The Complete Beginner’s Guide to Altcoins

This comprehensive guide provides an expert introduction to altcoins tailored specifically for beginners, and a list of the top altcoins.

Carson O.
16 Min Read
Altcoins COURTESY

Altcoins refer to the thousands of alternative cryptocurrencies that have been created after the launch and mainstream success of Bitcoin. While Bitcoin remains the most popular and valuable cryptocurrency, altcoins have become an integral part of the digital currency landscape.

Altcoins aims to build upon Bitcoin’s innovations by experimenting with different cryptographic algorithms, governance models, use cases, and more. For cryptocurrency investors, altcoins present an opportunity to get in early on potentially groundbreaking projects. However, they also come with significant risks due to the nascency and uncertainty of many altcoin ecosystems.

This comprehensive guide provides an introduction to altcoins tailored specifically for beginners. We cover everything from the history of altcoins, how they differ from Bitcoin, and criteria for evaluating emerging cryptocurrencies, to tips for analyzing and investing in altcoin projects.

Buckle up, and let’s dive in!

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A Brief History of Altcoins

The origins of altcoins trace back to Namecoin, which launched in April 2011 as the very first alternative to Bitcoin. Namecoin was built on Bitcoin’s core code but modified to serve a specific use case – a decentralized domain name registry that could avoid internet censorship.

Later in 2011, Litecoin emerged as one of the first altcoins to gain significant traction. It adopted the Bitcoin software but altered parameters such as block generation time, hard cap supply, and mining algorithm. For its innovations, Litecoin is often referred to as the “silver to bitcoin’s gold.”

The success of Namecoin and Litecoin kickstarted a proliferation of altcoins between 2011-2014. This period gave rise to prominent altcoins like Peercoin, Dogecoin, Dash, Ripple, Stellar, Monero, and Ethereum.

The market eventually became oversaturated with low-quality clone coins that provided little innovation. This led to a severe bear market and resulted in many altcoins fading into obscurity. However, the crypto markets eventually recovered, and a new wave of promising altcoins has emerged over the last few years.

Some major altcoins were also created as a result of the contentious hard forks of Bitcoin. These include Bitcoin Cash (BCH), Bitcoin Gold (BTG), and Bitcoin SV (BSV). While they share an origination with Bitcoin, they have diverged into separate cryptocurrencies.

Understanding Key Differences Between Altcoins and Bitcoin

Altcoins may seem identical to Bitcoin at first glance, but under the hood, most implement a variety of technical changes and innovations. Let’s examine some of the key ways in which altcoins differentiate themselves from the original Bitcoin protocol.

Consensus Mechanisms

Bitcoin utilizes a proof-of-work (PoW) consensus mechanism to process transactions and mint new coins. In PoW, specialized computers called mining rigs race to solve complex cryptographic puzzles to verify blocks of transactions and get rewarded with BTC.

Many altcoins use modified versions of PoW that alter parameters like block time, mining difficulty, and reward mechanisms. Others use entirely different consensus models, such as:

  • Proof-of-stake (PoS) – Validators stake cryptocurrency holdings to verify blocks and earn staking rewards. Prominent PoS coins include Cardano, Solana, Polkadot, and Ethereum (post-merge).
  • Delegated proof-of-stake (DPoS) – Coin holders vote to elect delegates responsible for validating blocks. Used by EOS, Lisk, and Steem.
  • Proof-of-capacity – Miners allocate disk space instead of computation power. Utilized by Chia and Burstcoin.
  • Proof-of-burn – Miners send coins to an unspendable address to get the right to validate blocks. Used by Slimcoin.

Each consensus mechanism has its own unique set of advantages and disadvantages. Altcoin developers leverage alternatives to PoW aiming to improve speed, efficiency, decentralization, security, and other aspects.

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Hashing Algorithms

The Bitcoin network utilizes the SHA-256 hashing algorithm to mine new blocks and validate transactions. Many early altcoins simply copied this algorithm. However, over time altcoins have adopted a wider variety of hashing functions, including:

  • Scrypt – Used by Litecoin and Dogecoin. Scrypt was initially ASIC-resistant, allowing CPU and GPU mining.
  • X11 – Created for Dash. X11 combines multiple hash functions for improved security.
  • Ethash – Ethereum’s hashing algorithm, which utilizes DAG architectures to favour GPU mining.
  • CryptoNight – Privacy-focused algorithm used by Monero. Designed for CPU mining.

