What Is an Altcoin?
Traditionally, an altcoin is any coin that is not Bitcoin. Today, in some crypto circles, Ethereum is sometimes excluded when talking about altcoins due to its massive popularity and outsized market capitalization.
Altcoin means “alternative” coin, as in an alternative to Bitcoin and, in some contexts, Ethereum.
An Altcoin (umbrella term encompassing “alt” for “alternative” and “coin”) is a labeling for a cryptocurrency that is alternative to Bitcoin.
Schueffel et al. (2019)
Different Categories of Altcoins
Altcoins come in a variety of types, and they can be categorized by market capitalization, sector, use case, function, etc.
Payment Tokens
Payment tokens are a type of cryptocurrency designed specifically for decentralized digital payments. Bitcoin, Litecoin, Monero, and many stablecoins are examples of payment tokens.
Note: In addition to not qualifying as an altcoin, Bitcoin may also be a poor choice of cryptocurrency for payments, as a single transaction takes 10-15 minutes. However, its security, decentralization, and popularity have made it today’s de facto digital gold.
Stablecoins
Stablecoins are an essential element in the cryptocurrency ecosystem. They serve as a bridge between the traditional financial system and crypto by tracking the price of assets external to the crypto space.
Some stablecoins (e.g., USDT, USDC, and EURC) are pegged to the U.S. Dollar, the Euro, and most other major national currencies. Others, like PAXG, follow the price of commodities such as gold, silver, oil, and even wheat.
Security Tokens
Security tokens are cryptocurrencies classified as securities in the eyes of financial authorities. A security is a financial instrument representing the value of something. They’re mainly used for investment purposes, and so are security tokens.
Owning, trading, and investing in security tokens is more or less equivalent to doing the same with traditional securities, and many of the same regulatory requirements apply.
It’s worth noting that there is yet little clear regulatory consensus on which cryptocurrencies are securities. Over the years, tokens like BNB, SOL, NEAR, and many more have been called unregistered securities by the U.S. Securities and Exchange Commission (SEC).
XRP is perhaps the most famous example, waging a years-long legal battle with the SEC over such allegations.
Utility Tokens
Utility tokens are a type of altcoins designed to facilitate the proper functioning of a specific decentralized application or blockchain. The most prominent example of a utility token is Etherem’s Ether (ETH), used to pay network gas fees, staking, decentralized governance, and more.
What constitutes a utility token in the eyes of the law is still relatively unclear.
However, the main underlying condition for a cryptocurrency to be considered a utility token is that it should not promise any dividends, future payments, or other financial rewards or incentives for buying it.
Mining-Based Altcoins
Monero, Dash, Ethereum Classic, and many more altcoins still use a proof-of-work (PoW) consensus mechanism, making them mining-based altcoins.
Resource-intensive crypto mining as a method of securing blockchains has seen a decline in popularity in recent years since The Merge — Ethereum’s switch from PoW to proof-of-stake (PoS). However, mining is still considered the most secure method of achieving consensus.
Meme Coins
Meme coins are altcoins created for fun and gambling without any intrinsic value attached. They often have wacky names like Dogecoin, Shiba Inu, and Pepe.
Memecoins tend to attract large communities of a certain type of crypto trader, colloquially known as a “degen.” Some meme coins, like DOGE, regularly rank among the top five highest-ranking cryptocurrencies by market capitalization.
If a little less serious, some meme coins are based on robust technology, such as Doge, which runs on its own blockchain and has been used for transactions and online tipping for years.
Advantages and Disadvantages of Altcoins
Altcoins, as a category, don’t have any major advantages over established cryptocurrencies like Bitcoin and Ethereum.
Individual altcoins, however, can push innovation in the crypto space by experimenting more freely with new technologies. Some have volatile prices, which might be attractive to short-term traders, and some offer unique services that bigger players in the space do not, such as completely private and untraceable transactions (in the case of Monero) or incredibly cheap gas fees (with Solana).
Conclusion
Altcoins have become a popular category of cryptocurrencies for both short-term traders and long-term investors. They’ve achieved spectacular growth over the years, and altcoin blockchains are a source of innovation and discovery in the blockchain space.
Schueffel, P., Groeneweg, N., & Baldegger, R. (2019). The crypto encyclopedia: Coins, tokens and digital assets from A to Z. Growth Publishers.
https://www.heg-fr.ch/media/lbdfnyd1/schueffelgroenewegbaldegger2019_crypto-encyclopedia_eng.pdf
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