Most crypto-currency investors have followed a similar path. They first heard about Bitcoin, and decided to buy their first satoshis.
They then quickly discovered that there were hundreds of “altcoins” (other “alternative” crypto-currencies to Bitcoin): Ether, Ripple, Litecoin, Zcash..
These altcoins are also based on blockchain technology – but they have other objectives and other functionalities, other validation protocols…
But what are these altcoins really? What do these different alternative crypto-currencies to Bitcoin offer? How can you get information about them – and how can you buy them?
Altcoin means an abbreviation of “Bitcoin alternative”. This includes all crypto-currencies – except for Bitcoin. They are alternatives to Bitcoin in that they are also digital assets, based on blockchain technology.
There are now at least 1469 altcoins and more as time goes by.
As you can imagine, most of them are not very interesting. MacronCoin, LePenCoin, FAILCoin, FraudCoin.. Hundreds of digital currencies have no new features whatsoever, and were only designed to attract enough investors to generate revenue for their developers. Some of these currencies collapse overnight. This was the case a few weeks ago with the digital asset Confido (“I trust” in Italian), whose leader took off with the money raise raised in an ICO (crypto-currency fundraising), causing the asset’s price to plummet.
There are also anonymous crypto-currencies. Some of them, such as Monero, are based on a non-transparent blockchain, and thus allow transactions to be carried out confidentially – a confidentiality not offered by Bitcoin, which is a pseudonymous network.
Finally, others such as Nano allow payments to be made almost instantaneously, without any transaction fees.
For the “Bitcoin maximalists” there is only one currency worth having: Bitcoin.
They believe it is the first fully decentralised currency, and point out that it is the only one that can rely on a significant transaction volume and hash rate. They also point to network effects as the reason they swear by Bitcoin.
Yet, even if you are extremely enthusiastic about Bitcoin and believe it should remain the most valued asset in the ecosystem for at least several years, there is a case to be made that altcoins also have a role to play.
to the financial system – and altcoins are part of such decentralization. Moreover, while it is difficult to modify Bitcoin (as we have seen in the “fork wars”), altcoins offer a great “laboratory” to go much further than Bitcoin’s “testnet” (the alternative blockchain) can do.
Bitcoin can also be seen to benefit from the emergence of these altcoins. It is still the reference asset used by traders to obtain these alternative digital currencies. And every time one of them is mentioned in the general press, the author will invariably mention Bitcoin, which is the foundation of this ecosystem.
Finally, the presence of these altcoins gives users a choice – Bitcoin and altcoins are not mutually exclusive. If they feel that BTC is not fulfilling its role, for example because of rising fees and transaction times (issues that are being addressed, notably through so-called “second layer” scaling solutions) or a lack of anonymity, they may well decide to turn to other alternative currencies.
While it can be used as a medium of exchange, it was primarily developed to decentralize the process of reserving domain names.
Although it was only ranked 229 at the time of writing, the asset was still being traded on several platforms.
By 2017, the valuation of these altcoins had risen significantly, from less than $2.3 billion to $373 billion :
At the same time, although the price of Bitcoin grew by 1,500% over the year, its dominance of the crypto-currency market fell sharply from 87% to 38%:
So should we sulk about Bitcoin, and turn exclusively to these alternative crypto-currencies? Probably not.
First, some alternative crypto-currencies, which have not yet offered any truly functional products, are already valued at several billion dollars. It is therefore questionable whether their teams will be able to justify such valuations in the coming months.
Second, while Bitcoin is already considered volatile, many altcoins are volatile to a much greater degree. Therefore, while the potential for gains is significant, so are the potential for capital losses.
These assets are also susceptible to price manipulation, even though their trading volumes are low and the markets on which they trade are largely unregulated.
On the other hand, a wealthy trader (nicknamed “whale”) can afford a large share of the available coins, which will drive up their price. This will attract investors, who will want to profit from this rise – and expect it to continue. Once the price has risen sufficiently due to their arrival, the trader can suddenly sell all these coins – and make a profit.
This is the mechanism used by pump-and-dump groups, where they try to attract as many investors as possible to a stock, so they can make money at their expense.
Therefore, it is best to avoid rushing into assets that are flaring up, and to focus on those with promising technology that appear to be undervalued relative to other competing networks. To do this, one should pay attention to the Market Cap displayed by CoinMarketCap, which gives an idea of the valuation of an asset – the price of a corner, on its own, does not provide any indication in this respect.
You can also visit CoinGecko, which offers scores (developer, community and public interest). Although these are calculated from an algorithm (and you will need to refine these results with your research), it can be a valuable tool for finding promising assets.
Our advice is to take the time to do thorough research before investing in an asset. And remember, just because one or two people get excited on Twitter or Reddit about their latest purchase, it doesn’t mean it’s a good buy.
You also need to understand that these are extremely risky assets. Some observers believe that it would be unreasonable to invest more than 1 or 2% of your wealth in these alternative digital currencies. Whatever your choice, it is best to invest only in amounts you can afford to lose.
Finally, even if applications like Blockfolio allow you to follow the evolution of your crypto-currency portfolio in real time, it may not be relevant if you have a long-term objective. It may be better to buy a few stocks and forget about them for several months – to save yourself some angst.