How do altcoins differ from Bitcoin (BTC)
Altcoins usually differ from Bitcoin in their technical features and use cases. Bitcoin is primarily designed as digital money and a means of payment. Altcoins often address specific needs or push the boundaries of technology.
At the same time, there are many altcoins built on Bitcoin’s blockchain or also primarily designed as a store of value. Unlike Bitcoin, many altcoins allow faster transactions, enhanced security or the development and use of decentralised applications (DApps) through smart digital contracts (smart contracts). In addition, they often offer new consensus mechanisms or blockchain technologies. These differences reflect the diversity and innovation in the crypto sector.
The historical development of altcoins
One of the first altcoins was Litecoin (LTC), launched in 2011, just three years after the publication of the Bitcoin white paper. Just a year later, in 2012, Ripple (XRP) appeared, addressing Bitcoin’s high block time.
The first altcoins thus emerged shortly after Bitcoin (BTC) was introduced. They were primarily developed to address the limitations and challenges of Bitcoin, the first generation of blockchain technology. These early altcoins offered improvements in transaction speed, mining process and potential applications.
In 2013, Dogecoin (DOGE) was launched by Billy Markus and Jackson Palmer. The network is based on the Litecoin protocol and was originally created as a humorous project. The cryptocurrency aimed to build on Bitcoin’s success and attract a broader audience through its playful reference to the internet meme “Doge”. To everyone’s surprise, Dogecoin became very popular and reached a market capitalisation of US$353,408,334 by August 2019.
Investment in altcoins
Before investing in altcoins, you should thoroughly research the respective crypto projects. This is the only way to realistically assess opportunities and risks. Key factors in evaluating an altcoin project include:
Evaluating the underlying technology
When assessing an altcoin’s technology, look at how well it is scalable, secure and adaptable. These factors are crucial for the long-term viability and innovation potential of the project.
A scalable technology can efficiently handle a growing number of users and transactions. Security features strengthen user trust and can positively influence the project’s market capitalisation and overall growth. Adaptability ensures the project can withstand future challenges and developments in the crypto market.
Experience and vision of the development team
A qualified and committed development team is a vital indicator of an altcoin project’s potential success. Teams that present a clear vision, extensive experience and a solid track record contribute significantly to the credibility and progress of their project.
It’s recommended to look into the professional backgrounds of team members, their involvement in past crypto projects and their participation in the crypto community. This helps you gain a well-rounded view of their expertise and commitment.
Recognising market trends
If you want to invest in altcoins, you’ll need a basic understanding of market trends in the crypto space. The prices of many cryptocurrencies, including altcoins, often follow Bitcoin’s movements. So in addition to metrics like your altcoin’s market capitalisation, you should also keep an eye on Bitcoin forecasts and trends.
The “altcoin season” is a unique phase. During this period, altcoins often significantly outperform Bitcoin. Timing your investments during these market phases can directly impact your chances of success.
Properly assessing the risks of an altcoin project
To assess an altcoin project, you should review the underlying technology’s technical innovations, security and adaptability. These observations help you better understand the risks and opportunities of a new blockchain platform and its related coins and tokens.
However, investments in altcoins can be volatile and risky. Even with extensive research and a promising outlook, your investment could lose value. That’s why you should never invest all your available capital in a single asset class.
Technological innovation: how altcoins are advancing the crypto space
Altcoins are constantly pushing the boundaries of blockchain technology. From improving transaction speed to introducing new security mechanisms, each innovation aims to enhance efficiency, security and user-friendliness. Altcoins tackle fundamental blockchain challenges such as privacy, interoperability and scalability.
Privacy and security
Altcoins are pioneers in privacy and security. The cryptocurrency Monero (XMR) offers a high level of anonymity using ring signatures and stealth addresses. The level of anonymity is so high that Monero earned the nickname “Stealth Coin” and became a popular currency for illegal transactions on the darknet.
Another example is ZCash (ZEC). Using a cryptographic method called zero-knowledge proof, this cryptocurrency takes privacy to a new level. This technology allows transactions to be verified without revealing sensitive information. It enables a new level of privacy where transaction security is ensured without compromising user confidentiality.
At the same time, these cryptocurrencies raise ethical questions and reveal new challenges for the crypto space.
Interoperability between different blockchain systems
Interoperability refers to the ability of different blockchains to communicate with each other. Expanding interoperability supports the exchange and interaction between blockchain networks, enabling solutions such as Layer 2. These increase transaction speed by offloading certain tasks from one blockchain to another.
Projects like Polkadot (DOT) and Cosmos (ATOM) are leading this development. They enable the secure and efficient exchange of information across different blockchains. Polkadot uses parachains and a relay chain for this purpose – specialised blockchains for specific tasks and a main blockchain that links them. Cosmos employs an inter-blockchain communication protocol (IBC), which transfers data and value between independent blockchains.
The goal is to build a connected network of blockchains. This reduces fragmentation in the crypto space and allows different cryptocurrencies and blockchain applications to work seamlessly together.
Scalability and efficiency
Scalability and efficiency describe a blockchain network’s ability to process an increasing number of transactions quickly and cost-effectively, without losing performance.
The Polygon (Matic) network significantly boosts scalability and efficiency using Layer 2 protocols. By offloading tasks to separate blockchains, Polygon can process up to 65,000 transactions per second and rivals systems like Visa in speed. Another example is the altcoin Ethereum (ETH), which increases its processing capacity through sharding. By splitting the database into smaller, more manageable segments, Ethereum can handle more transactions simultaneously. Such innovations enhance performance and promote the wider adoption of blockchains.
The influence of open-source projects on altcoins
Many altcoins are developed as open-source projects. By making their source code publicly available, these projects allow thorough review and improvement by the global developer community. This not only enhances the security and reliability of altcoins but also supports the creation of new cryptocurrencies addressing challenges like privacy, scalability and interoperability.
The open development approach builds trust in altcoins and encourages active community participation to advance blockchain technology. Through close collaboration within these open-source projects, the entire altcoin ecosystem moves forward, laying the foundation for the next generation of blockchain innovation.
