Altcoins Vs. Stablecoins: The Key Differences
The growing popularity of cryptocurrency has seen the emergence of various digital tokens in the crypto investment space. However, it is essential to differentiate between the most widely used digital assets, altcoins, and stablecoins, what they are, and their similarities where applicable.
What Are Altcoins?
Altcoins are another crypto token or an alternative to Bitcoin (BTC) or any other digital assets that are not BTC. These virtual currencies make up a significant part of the cryptocurrency market and are created to compete for market shares with Bitcoin.
Moreover, altcoins have similar functionality to Bitcoin and can be traded on most crypto exchanges. However, some confuse them with stablecoins.
Thus, the focus is on examining the key differences between altcoins and stablecoins and their individual use cases.
What Are Stablecoins?
Stablecoins are a type of altcoin designed to be stable or to guarantee price stability within the digital asset market. Regardless of price fluctuations, stablecoins always maintain a constant value.
They are not usually affected by the price volatility of the broader crypto market except in rare cases. Stablecoins are typically pegged to fiat currencies, mainly the USD, and their value is usually 1:1 to the dollar. For example, one USD Tether (USDT) equals $1.
Furthermore, stablecoins can be backed by any fiat currency and not necessarily the dollar. Therefore, observers noted that there are no perfect or best stablecoins.
Experts opined that it had become the standard practice for stablecoin issuers to peg the value of their assets to the global reserve currency, the USD. Apart from this, it is also possible for asset developers to peg a stablecoin to another crypto asset.
In other words, these types of stablecoins are called “algorithmic stablecoins.”
The purpose and use cases of altcoins and stablecoins determine their differences and functionalities. While altcoins are prone to extreme price volatility, stablecoins, on the other hand, are designed to provide market stability and serve as a hedge against inflation.
It is worth noting that stablecoin issuers have a certain amount of cash reserves, usually fixed to provide sufficient liquidity. Conversely, altcoins are distinct from Bitcoin because they provide specific capabilities by allowing users access to decentralized finance (DeFi) platforms.
These features are possible because smart contracts offer faster transaction processing time and lower fees than Bitcoin. Meanwhile, altcoins like Bitcoin are susceptible to price fluctuations, and the best-performing altcoin has the potential to control a sizable market share provided it becomes an improvement on Bitcoin’s consensus mechanisms.
Stablecoins have a much lower return on investments but offer friendly interest rates. Observers noted that interest rates of 5-20% are one prominent feature of stablecoins that attract its holders.
Ethereum As An Altcoin
After Bitcoin, Ethereum (ETH) is the second-largest crypto asset based on market capitalization. It also has the highest trading volume and total value locked (TVL) among altcoins.
Therefore, ETH is the most widely used altcoin in the crypto industry. However, some investors opposed the classification of ETH with other altcoins, given that Ethereum is the first blockchain protocol to have smart contracts functionality.
Despite the objection, Ethereum is widely regarded as an altcoin. Some even consider it the king of altcoins.
There is a widely assumed notion in the crypto ecosystem that altcoins generally performed better following a Bitcoin price rally. This scenario is known as the “altcoin season.”
Moreover, the altcoin season is when most of the top 50 altcoins outperform Bitcoin within 90 days. Some of the altcoin season indicators include:
- The rising price of BTC often signifies lower prices for alternate crypto assets
- Falling prices of Bitcoin mean a decline for altcoins as well
- Altcoins only rise when BTC trade sideways
Meanwhile, the crypto market’s susceptibility to rapid changes makes it difficult to predict an altcoin season. Some of the most widely used stablecoins include Tether USDT, Circle USD Coin, and MakerDAO Dai stablecoins.
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