How it Works and What Should you Know?

In 2009, Bitcoin made an entrance as a bizarre and obscure gimmick, destined to revolutionize the financial world and change it forever. Besides, it created a philosophy and technological framework that allowed other enthusiasts and businesses to create their cryptocurrencies — altcoins. Investments in them can help diversify a crypto portfolio, fix profits, and earn interest, but it can be risky if not paired with comprehensive research.

Differences of Altcoins

All coins other than Bitcoin are called altcoins, no matter how big and famous they are. Even Ethereum, which accounted for 20% of the crypto market cap in 2021, is still considered an altcoin. Bitcoin’s market share is 40%, meaning that the rest belongs to over 14,000 existing altcoins.

Though Bitcoin and altcoins share the core concept and functionality, altcoins provide various improvements over Bitcoin. For example, Bitcoin’s proof of work consensus mechanism requires significant computing powers and is rather time-consuming. In response, some altcoins introduced a proof of stake mechanism and smart contracts, which allowed them to increase the speed of transactions and lower commission rates.

Types of Altcoins

After Bitcoin became mainstream, bright minds around the world understood the potential of cryptocurrencies. There were problems to deal with, such as high volatility, so there came coins aimed to solve them. Here are the key altcoin types available on the market.

Mining-based

These are coins that follow the same principle of creating new coins as Bitcoin does. They utilize the proof of work method to create hashes for transaction blocks in a blockchain, which are used to organize all transactions and prevent tampering. The hashes are created by solving complex cryptographic math problems for which those who solved them are given a certain amount of coin as a reward. There are also pre-mined coins. In their case, new coins can’t be produced, and they are distributed during an initial coin offering (ICO) before they are listed on exchanges and become available for trading.

A good example of minable altcoins is Litecoin — one of the oldest altcoins on the market dating back to October 2011. It derives from Bitcoin, uses its best features, and offers a series of improvements. The main differences are four times faster transaction time and lower fees, which essentially gave this coin its name. To buy and sell litecoin Australia, you should use a great crypto exchange platform TimeX, where you can find this BTC and over 20 more coins and projects available for trading.

Stablecoins

Crypto is subject to extraordinary volatility, influenced by speculation, media hype, and new government regulations. The reason for it is that each coin has a predetermined maximum amount of currency that can be issued. Bitcoin, for example, limits its max amount to 21 million, and the more coins are issued, the higher will be the price.

Those extreme fluctuations make crypto unsuitable for storing assets and daily exchange; so, in response, stablecoins emerged. In stablecoins, every issued coin is backed with a valuable asset, let it be dollars or precious metals. They work as a guarantee for a coin’s value and keep stablecoin price changes within very narrow margins.

Some of the wide-used stablecoins are USDT, MakerDAO’s DAI, and USD Coin.

Meme Coins

This category includes coins that were created just for laughs, featuring meme-worthy characters or mocking the titans of the industry. They usually bring nothing new technology-wise to the crypto industry and have plenty of issues. However, they easily draw public attention, which influencers and investors use for speculations.

You may have witnessed the frenzy caused by Elon Musk’s support of Dogecoin on Twitter through the spring of 2021. A series of shared memes and prophecies that DOGE would become a new financial standard caused huge price spikes and made the once-a-joke coin join the big ten of cryptocurrencies at that date.

Utility Tokens

Utility tokens are virtual money used to pay for certain goods and services within a vendor’s network. One can get them for completing certain marketing tasks or as a part of loyalty programs. Utility tokens don’t provide significant value outside the platform that issues them and are used to establish an internal economy on the basis of blockchain. For example, Siacoin, a coin by Sia, a cloud storage platform, is a currency used to pay rent for the storage space on the said platform.

Trading Altcoins

Since many new coins are derivatives of Bitcoin, their price charts often match on a large scale. However, the altcoin market is still young and attracts many amateur traders who have neither sufficient funds nor patience to provide value stability. Let’s take ADA, one of the large altcoins, as an example. On April 18, 2021, it was worth $1,37. Just 6 months later, on September 3rd, it reached its historical maximum of $2,96, followed by a long plummet with the lowest point at $0,78. There are no defined criteria or trustworthy metrics for trading on the altcoin market. Its volatility can bring enormous profits to those not afraid to take the risks. The lack of regulations already resulted in some “dead” coins, where the project failed or disappeared with investors’ money.

Pros of trading stablecoins:

• Altcoins improve on Bitcoin’s flaws.
• Potential to invest early in a successful project.
• Wide choice of coins with different innovations and functions.
• Lock in profits with stablecoin.

Cons:

• A smaller investor market compared to Bitcoin.
• Lack of regulations and investment criteria.
• Hard to tell if a coin will be a success or a dead end.
• Can be rather stressful due to rapid changes.

If you want to try trading Bitcoin or altcoins, you can do it on the Australian cryptocurrency exchange platform timex.io.