Altcoins play a pivotal role in the cryptocurrency ecosystem, just like Bitcoin. After the king of crypto was introduced in 2009, the coins that were later released were considered altcoins, short for alternative coins. From Litecoin, the second coin launched, to Pi, each coin has its distinct features and serves a unique purpose. This article will cover the importance of altcoins in the crypto world, their types, the benefits and challenges they face, and their connection with Bitcoin.
Table of contents
What are Altcoins?
Apart from Bitcoin, all other cryptocurrencies, including tokens, are altcoins. While some altcoins aim to directly compete with Bitcoin as a form of currency, others focus on offering distinct functionalities such as smart contracts, decentralized applications, privacy, or stable value.
As of 2025, there are over 20,000 altcoins in existence. Some of the most prominent include Ethereum (ETH), Binance Coin (BNB), Ripple (XRP), Cardano (ADA), Solana (SOL), and Polkadot (DOT). Each of these altcoins brings unique features and innovations, contributing to the growing diversity of the cryptocurrency ecosystem and offering investors a wide range of opportunities.
How Do Altcoins Function?
Altcoins function using blockchain technology. A blockchain is a digital, distributed database that is simultaneously maintained by several computers globally. New transactions are authorized and recorded on the blockchain as blocks of transactions. These transactions cannot be reversed after they are recorded into a blockchain.
Altcoins share the same fundamentals as Bitcoin in using the blockchain as a trusted, distributed public ledger, which allows and records a transaction only if the transaction is legitimate, however, this has enabled altcoins to either use it to achieve different goals or to improve flaws in Bitcoin.
Types of Altcoins
- Stablecoins: Pegged to stable assets like the US Dollar (USD) or gold, these altcoins help to reduce price volatility. Popular stablecoins include Tether (USDT), USD Coin (USDC), and DAI.
- Utility Tokens: These tokens provide users with access to a product or service within a blockchain ecosystem and are often used for paying transaction fees or services. For example, Binance Coin (BNB) helps to pay fees on the Binance exchange.
- Security Tokens: Like traditional securities, these altcoins represent ownership in a project and are subject to regulatory oversight.
- Governance Tokens: These tokens allow holders to make decisions in the blockchain protocol, wherein they can vote on proposed changes made to the platform. Altcoins like Uniswap and MakerDAO are perfect examples.
- Privacy Coins: They are designed to enhance anonymity and confidentiality in transactions. Unlike Bitcoin, which allows partial privacy like pseudonymity, coins like Monero and Zcash can use advanced cryptographic techniques to hide transaction details.
- Meme Coins: Created for entertainment purposes, meme coins have gained popularity with community interest and viral marketing. The most common meme coin altcoins are DOGE, SHIB, PENGU, and PNUT.
Differences between Bitcoin and Altcoins
Though altcoins stem from the same foundational technology as Bitcoin, they differ in multiple ways, including technology, use case, and market positioning.
Purpose
While Bitcoin is primarily designed as a digital store of value, altcoins serve a wide array of purposes. In Ethereum, smart contracts are enhanced, while Monero boosts privacy, and meme coins provide entertainment.
Blockchain Technology
While Bitcoin’s blockchain technology is simple and secure, focusing on P2P transactions, altcoins develop dApps, enable interoperability between blockchains, and also boost transaction speed with low fees.
Consensus Mechanism
While Bitcoin primarily uses proof of work (PoW), the altcoins use both PoW and PoS (proof of stake). While some altcoins like Monero, Litecoin, and Dogecoin use the PoW mechanism, Cardano and Polkadot use the PoS mechanism. Notably, Ethereum was using the PoW mechanism, but after the DAO hack in 2016, it moved to PoS. Apart from this, altcoins also use consensus mechanisms like DPoS and PoA. While DPoS is used by Tron, PoA is used by VeChain.
Adoption
While Bitcoin has garnered strong investor interest, it cannot be said the same for altcoins. Each token and coin has different levels of adoption based on user trust, and this sentiment plays a crucial part in the market. Apart from regular coins, stablecoins and meme coins have garnered interest in the market.
Market cap
It is a known fact that Bitcoin’s supply is capped at 21 million coins and could probably be over by the year 2140. However, in the case of altcoins, each has its own supply limit. In Ethereum, there is no cap, but the tokens are burned to reduce supply over time, whereas the stablecoins, which are pegged to the USD, expand or contract their supply based on market demand. On the other hand, meme coins, created for fun, often have large supplies to encourage wide distribution.
Advantages of Altcoins
- Innovative: Many altcoins introduce new features that expand the functionality of blockchain technology.
- Diversification: Since there are different types of altcoins, investors can diversify their portfolios by holding altcoins based on risk profiles and use cases.
- Affordable: Some altcoins are more affordable per unit, attracting retail investors.
- Quick transactions: Several altcoins offer higher throughput and lower fees compared to Bitcoin.
Disadvantages of Altcoins
- High Volatility: Since they play a significant role in the market, altcoin price fluctuations can disrupt investor sentiment.
- Lower Liquidity: Many altcoins have smaller market caps and limited trading volumes.
- Regulatory Uncertainty: Some altcoins, excluding meme coins, may be deemed securities or face bans in certain jurisdictions.
- Technological Vulnerabilities: New projects could be attacked by bugs, poor security, or weak governance.
- Short Lifespan: Many altcoins fail to achieve long-term success and eventually lose relevance, especially meme coins.
How Bitcoin and Altcoins Work Together
Interestingly, Bitcoin and altcoins often move together in market cycles. When Bitcoin experiences significant price changes, it tends to influence the overall sentiment across the crypto market, often pulling altcoins in the same direction. This is largely because Bitcoin holds the largest share of the market and acts as a benchmark for the entire cryptocurrency space. Many investors enter altcoins only after gaining confidence from Bitcoin’s performance. Additionally, technological advancements in altcoins often draw more attention to the crypto sector as a whole, indirectly benefiting Bitcoin’s visibility and adoption.
Conclusion
While Bitcoin is still the most well-known and trusted crypto, altcoins play a big role by offering different features and uses beyond what Bitcoin was designed for. With features like smart contracts, quick transactions, and privacy, altcoins drive more adoption. However, risks like price swings make investments in altcoins a cautionary tale. On an overall note, both Bitcoin and altcoins enable the crypto ecosystem to thrive by expanding its use cases, attracting diverse participants, and driving continuous innovation.
Disclaimer: The information presented in this article is for informational and educational purposes only. The article does not constitute financial advice or advice of any kind. Coin Edition is not responsible for any losses incurred as a result of the utilization of content, products, or services mentioned. Readers are advised to exercise caution before taking any action related to the company.