The choice of a hashing algorithm can significantly impact mining accessibility, efficiency, and decentralization dynamics on a blockchain.

Blockchain Parameters

Altcoin developers can fine-tune blockchain parameters like block time, block size, reward mechanics, difficulty adjustment, maximum supply, and more. For instance:

  • Litecoin produces blocks every 2.5 minutes, four times faster than Bitcoin’s 10 minutes. This allows faster transaction confirmation.
  • Zcash has a 20 times larger block size compared to Bitcoin, which accommodates more transactions per block.
  • Many altcoins use shorter block reward halving cycles or have no cap on total supply.

Modifying parameters provides more flexibility for customizing altcoin blockchains to fulfil specific use cases. Changes to block time, size, and reward systems also impact mining economics.

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Privacy Technologies

Most altcoin transactions are public like on the Bitcoin blockchain. However, some altcoins leverage complex cryptographic tools to offer greater transaction privacy and anonymity. These include:

  • Ring signatures – Used to obscure sender identities on the Monero blockchain.
  • Zerocoin protocol – Provides untraceable coins through zero-knowledge cryptography, implemented in Zcash and PIVX.
  • Mixing protocols – Techniques like CoinJoin that pool and mix transactions to provide stronger anonymity.

Privacy remains a major issue for Bitcoin and many altcoins. Innovations in anonymity help position privacy-focused altcoins for use cases like online payments.

Evaluating an Altcoin’s Credibility and Viability

The open-source nature of cryptocurrency means anyone can create an altcoin, but most projects fail to gain traction and eventually get delisted from exchanges. When assessing the hundreds of competing altcoins, it helps to analyze certain key factors related to credibility and viability:

Community

A strong community of backers is essential for the survival and growth of any altcoin. Analyze engagement metrics on developer forums, social channels, and community platforms. The size of the team and frequency of code commits also provide information on the project’s support.

Market Capitalization and Liquidity

While nascent projects can gain significant momentum fast, altcoins with larger market caps and trading volumes have more stable and liquid markets. This reduces volatility and makes cashing out easier.

Track Record and History

The longer an altcoin has been around while maintaining relevance, the better. Newer coins with short histories are riskier from an investment standpoint. Checking the release history and milestones achieved can give more confidence in the altcoin’s future potential.

Unique Value Proposition

The altcoin space is highly competitive. Coins with no clear technical innovations or real-world utility get outshined by alternatives. Evaluating the uniqueness of an altcoin’s value proposition indicates underlying demand drivers.

By carefully researching and analyzing these success factors, investors can separate promising altcoins with long-term viability from shallow schemes and hype-driven fads.

How to Evaluate and Invest in Altcoins

Once you’ve identified potentially promising altcoin projects, the next step is learning how to properly analyze, value, and invest in them as an asset class. Here are some tips and strategies for altcoin investing:

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Understanding Market Cycles and Sentiment

Like most assets, altcoin prices experience cyclical swings between bull and bear markets. During euphoric bubbles, hype drives prices upwards, while capitulation during bears leads to pessimism.

It’s important to take a level-headed long-term outlook focused on fundamentals. Avoid buying into greed and hysteria, or panic selling when the market looks bleak. Analyze cycles of speculation and undervaluation to determine ideal entry and exit points.

Use valuation metrics like the crypto version of price-to-earnings ratios to identify undervalued altcoins with room to grow. The Bitcoin Dominance index (percentage of total crypto market cap) can also reveal trends in money rotating between Bitcoin and altcoins.

Researching and Analyzing Altcoin Projects

Thorough research is key before investing in an altcoin. Scan materials like whitepapers, roadmaps, documentation, and GitHub repositories to evaluate the technology.

Research the team’s background and their advisors’ credentials. Joining Telegram groups and Discord servers provides unfiltered insights into the community sentiments and engagement.

It’s also crucial to analyze the tokenomics – the token distribution schedule, capped supply, burning mechanisms, governance rights, and more. These factors directly impact the coin’s investment merits.

Technical Analysis

While fundamentals determine long-term trajectory, technical analysis can help identify ideal short-term entry and exit positions. Analyze price charts using indicators like moving averages, support/resistance levels, RSI, and trading volumes.

