Bitcoin is considered the original cryptocurrency and every other currency that was created after it will always be a Bitcoin alternative. Hence, alternative coins - popularly known as ‘altcoins’. Altcoins is basically a large group of cryptocurrencies and is the generic term used for a non-Bitcoin cryptocurrency.
Many Altcoins are actually based on the framework provided by Bitcoins. This means that they have the characteristics of Bitcoins with very minor changes. The characteristics of Bitcoins such as - peer to peer nature, the ability to be ‘mined’ etc are a core component of most of these alternative coins and currencies.
There are about a thousand alternative cryptocurrencies in the markets as we write. It is essential that the users know what these currencies stand for and the framework upon which they function before investing in them. As of now the total market cap of all cryptocurrencies combined (including Bitcoin) stands at $133 Billion.
The Need for Altcoins
Bitcoin is the supreme cryptocurrency. Most Altcoins function as Bitcoin clones but offer small differences. These differences can be that of speed of transactions, distribution methods, algorithms of hashing among others. While many Altcoins look like they are there because a business decided to encash upon the hot market trends, some of them actually have a purpose. Most of the coins which do not have a clear vision or a purpose ahead tend to fizzle away and die off - along with the investors’ money.
Some alternate currencies are made to solve particular problems - or for a particular use. There are coins which can be used for purchasing domains and hostings. There are coins which are meant only for the purchase of adult content, etc.
Some platforms like Ethereum are rather revolutionary and can possibly change the way the internet as we know it functions. However there are others which seem rather purpose-less and are destined for failure.
Altcoins should ideally be created to solve a particular problem - not just to amass money and go the route of lets-see-how-it-goes like many of the coins are going. However, that aside, there have been many altcoins which have been doing exceptionally well in the markets such as Ether, Ripple, Neo and others.
Why Do People Invest in Altcoins?
Altcoins are largely comprised of new currencies which are introduced into the market which intend at piggybacking on the success of Bitcoins. While some altcoins have been in the market for many years now, every year, an increasing number of cryptocurrencies are being added to the markets. People invest in Altcoins for these reasons:
They truly believe that a newly introduced cryptocurrency brings an effective solution to an existing cause or problem. They know the market sentiments that enough people would be willing to invest in the currency and hence they too invest.
The growth of Bitcoin from $0 to $4700 has led many people into believing that all cryptocurrencies, if given the right sort of backing and faith, would one day boom the way Bitcoin has boomed.
Finally, newly introduced cryptocurrencies can be mined with a considerable ease compared to older cryptocurrencies. These new litecoins can easily be mined and can be purchased for lower rates. Holding on to them for a few years could result in selling them off at a profit of 400 to 500 times the original value.
However, not all altcoins reach the status that they aspire to be and they tend to fizzle out very soon. Let us now look at what an Initial Coin Offering is and how do new altcoins come into the markets.
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What is an ICO?
ICO stands for Initial Coin Offering and it is quite similar to an IPO. An Initial Public Offer is introduced by companies when they want to go public and gather money from the investors. Once a company decides to go public, they would start promoting their offerings and going on various investor pitches to attract the right kind of people to back them up during their public offer.
This is one of the best ways to raise money for a company and most major names have gone Public over the years. Over the past decade we saw names like Facebook, Alibaba, Twitter and Snapchat all go public and raise money from investors who then become shareholders.
Similarly, in case of an ICO, the coin-maker would go on pitches and would promote their coin on various networks and platforms to gain enough backers. However in case of an ICO, there are some things which are different. Basically, a new ICO is out, you do not have to pay in fiat currency. Instead you pay in existing cryptocurrencies. Almost all ICOs accept Bitcoins, some of them accept ether and other major altcoins too. In exchange for what you pay, you will get their newly introduced altcoins equivalent to the amount you have paid.
People who take part in Initial Coin Offerings do so in hopes that someday the currency they have invested in would surge and would give them good returns. The coin-maker hopes that they will generate enough currency to power what they had envisioned for when they first created their altcoin. It’s supposed to be a win-win situation for all the users.
The Sad Reality of Altcoins
While Altcoins look like they are a tool for visionaries and entrepreneurs to build solutions to certain challenges. On most occasions it is quite easy to create an Altcoin but very difficult to manage them. A large number of times, the coins do not live up to the hype end end up disappointing the investors. People who invest in these coins end up making losses.
Moreover, many coins are created with fraudulent intentions. While they might show you a rosy picture, the reality might be that their aim would be to default and run away once they gather enough ICO money. It is best advised to stay alert.
Things to Keep in Mind Before Investing in Altcoins
There is no sure-shot indicator that will tell you if the coin you are investing in is going to make it big. However, first off, the altcoin you want to buy must have a purpose - a motive for its existence. Going by the massive number of alternate currencies there are which exist simply as Bitcoin clones or clones to other altcoins, there’s a good chance they are going to stagnate. Your coin must have a purpose. In the simplest of words, there must be a particular problem that the coin wants to solve.
A purpose is not enough. There must be a problem your coin is solving, and the altcoin you want to invest in must also have a solution to the problem it wants to solve. This ‘solution’ needs to be practical too. It is easy to say that you want to replace the internet with a new blockchain based system. It is hard to say how you are going to do it.
Another thing to look at before making an investment into an altcoin is to know who powers this coin. Is this coin being powered by an experienced team or is it a group of dreamy eyed entrepreneurs who lack hands-on experience with anything they are stepping into. It is always advisable to go for a coin which is backed by well established names rather than going for something which is completely new.
Anyone trading or investing in cryptocurrencies must know that the markets are subjected to risk. Bitcoins, Ether and the like have shown a proven track record of sustainable growth. However the same cannot be said about newer currencies and altcoins!
To conclude, Altcoins are only going to grow as years pass. However, not all the altcoins that come will boom. Many will come and many will go, like many have come and many have gone without seeing a ray of success. Be careful when investing into altcoins.