A cryptocurrency is a digital currency that uses cryptography to make it hard to counterfeit. Cryptocurrencies are changing the world because they have connected people across the globe with a low-cost, fast and secure means of payment. But what exactly is an altcoin? How different are they from cryptocurrencies?
It's not easy to keep up with every new coin that comes out, so let's start by looking at some popular ones. Most cryptocurrencies that come in crypto-tokens can be grouped into three categories: vendor tokens, platform tokens, and utility tokens.
Vendor tokens are typically used for apps that want users to pay for upgrades or add-ons with cryptocurrency. Platform tokens are designed to be used by a company or group running an application, and utility tokens are intended to be used in a specific use case. The most popular vendor and utility token nowadays include Ethereum. The platform token is not yet as established as the others, but some have made significant gains lately.
Altcoins, or alternative coins to bitcoin, are a popular category of cryptocurrency. They are called “alternatives” because they make an alternative to Bitcoin. Today there are more than 1300 types of these altcoins, but most of them have a very small market capitalization. Altcoins are cryptocurrencies that aren't Bitcoin. If you want to be precise and use the term “altcoin” correctly then it's shorthand for “alternative coins to Bitcoin” and sets them apart from coins like Ethereum and Litecoin.
The essential features of altcoins are that they solve the scaling problems that Bitcoin started out with. They make it possible to conduct more transactions on less energy. And they bring a new type of market participation.
A stable coin is a cryptocurrency, like Bitcoin or Litecoin, but doesn't have any of the features that make altcoins unique. Instead, coins can be traded and converted to coins and back again. So, for example, if you sent $10 in Ethereum to someone in exchange for 10 ETH, they could send their coins back to you, and you'd get back 10 dollars worth of coins instead — though it wouldn't be a 10-dollar coin.
What kind of technology is cryptocurrency?
Cryptocurrencies like Bitcoin work on blockchain technology, which is a fancy way of saying that they use mathematics to allow people who don't trust each other to transfer money without having to go through a bank or some kind of middleman. The Blockchain tracks all payments so that if someone tries to spend the same money twice, it will fail. Everyone else will know that they attempted an invalid transaction because it will sit as a block on the chain.
The idea is to create a digital ledger that can't be changed so that its information is permanent. People who have been paid or have bought something from someone else are listed as having transferred money, and their balances are updated automatically. In addition, the ledger can be used to keep track of stock. For example, if a company buys a hundred thousand shares of stock, the Blockchain will identify when these transfers happened and who owns what.
Blockchains need to work well because they need to be secure: if you didn't trust everyone else, then no one would trust you either. So cryptography was developed, which is the art of writing codes that make it very hard to break the code before certain events occur. So, for example, if it's possible for you to see the code used to lock a safe, you can then open the safe when a specific combination of numbers is entered, making it untrustworthy, so blockchain technology doe this a mathematical way with coeds to keep all the transactions safe and secure.
The Blockchain in more details
The Blockchain is the underlying technology that allows for decentralized and trustless data on cold wallets and storage and transmission. For example, it could be used to store information about monetary transactions, but we mostly know it as a distributed ledger technology because of bitcoin.
The irreversible nature of the transactions made through Blockchain means that it is nearly impossible to cheat. The fact that these ledgers are distributed and encrypted means than anyone can verify them, but no one user can control what goes into or out of them; when a block in the chain is changed, it will invalidate every subsequent block.
There are three steps: encryption, transfer and confirmation. Encryption ensures that no one can read the message except for the person you're sending it to. Transfer means resisting a man-in-the-middle attack where someone secretly takes your message, changes it and sends it on — this is like having someone change words in this sentence before I send it to you.
Finally, confirmation means that there is a system in place to make sure that the message really is from the person you're sending it to. If the message looks like it might be from that person, then we'll let them send it on — but not before we check their identity and make sure that it really is from them.
What's special about altcoins?
Altcoins solve the scaling problems that Bitcoin started out with. Next, we need to solve two major scaling problems: one is how to make more transactions happen on the Blockchain, and the other is how to make each transaction more efficient.
The first scaling problem means that people have been delaying payments because they don't want them clogging up the network. For example, Ethereum has a backlog of payments because so many people are using it at once. This makes it hard for people to sell their coins because if you wanted to sell $150 worth of ETH, you'd have to wait 10 minutes just for your transaction to go through.
All of this blockchain jiggery-pokery can sound quite complicated, and you might wonder why anyone would bother with all this work when you can just go through an intermediary. One of the main reasons is that if you use a mediator, you don't have to trust them and still control all your money.
The second problem is that each blockchain transaction uses a lot of energy at once because they all get conducted simultaneously. This means there'll be a very high cost to everyone involved in each one — and the more transactions we want to make, the higher these costs will be.
Altcoin developers are working on two ways to solve these problems. First, if you're an altcoin developer who's trying to solve the scaling problem and wants your altcoin to be successful, then you need people who are willing to invest in it and use it over other coins.
For example, if someone is building an altcoin, then they will want to create a new blockchain that's easier for others to use. This means that all their transactions would be more efficient and be able to take place more quickly.
New coins can still offer features
If you were a new altcoin developer trying to make an altcoin that works well with other coins, then you would want people who want to buy and sell your currency — people who already own other coins. You could also create an ecosystem where your coin works together with other coins in specific ways. This could be something like a decentralized marketplace where there are people who already accept your coin in exchange for their goods or services.
How? Well, you can decide what kinds of coins you want to allow and use. For example, you could support all the major coins (BTC and BTC) and some smaller currencies popular in your community. The point is that altcoins still have a lot of flexibility when it comes to deciding what features they'll have.
Altcoin as a store of value
Do you know why bitcoin is so popular? It's because it's the first digital currency that people trust. That means that people think bitcoin has value, and no one knows why. It just seems to be a fascinating, trustworthy invention — and this makes it an excellent store of value.
Altcoins can also be a store of value because they're also a form of currency — even though they're often smaller and newer. So you could choose any altcoin that you like and use it as an investment or something to save money in. This is especially true if the altcoin does well, and lots of people are interested in it, making it an excellent way to store value for long periods.
Many people are asking why you should invest in bitcoin when there are newer cryptocurrencies out there. Some altcoins may indeed seem more attractive than bitcoin at first glance, but this doesn't mean that you should jump from one end to the other without staying in the middle for a while.
This is a huge opportunity to make money! If you join all the different areas with potential, there are enormous risks and rewards for making intelligent investments and choosing the right coins.