The cryptocurrency market is still dominated by Bitcoin (BTC), but there are many other competing digital assets, called alternative coins, or altcoins. With so many alternatives out there, investors need a clear idea of how each altcoin differs from Bitcoin and what it can offer in a portfolio.
Altcoins can be thought of as variations of Bitcoin. In other words, developers create altcoins to improve the functionality or add features that are not present in Bitcoin. But not all cryptocurrencies are created equal. While there are alternative coins that may have merit for investors, there are others that advance purely on hype and thrive on speculation.
Just as Bitcoin has been rallying this year, up more than 110% as of Nov. 15, many altcoins have had meteoric rises. Ethereum (ETH), Bitcoin’s top competitor, is up nearly 500% year to date, while the upstart Shiba Inu Coin (SHIB) has gained an astounding 380,000% in a year.
Such numbers may entice investors looking to strike it rich. But altcoins carry several unique risks investors need to understand. Here’s what you need to know when comparing digital assets in the crypto market:
- What are altcoins?
- Differences between Bitcoin and altcoins.
- Investing in altcoins.
What Are Altcoins?
Altcoins are alternative cryptocurrencies to Bitcoin. But altcoins use Bitcoin as a benchmark since it was the first cryptocurrency and has dominated the market, accounting for a majority of all cryptocurrencies’ market capitalization.
“As the first-ever cryptocurrency, Bitcoin has set a model of how cryptocurrency projects should operate,” says Colin Pape, founder of Presearch, a search engine that, like cryptocurrencies, is powered by blockchain technology.
While both altcoins and Bitcoin use blockchain technology, these digital assets can vary in their purpose, features and operation. There are thousands of altcoins, but some of the most popular are:
Creators and developers of alternative coins wanted to create different versions of Bitcoin, according to what they thought was missing from Bitcoin’s platform.
For example, Ethereum is a technology that allows users to send cryptocurrency to one another, but another purpose of Ethereum is to be used as a tool in application development where new tokens can be built on the network.
Similar to Ethereum, the purpose of Cardano is to offer peer-to-peer transactions, and it allows developers to build applications on the network. But Cardano’s platform takes a research-intensive approach to building out its blockchain network.
Litecoin also has different features. First and foremost, Litecoin has a larger supply than Bitcoin, and transactions on the Litecoin network tend to be faster. The purpose of Litecoin is to be an alternative to silver, just as some see Bitcoin as an alternative to gold.
There may be an endless list of altcoins, but they don’t necessarily compete with Bitcoin. Rather, Pape says “The purpose of altcoins is to be projects that build on top of open-source blockchain technology, providing alternative use cases to the traditional financial system and big tech companies – think DeFi (decentralized finance) or NFTs (nonfungible tokens).”
Differences Between Bitcoin and Alternative Coins
It is fair to say that Bitcoin has better investing fundamentals than the vast majority of altcoins. Bitcoin is the most purchased, held and traded cryptocurrency on the market. It has a market capitalization of about $1.2 trillion, or more than 60% of the total market cap of cryptocurrencies. Bitcoin’s daily trading volume accounts for more than $30 billion, which means it’s a highly liquid asset.
For each Bitcoin alternative, there is a high probability that the coins will eventually fade away unless it has a strong practical case to make. Many altcoins were created for experimentation, but even the altcoins with stronger fundamentals will have difficulty catching up with Bitcoin. All the while, Bitcoin’s popularity and demand continue to grow.
There is debate as to how to view Bitcoin as an investment, but it is built for future utility. Some investors see Bitcoin as a way to store wealth and point to its increasing acceptance as a payment currency.
Furthermore, there’s growing demand for Bitcoin among both individual and institutional investors. As a result, greater investment interest creates more credibility and adoption of Bitcoin in the long term.
Another factor contributing to Bitcoin’s dominance over altcoins is that Bitcoin has enough of a track record to show an ability to withstand market crashes.
Investing in Altcoins
When Bitcoin goes up, altcoins also tend to go up, and when Bitcoin falls, altcoins tend to also fall. But the rises and falls of altcoins tend to be much more volatile than those of Bitcoin.
Still, some investors see upside in altcoins in a market where Bitcoin is trading near record highs.
“As the price of Bitcoin rises to a certain point, money will flow from Bitcoin to altcoins. As the price of altcoins rises, it flows back to Bitcoin,” says Philippe Bekhazi, CEO of cryptofinance firm XBTO.
Crypto investors who want to diversify into altcoins should consider the risks associated with these digital assets. There are more than 10,000 cryptocurrencies, which means the probability of choosing one of the few that will have staying power is low.
Given the versatility in altcoin options, Bekhazi says crypto investors can tailor their risk.
“Altcoins, especially the smaller ones, have the potential to provide exponential returns on the initial investment if you choose the right ones. One year ago, a Solana token now worth over $200 cost just $2. However, most altcoins will never take off, and often lose what little value they have if the project isn’t maintained,” he says.
Since altcoins carry high risk, it’s best to seek out alternatives that are high in quality and have strong fundamentals, experts told U.S. News. Risk-averse investors should seek out altcoins that have the promise of future widespread utility and consider the size of their market cap and the magnitude of price swings.
“Volatility is always going to be an issue with a nascent, speculative asset class like crypto, so investing in fundamentals will ultimately lead to a more successful long-term strategy,” says Nick Saponaro, CEO of the Divi Project, a blockchain startup in San Diego.
Meme coins like Dogecoin and Shiba Inu may ride community-driven waves to exponential highs, but Saponaro says, “These peaks are often short-lived because there is little to no fundamental basis for the price of the asset.”