The word altcoin is short for “alternatives to Bitcoin” and is literally any cryptocurrency that isn’t Bitcoin. In addition to being a cryptocurrency, Bitcoin is also a software that people run called “Bitcoin Core” as well as an underlying blockchain called “Bitcoin Network” that keeps track of bitcoin ownership. The concept of a blockchain was invented by Satoshi Nakamoto, the creator of Bitcoin, but others can create their own cryptocurrencies and blockchains.
There are many other cryptocurrencies, but there is no guarantee that others have underlying technology based on a blockchain or a distributed trust network simply due to being called “cryptocurrency”. Some altcoins are based on Bitcoin but have been modified in various ways. When an altcoin is modified and goes a different direction from Bitcoin, it is said to be a “fork” that now has its own separate blockchain. Bitcoin Cash is an example of a “hard fork” cryptocurrency that has been altered to no longer be the same as Bitcoin.
Why were altcoins created?
You will find many reasons cited as to why altcoins have been created. Technically, there are those that feel Bitcoin has problems that an altcoin solves or improves upon. For example, Monero is more anonymous by design. Cynically, since Bitcoin has increased in value there have been more looking to capitalize on the cryptocurrency market by creating coins that claim to do one thing or another. These altcoins may or may not offer advantageous differences, but they have most certainly made money in light of irrational exuberance from speculators.
A good example is Dogecoin, originally created as a joke back in 2013. The founder, Jackson Palmer, left the project in 2015 and there have been no software updates or development activity since then. Even so, in December 2017 when Bitcoin and others reached all-time highs in price, many people bought Dogecoin and the sum total of all coins in circulation became worth a billion dollars. There is clearly no reasonable logic to buying into a coin not actively being developed for several years other than speculation. The price of altcoins go up or down together and follow Bitcoin’s lead at this point in time. Nothing forces people to use Bitcoin over an altcoin, but it is the original with the strongest supporting network and the most conservative development team.
Why do we need altcoins?
There are a lot of different varieties and many new altcoins being released at any given time. Bitcoin has some very specific rules that will not be changed, such as the number of bitcoins to be created, the creation of new coins every 10 minutes, the proof of work (POW) concept to facilitate transactions, and so on. As a result, many people took the basic principles of Bitcoin and developed their own versions with rules that suit their own needs. Litecoin is a popular cryptocurrency that changed the rules in order to appeal to those wanting faster transactions. While not very different regarding the underlying technology, Litecoin creates new coins every 2.5 minutes and transactions are confirmed more quickly. This altcoin specifically uses different mining rules to prevent those who can afford new kinds of mining equipment from having an unfair advantage over those using more ordinary equipment.
Bitcoin and Litecoin are similar, with one of the main differences being the total number of coins that can be produced. The Bitcoin Network can never exceed 21 million coins, and Litecoin can create up to 84 million coins. Both are divisible into nearly infinitesimal amounts, making the real-world advantage in favor of Litecoin negligible given users of either will have no problem purchasing low-priced goods or services regardless of how high the price a single coin reaches. The other difference is the time it takes to confirm transactions. Technically, transactions occur instantaneously on both networks, but the time needed for them to be confirmed is different, with Litecoin taking only 2.5 minutes vs. roughly 10 minutes for Bitcoin confirmations. Another difference is the algorithms used by each which has a significant impact on the process of mining new coins.
The point is, Litecoin was created to solve what its creators viewed as issues with using Bitcoin. While these issues may, in fact, have been “solved” in the short-term, many feel the emerging technology of the larger ecosystem behind Bitcoin will prove them to be short-lived. As in the case of the Lightning Network, a system of smart contracts built on top of Bitcoin blockchain base that permits fast, cheap payments between two parties.
What are scamcoins?
There are many coins created that do not have such commendable goals as Litecoin, and these are known as “scamcoins” because their sole purpose is to make a profit for the creators. Scamcoins are pre-mined to provide the creators with a sizeable number of holdings. then pumped to get community support. Once people begin mining and trading them, the creators build the buzz to drive up the price of their scamcoin. When the price rises, they sell all their coins, take the money, exit the market and disappear as the price drops. This practice is known as a “pump and dump” scheme and there have been far too many to list in the last couple of years.
What gives altcoins validity?
In order to be a valid altcoin, the creator must provide some unique productive aspect or utility. For example, some coins may provide extra levels of security or privacy, like Zcash. Others, like Dash, may offer more anonymity to make transactions less traceable. The Ripple real-time global settlement network is designed to enable banks to inexpensively settle cross-border payments in real time, with end-to-end transparency and uses XRP as the digital asset to do so. XRP is probably one of the more popular speculative coins because it targets the banking industry and has a solid development and marketing team behind it. Others such as Ethereum (ETH) or Cardano (ADA) offer platforms for Dapps and smart contracts.
Valid altcoins offer different functions, are backed by a solid team of developers, and successfully gain broad market support. They are sometimes the basis for new business models and other times are projects from enthusiasts that look to capitalize on niche markets. Great care should be taken to research and investigate altcoins before investing. If one considers Bitcoin to be risky, the altcoins are even more so by their very nature and number.