Ever since the hike in bitcoin’s price, a lot of traders prefer to invest in other coins (altcoins). This is because they have low prices, and they can be easily purchased from crypto exchanges. The fact that they yield a high return on investment has shifted people’s interest from Travel With Bitcoin. The word altcoin is coined from the combination of two words “alternative” and “coin”. There are other cryptocurrencies aside from Bitcoin (BTC). They have the same characteristics as bitcoin although they are slightly different. Their distinguishing factor is low price volatility, provision of smart contracts, and consensus mechanisms.
An estimated number of 14,000 cryptocurrencies were recorded as of November 2021. During this time, Bitcoin and Ethereum were estimated to have about 60% of the total cryptocurrency market. Coins such as Ethereum, dogecoin, and litecoin are not considered altcoins.
Altcoins are different from one another. Their prices range from a low cent to hundreds of dollars. However, while some altcoins have proven to be useful and invaluable, some have been created to scam people. This is why a trader needs to examine some altcoins before investing.
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How do altcoins work?
Altcoins operate on blockchain technology just like bitcoin. Each altcoin has its distinctive features and community. The consensus mechanism for altcoins to approve transactions is termed proof of stake (POS). Transactions are carried out via a peer-to-peer system. Codes are shared for verification as these irreversible transactions are recorded on the blockchain.
Types of altcoins
1. Stablecoins
These coins were created without price volatility. This is achievable, as their values are tied to an existing currency. The largest stable coin by market capitalization is Tether. It was tied to the U.S. dollars thereby making its price equivalent to it. Apparently, one tether will always be one U.S. dollar.
As a result of their stability, they are popularly used in decentralized systems. They can be used to hold funds in crypto exchanges wallets before converting them to other cryptocurrencies. In addition, they can be easily used to receive and send funds globally. Other examples of stable coins are USD coin (USDC) and Dai (DAI).
2. Memecoins
These are coins hyped by celebrities or influencers in the crypto world as they have no fundamental analysis. Elon Musk, Tesla’s CEO has an interest in a particular coin called Dogecoin. Over the years, his tweets about the coin brought a rapid increase in its price. Shiba Inu (SHIB), Kishu Inu, to name a few are other examples of meme coins.
3. Mining based altcoins
These coins are generated through mining, using bitcoin’s consensus mechanism PoW (proof of work). They are mined on computers by solving complex mathematical operations to validate a block. Zcash (ZEC), Litecoin (LTC), and Monero (XMR) are examples of mining-based altcoins.
Evaluation of altcoins
Selecting an altcoin requires a level of understanding about the utility of the coin. Making a research about the coin for analysis is necessary as this helps to know if the coin is undervalued or not. The more ideal ones are undervalued as they have more potential to grow and are very profitable. The overvalued assets, on the other hand, might experience a decline in price or return to their original value.
Conducting personal research is very important. Information about the project’s team can be gotten from their white paper. Additional information can be derived from their social media pages such as Twitter or LinkedIn. This is to know if the team is composed of experienced experts who are good at what they do.
Moreover, some questions are meant to be answered while citing a good altcoin. Is the team highly regarded in the crypto community? Perhaps they have worked on other projects, was it successful? What are their qualifications?
There are two ways in analysing a coin. These are fundamental and technical analyses. The fundamental analysis entails gathering and evaluating information about the coin. This includes knowing the team behind the project, its network and use case, and the date it was created. This can be done by conducting a thorough analysis of the white paper.
Technical analysis involves studying charts to scrutinize how the demand and supply of the coin affect the volatility, volume, and changes in price. An increase in the demand for the coin oversupply would lead to an increase in price and more demand.
Also read: Top 5 Most Influential People in Cryptocurrency Trading