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Combining analysis of fundamentals and technicals works best for developing a robust altcoin investment strategy. Always wait for pullbacks after a surge before buying to avoid FOMO at peak prices.

Managing Risks and Position Sizing

Crypto markets tend to be highly volatile, making risk management essential. Only invest what you can afford to lose, and ensure proper portfolio diversification across assets and altcoins.

Use stop-loss orders to contain downside, and avoid excessive speculation, leverage, and margin trading which amplify risks of liquidation.

Securing Altcoin Holdings

Use cold storage hardware wallets like Ledger and Trezor to securely hold altcoin private keys offline. More obscure altcoins may require their own official wallets.

For active trading, hold coins on reputable exchanges that offer robust security features. Always withdraw to private wallets after trading rather than leaving holdings on an exchange long term.

Enable two-factor authentication, use strong unique passwords, and follow other security best practices to avoid losing funds.

Now that we’ve covered the basics of altcoins, it’s time to highlight some of the most promising and popular altcoins that are worth watching in the 21st Century.

1. Ethereum (ETH)

As the second-largest cryptocurrency after Bitcoin, Ethereum has firmly established itself as the king of altcoins. Its native token ETH powers a global decentralized computing network that supports smart contracts and dapps.

Upcoming major upgrades like the Merge (to proof-of-stake) and sharding will scale the network and reduce fees, while ETH remains essential for DeFi, NFTs, metaverses, and Web3 ecosystems.

2. Cardano (ADA)

Cardano brands itself as a “third-generation” blockchain that aims to improve on Ethereum’s innovations. It uses the Ouroboros proof-of-stake consensus powered by the ADA cryptocurrency.

Cardano’s roadmap involves methodical research-driven upgrades to support advanced smart contracts, DeFi, and layer-2 scaling solutions. Its focus on peer-reviewed algorithms, formal verification, and transparency gives it strong technical credibility.

3. Solana (SOL)

One of the hottest Ethereum challengers, Solana prioritizes scalability and transaction speed using proof-of-history and other innovations. The SOL token supports high throughput DeFi and NFT projects built on Solana.

Despite intermittent network outages, Solana has attracted significant developer interest due to its ease of building dapps, low fees, and interoperability with other chains via wormholes.

4. Polkadot (DOT)

Polkadot’s multi-chain architecture allows customizable parallel blockchains to connect and share data and transactions. It aims to be the backbone of a decentralized internet of blockchains.

The platform offers strong interoperability, shared security, and cross-chain composability. DOT is the governance and staking token that secures Polkadot’s network of parachains.

5. Polygon (MATIC)

Polygon (formerly Matic Network) leverages a novel sidechain solution to scale Ethereum. Users can secure assets on Ethereum while enjoying fast and cheap transactions on Polygon sidechains.

As a layer-2 scaling helper for Ethereum, Polygon has become the go-to choice for building wide-reaching Ethereum-compatible DeFi and dApp platforms. MATIC is used for fees and governance.

6. Uniswap (UNI)

Uniswap pioneered the automated market maker model for decentralized trading without centralized intermediaries. The UNI token governs this leading DeFi protocol on Ethereum.

Innovations like v3 and liquidity pools made Uniswap a dominant on-chain exchange. UNI incentivizes liquidity providers, while allowing community control via governance rights.

Conclusion

Altcoins present investors with exciting potential opportunities mixed with substantial uncertainty and risk. This guide covers all the essentials – from altcoin history, key technical differences, and credibility analysis, to investing strategies and risk management practices.

While the crypto markets will continue to witness rapid evolution and disruption, the long-term growth trajectory remains positive. Many of today’s altcoins offer solutions that could become tomorrow’s blockchain mainstream after further refinement and adoption. By making informed decisions, while being cognizant of risks, retail investors can responsibly tap into the potential of altcoins.

The world of altcoins provides a thrilling glimpse into the possibilities of blockchain-based digital currencies. However, it pays to deeply research projects, manage speculative risks, and invest based on a solid analytical framework. With patience and prudence, altcoins can become a rewarding component of a well-balanced crypto portfolio.

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I am a multi-faceted professional with a strong foundation in Business and Finance, honed since 2020. Additionally, I possess a deep passion for automobiles, serving as an avid car enthusiast. In parallel to my diverse interests, I am also a dedicated student pursuing a career in the medical field.
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