Altcoin Investing: What Investors Need To Know About Altcoins

Last Updated September 2nd 2021
12 Min Read

Since the beginning of 2021, altcoins have become a more prominent part of the entire cryptocurrency market. According to Coinmarketcap, there are now over 11,000 listed cryptocurrencies.

The global cryptocurrency market is over $2.11 trillion.

According to TradingViews, Bitcoin dominated the cryptocurrency market by 70% at the beginning of the year. But, by the end of July 2021, the Bitcoin share had dropped to 48%, and altcoins were gaining traction.

Bitwise Chief Investment Strategist, Matt Hougan, said "Crypto and blockchain is about moving money and property rights onto the internet," and he added, "That's one of the largest addressable markets that the internet has ever attacked."

More investors are diversifying their portfolios to include altcoins. The pros of investing in altcoins are that it's easy to get started, and you can begin investing in altcoins with a small investment budget.

But, the ease of investing in altcoins can also be a downside as many new investors jump into altcoin investing without considering the implications and may buy worthless coins.

This guide walks you through the things you need to know about investing in altcoins. In conclusion, you will have a foundation for what to look for when investing in altcoins.

What Are Altcoins?

The term altcoin means alternative coin, as in any other cryptocurrency other than Bitcoin.

Altcoins have similar characteristics to Bitcoin but are different in many ways. For instance, Bitcoin uses a proof of work (PoW) consensus mechanism where Bitcoin miners validate transactions and produce blocks.

Although some altcoins also use PoW, many use the proof of stake (PoS) model. PoS means that crypto miners can validate or mine transactions on the blockchain according to the number of altcoins they hold and receive reward tokens from the network in appreciation. 

Many altcoins have different functions and utility. For example, some altcoins provide low-price volatility or smart contracts. Some of the types of altcoins are utility tokens, stablecoins, security tokens and mining-based cryptos.

For instance, Ethereum is a technological platform that is providing the underpinning for the expanding DeFi movement. Stablecoins are digital currencies pegged to fiat currencies or assets. And there are also meme cryptocurrencies like Dogecoin (DOGE).

Uniswap (UNI) is another example of a stablecoin that provides guaranteed liquidity.

Security tokens are on the rise. They act as a digital, liquid contract for a fraction(s) of an asset with established value, such as a car, corporate stock, or real estate.

A utility token finances start-up projects, companies, and project development groups. The Basic Attention Token (BAT) is an example of a utility token.

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How to Understand Altcoins

Altcoins may share similar functions and code to Bitcoin for peer-to-peer transactions and processing large amounts of data. And many altcoins may aspire to become the next Bitcoin by providing a low-cost method for digital transactions.

Bitcoin was the benchmark for the development of the cryptos that followed. But Bitcoin has many shortcomings. The Bitcoin proof of work (PoW) consensus mechanism used for creating blocks is time-consuming and energy-intensive.

The University of Cambridge reports that the global Bitcoin network consumes 80 terawatt-hours of annual electricity, approximately equal to a yearly output of 23 coal-fired plants. Bitcoin also has limited smart contract capabilities.

So, compared with Bitcoin, altcoins can achieve a competitive advantage by improving upon Bitcoin's limitations. Notably, the proof of stake (PoS) consensus method requires less energy. It is faster to validate new transactions and create new blocks. For example, Ethereum is used to pay transaction fees (gas fees) in smart contracts on Ethereum. Stablecoins have less price volatility than Bitcoin, so they are preferable for daily transactions.

In effect, altcoins are creating their own market with unique potential.

Investors are attracted to altcoins as a preferable option to investing in Bitcoin. Altcoin investors anticipate making profits from altcoins as they gain more dominance in the cryptocurrency domain and the prices appreciate.

Check Out: Top 10 Altcoins that Will Blow Up

Types of Altcoins for Investment

Some altcoins fall into more than one category, but below are more details of the types of altcoins you may consider for investing.

Mining-Based Altcoins

Most mining-based altcoins use proof of work (PoW) consensus, which requires a computer to solve a complex problem (hashing) by generating an answer closest or equal to the target answer but not above it.

Examples of mining-based altcoins are Litecoin (LTC), Zcash (ZEC) and Monero (XMR). There are a few pre-mined coins, such as Ripple's XRP.

Stablecoins

The cryptocurrency market is known for high volatility, and stablecoins aim to reduce this by attaching their value to a basket of items such as other cryptos, fiat currency or even precious metals. This basket then serves as a reserve in case the crypto has problems or fails, in which case, the holder can redeem the basket of goods.

USDC is an example of a stablecoin.

Security Tokens

Security tokens are not dissimilar to stock market securities. The only difference is the digital origin. So, like traditional stocks, security tokens may provide equity, which can be via a dividend pay-out or in ownership form. Security tokens may be offered as initial coin offerings (ICOs) and are of great interest to crypto investors because of the potential price appreciation.

Examples of security tokens are PolyMath (POLY) and Swarm (SWM).

Utility Tokens

Utility tokens provide network services, such as redeeming rewards or purchasing services.

Solana (SOL) and Polkadot (DOT) are examples of utility tokens.

Are Altcoins Good Investments?

The market for altcoins is growing as more investors are attracted to crypto investing.

Over the last decade, the cryptocurrency market grew exponentially, offering opportunities for retail crypto investors. But, for the novice crypto investor, price volatility is a downside, especially if you don't yet understand how the cryptocurrency market moves.

For most of 2021, the cryptocurrency market experienced a crazy bull run, right up until April, when prices then crashed. Most altcoins dropped by 50%. Bitcoin, at a high of $64k, fell to $30k.

