Silicon Valley will follow suit.

This mass adoption will further raise the price of altcoins as coin availability becomes scarcer.

Related: Is Bitcoin a Good Investment?

Are Altcoins Safe?

Established altcoins like Ethereum (ETH) and Litecoin (LTC) are safe. They are decentralized and enable secure peer-to-peer transactions. But not all altcoins are created equally. Scams, hacks, and fraud are common in crypto.

However, exchanges like Gemini, Coinbase, and Binance are doubling down on security. They are bolstering their security posture, utilizing cold storage capabilities, encryption, and are employing third-party cybersecurity vendors to monitor their exchanges.

Related: Is Cryptocurrency Safe?

Bottom Line: Understanding Altcoins

If you are looking for a bitcoin alternative, then investing in altcoins is your best bet.

That said, know the risks altcoins carry and make informed investments. Only buy altcoins that are established, well-known, and secure.

More Crypto Resources:

Drew Cheneler
Drew Cheneler
Drew is a recognized Credit, Small Business, and Personal Finance Expert. He has been quoted in CNBC, Fox Business News Section, The Huffington Post, Business.com, Moneyunder30, US Chamber of Commerce, and more. He is known for breaking down complex personal finance topics into action-oriented advice, so you can make the most of your hard-earned money.