What is Altcoin, how is it different from Bitcoin? All that investors need to know

2021 saw major upheavals in the cryptocurrency market as the good old cryptos like Bitcoin and Ether lost to newer tokens promising much more security of investment and greater returns, also known as altcoins.

“Bitcoin’s performance has been dwarfed by the incredible altcoin growth this year. 2021 has felt like a continuous altseason, only taking a breather during the summer months. This altseason has seen several short-lasting bull runs in various parts of the markets as traders have rotated through the narratives,” Arcane Research said in a note.

The research firm further noted that while Bitcoin may have beaten the stock market in 2021, it has been overtaken by other cryptocurrencies this year. Of these, Binance Coin (BNB) has fared as the best performer of the three biggest cryptos by m-cap with a 1,344 percent gain whereas the Binance Smart Chain ecosystem has seen massive growth in 2021 as it took some of Ethereum’s market share.

WHAT EXACTLY IS AN ALTCOIN?

Altcoins are cryptocurrencies other than Bitcoin. Altcoin is a combination of the words “alternate” and “coin”. These coins differentiate themselves from Bitcoin by extending their capabilities and plugging their shortcomings.

As of November this year, there were more than 14,000 cryptocurrencies. Of these, Bitcoin and Ethereum accounted for around 60 percent of the total cryptocurrency market whereas so-called altcoins made up for the rest in November 2021.

TYPES OF ALTCOINS

There are several categories of altcoins on the basis of their functionalities and consensus mechanisms—mining-based, pre-mined, meme coins, utility tokens, security tokens and stablecoins.

• Mining-based altcoins: These coins are mined into existence and most of them employ the proof of work (PoW) method which is used to generate new coins by solving different problems to create blocks. Notable mining-based altcoins are Litecoin, Monero and ZCash.
• Pre-mined altcoins: These are the exact opposite of mining-based coins as they are produced not through an algorithm but are distributed before being listed on crypto exchanges. An example of a pre-mined altcoin is Ripple’s XRP.
• Security tokens: They are similar to securities that are traded in bourses and they often promise equity in the form of ownership or a dividend payout to holders except they have a digital origin. The prospect of price appreciation for these tokens is a big reason why investors put their money into security tokens.
• Meme coins: Meme coins, also known as parody coins, are cryptocurrencies inspired by jokes or memes on social media. First parody coin or the meme coin to be created was the Dogecoin which was inspired by a popular Doge meme based on the Japanese Shiba Inu dog in 2013. Shiba Inu came in as a rival of the Dogecoin in 2020. Meme Coins such as Shiba Inu and Dogecoin are some of the prominent meme coins that ruled the roost in 2021.
• Utility tokens: These tokens are utilised to provide services within a network and can be used for purchasing services, paying network fees or redeeming rewards. Utility tokens are not used for paying dividends or part with an ownership stakes. 
• Stablecoins: As the name suggests, stablecoins eye the reduction of the volatility associated with crypto trading by pegging their value to a basket of goods (fiat currencies, precious metals and other cryptocurrencies). This basket acts as a reserve to redeem holders in case the cryptocurrency fails or faces problems. Notable stablecoins are Tether’s USDT, MakerDAO’s Dai and USD Coin (USDC).

WHAT IS THE DIFFERENCE BETWEEN ALTCOIN AND BITCOIN?

Basic framework for Altcoins and Bitcoin is similar. However, there are various differences between the two as Bitcoin is the first form of cryptocurrency. Bitcoin has its own share of shortfalls like its proof of work (PoW) mechanism used for creating blocks is energy-intensive and time-consuming. Its smart contract abilities are also constricted.

Altcoins, on the other hand, work on Bitcoin’s drawbacks and establish a competitive advantage for investors. This is done through the proof of stake (PoS) mechanism aimed at minimizing energy consumption and time for creating blocks and validating new transactions.

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