What are altcoins?The word “altcoin” is derived from “alternative” and “coin.” Altcoins refer to all alternatives to Bitcoin. Altcoins are cryptocurre
What are altcoins?
The word “altcoin” is derived from “alternative” and “coin.” Altcoins refer to all alternatives to Bitcoin. Altcoins are cryptocurrencies that share characteristics with Bitcoin (BTC). For example, Bitcoin and altcoins have a similar basic framework. Altcoins also function like peer-to-peer (P2P) systems and share code, much like Bitcoin.
Of course, there are also marked differences between Bitcoin and altcoins. One such difference is the consensus mechanism used by these altcoins to validate transactions or produce blocks. While Bitcoin uses the proof-of-work (PoW) consensus mechanism, altcoins typically use proof-of-stake (PoS). There are different altcoin categories, and they can best be defined by their consensus mechanisms and unique functionalities.
Here are the most common types of altcoins:
Mining-based
Mining-based altcoins use the proof-of-work method, most commonly known as PoW, which allows systems to generate new coins by way of mining. Mining entails solving complex problems to create blocks. Monero (XMR), Litecoin (LTC) and ZCash (ZEC) are all examples of mining-based altcoins.
Stablecoins
Stablecoins aim to reduce the volatility that has marked crypto trading and use since the beginning. The value of stablecoins is, therefore, pegged to the value of a basket of goods, like precious metals, fiat currencies or other cryptocurrencies. The basket serves as a reserve in case the cryptocurrency encounters problems. Dai (DAI), USD Coin (USDC) and Tether (USDT) are all examples of stablecoins.
Security tokens
True to its name, a security token is similar to traditional securities traded in stock markets. They resemble traditional stocks and represent equity, either in the form of ownership or dividends. Security tokens attract investors because of the high probability that their price will appreciate quickly.
Memecoins
Memecoins are called such because they represent a silly take on well-known cryptocurrencies. They are typically hyped by celebrities and popular influencers in the crypto space. Popular meme coins Dogecoin (DOGE) and Shiba Inu (SHIB), for example, often have their prices driven up by Elon Musk, Tesla’s CEO and well-known crypto enthusiast.
Utility tokens
Utility tokens are used to provide services like rewards, network fees and purchases within a given network. Utility tokens do not offer equity, unlike security tokens. Filecoin (FIL), for example, is a utility token used to purchase storage on a decentralized storage network.
How do you evaluate altcoins?
Altcoin fundamental analysis involves looking at and evaluating all available information on an altcoin. It involves looking at the cryptocurrency’s use cases and its network, as well as the team behind the project, to fully understand and evaluate the best altcoins to buy.
When analyzing altcoins, or any cryptocurrency for that matter, the goal is to understand whether the asset in question is overvalued or undervalued. Overvalued assets should be avoided, whereas undervalued assets are more ideal. This is because overvalued assets will likely underperform and dip back to their real value. Undervalued assets, on the other hand, have more potential for growth and are consistently profitable.
A thorough analysis will help you make the best decision concerning your investment decisions.
Here are some helpful guidelines on how to analyze cryptocurrency before investing:
Step 1: Analyze the whitepaper and find the value proposition
Scrutinizing a token’s whitepaper will provide a lot of relevant information such as its use cases, goals and the team’s vision for the project. The white paper must give you a good picture of how the altcoin will provide value for its users.
The value proposition for Bitcoin, for example, is as follows: “a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on a peer-to-peer network without the need for intermediaries.”
An altcoin’s value proposition can guide you as you continue to analyze other information about it.
Step 2: Look for increasing demand and stable (or decreasing) supply
Looking at supply and demand is one of the best ways to assess your next crypto investment. Now that you’ve gotten a clear picture of how the altcoin adds value to its users, it’s time to look at how it navigates supply and demand.
Simply put, the altcoin should have incentives that will facilitate the increase of demand in such a way that supply is continually decreasing or stable. When demand outpaces supply, prices go up, thereby fueling even more demand.
To do this, you can access resources like Cointelegraph’s Price Indexes and Market News, as well as Coin 360’s Heatmap and CoinMarketCap.
Step 3: Assess the team and stakeholders behind the project
Now that you have a good understanding of what the project can offer, it’s also important to thoroughly assess the team behind the project. You can find information about the…
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