The issue is, unlike the stock market and the foreign exchange, cryptocurrency markets are still embryonic. Historical data isn't yet accurately measurable, and whilst it is possible to analyze cryptocurrency patterns by technical analysis, it still isn't reliable.

With any investment, there needs to be measurable, defined investment criteria to assess potential. But the altcoin market is still speculative, and some cryptos never make it.

Other cryptos haven't advanced in price or adoption. Oyster Pearl was one such example. It was said to be the next big thing for cryptos, but it failed and disappeared, along with investors' money.

Therefore, if you plan to invest in altcoins, you must be willing to accept the risks of investing in an unregulated, unpredictable, and volatile market. Watching your investments halve (or worse) is stressful and is usually when novice investors pull out of their investment with a loss.

Read Also: Is Cryptocurrency A Good Investment And Should You Start Investing

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The Future of Altcoins

Altcoins are an inexpensive option for adding to a diversified investment portfolio. As the cryptocurrency markets mature, hopefully, over time, stability may improve. More investors will see cryptocurrency as an additional vehicle for an affordable investment. Though it is likely, many altcoins may not survive.

One of the best features of altcoins is the low-entry point. The high-ticket price of Bitcoin is too high for the small crypto investor. But with the wide range of cheaper altcoins, there is something for every level of crypto investing.

As mainstream institutions adopt digital currencies more widely, the altcoins with the best functions may become invaluable to the cryptocurrency market structure. As each new generation of cryptocurrency networks learn from previous generations, technological functionality may create exponential growth.

The Bottom Line for Investing in Altcoins

Over the last decade, the cryptocurrency market has experienced significant price corrections before pulling ahead of the previous high price point. There's no guarantee that this activity will continue.

We've come to accept that the crazy price swings are part of the crypto investing and trading process, so assuming that as a given helps alleviate the stress of investing in altcoins when the prices swing back and forth.

Therefore, investors with a stoic approach can make great returns from the cryptocurrency market if they hold their nerve.

There are many altcoins to choose from for investing, all with various functions and purposes. And as mainstream institutions adopt more cryptocurrencies, the cryptocurrency market cap will expand.

The downside of an unregulated market is the sometimes lack of liquidity and volatility, creating rapid price fluctuations. Therefore, investing in altcoins is better considered a long-term investment instead of trying to time the market and exit for a quick profit.

Altcoins have the potential to reshape the world of modern finance, but not all altcoins will perform.

Altcoins in the top 20 cryptocurrencies are worthy of research for investors. Take your time to research the best altcoins for investment in 2021, and you may build a balanced portfolio of successful altcoins for investment.

Please note that the above information is not providing advice on tax, investment, or financial services. We provide the above information without consideration for risk tolerance and a specific investor's financial circumstances.

Trading or investing in financial instruments such as cryptos may not be suitable for all investors. It does involve risk and the possibility of a loss of capital. There are no guarantees for profiting from cryptocurrencies, and it's advisable only to risk what you can comfortably afford to lose.

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Virtual currencies are highly volatile. Your capital is at risk. 

Read More:

What Cryptocurrency To Invest In? Best Altcoins

How To Choose Winning Altcoins?

5 Cheap DeFi Cryptocurrencies To Buy Right Now

9 Cryptocurrencies That Could Make You A Millionaire

Hot Cryptocurrency Price Predictions

7 Reasons to Invest and Trade in Cryptocurrency

The Top 7 Crypto Trading Tools You Should Use

FAQs

What Is an Altcoin?

An altcoin is any other cryptocurrency that is not Bitcoin. Altcoins differentiate from Bitcoin by capitalizing on the shortcomings of Bitcoin.

What Are the Top 10 Altcoins?

The top 10 listed altcoins are Ethereum, Cardano, Binance Coin, Tether, Dogecoin, Solano, Polkadot, Uniswap, XRP and USD Coin.

How Much Is an Altcoin?

Altcoins prices vary from a few cents like Dogecoin at $0.28 to thousands of dollars, such as Ethereum at $3,500.

What Is the Best Altcoin to Invest In?

Depending on your requirements, it is worth investing in Ethereum (ETH). As the #1 listed altcoin, Ethereum has significant growth potential.

At the #3 listed crypto, investing in Cardano (ADA) could prove to be a good idea. It is a low-priced altcoin with excellent growth potential based on scalability, disruptive and innovative technology.

Are Altcoins Good Investments for beginners?

Whether altcoins are a good investment for a beginner depends on your investing goals and how much you understand the cryptocurrency market.

If you are a complete beginner to the cryptocurrency market, spend time learning about how it works. Buying altcoins without some level of crypto education increases the risk of buying altcoins that fail to perform.

Investing in altcoins is risky. Many of the smaller altcoins have poor liquidity, so they may not be the best investments. In the top 10 cryptocurrencies listed, liquidity is better, so prices may be more stable and preferable options for altcoin investment. Always consider the risks of cryptocurrency investing. Make sure you research the altcoins you are considering and only invest what you can comfortably afford to lose.

Where do I buy altcoins?

You can purchase altcoins from an established cryptocurrency exchange such as eToro, the leading social trading platform, Binance, the largest crypto exchange, Kraken and Gemini, to name a few.

How do I keep my altcoins safe?

Before buying your altcoins, set up a secure crypto wallet. Most exchanges and platforms have secure wallet options. You will have a private key to access your crypto wallet and a public key for transferring cryptocurrency to your wallet.

Always keep your private key safe and enable the highest level of security.