What Are Altcoins? How To Pick And Analyze Them?
Altcoins is a word coined from the merging of two words, “Alternative” and “Coin.” It is a term used to refer to all the alternatives available to Bitcoin. In other words, altcoins are all the cryptocurrencies that have the same characteristics and features as Bitcoin (BTC). An example of that is the similar basic framework that both altcoins and Bitcoin have. Also, as much as BTC, altcoins have the share code and the peer-to-peer (P2P) systems.
Despite the similarities in the altcoins and Bitcoin (BTC), there are still some marked differences. One of such differences is the consensus mechanism employed by these altcoins for block productions and transactions validation. Bitcoin from inception till now uses the Proof of Work (PoW) consensus mechanism, but most of the altcoins typically use the Proof of Stake (PoS) consensus mechanism.
Furthermore, there are various categories for the altcoins, and most often, they are categorized based on the unique functionalities and consensus mechanism. Below are the various types of altcoins in the crypto space.
The Mining-Based Altcoins
For every altcoin in this category, their consensus mechanism is the proof of work which is commonly known as the PoW. This mechanism allows the systems to create new tokens through mining operations. Basically, mining in the crypto space is about solving some complex mathematical tasks to create new blocks on the blockchain. Examples of tokens tagged as mining-based altcoins in the crypto space are ZCash (ZEC), Litecoin (LTC), Monero (XMR).
The Stablecoins
The basic aim of stablecoins is to reduce the volatility that has been attributed to the crypto market since its inception. To explain further, the value of stablecoins is pegged to the value of other baskets of goods, like fiat currencies, precious metals, and other cryptocurrencies. The basket, however, serves as a reserve in case there is any problem with the cryptocurrency. Examples of stablecoins in the space are Tether (USDT), USD Coin (USDC), and Dai (DAI).
The Security Tokens
As you would guess from the name, the security tokens work just the traditional securities work in the stock market, so you can call them the securities of the crypto market. They have similar features to the traditional stocks and they represent equity either in the form of dividends or ownership. Because of the high probability that the tokens will appreciate in value very quickly, this category of tokens attracts more investors.
The Memecoins
This category of altcoins got its name from the way they represent a silly disposition of popular cryptocurrencies. These tokens actually have their value driven by the hypes from famous influencers and celebrities close to the crypto space. Examples of the famous meme coins are Dogecoin (DOGE) and the Shiba Inu (SHIB) of which their prices and value are rigorously driven by Elon Musk, the CEO of Tesla and a well-known crypto commentator.
The Utility Tokens
Tokens under this category are attributed to services within and outside the crypto space. They are either being used as network fees, purchases, or rewards within a given blockchain network. This category of tokens does not offer equity-like the security tokens do. An example of a token in this category is Filecoin (FIL), which is a utility token used to purchase cloud storage on a decentralized storage network.
What are the Processes of Evaluating Altcoins?
The process of engaging the fundamental analysis of altcoins involves examining and evaluating all the information available for the particular altcoin. This will involve looking into the use cases of the crypto and the network on which it is hosted, as well as the development team behind the project. This process will enable you to understand and accurately evaluate the best altcoins to invest in.
When analyzing the altcoins, or even any other cryptocurrency whatsoever, your basic goal is to understand the value attached to the asset in question; whether it is undervalued or overvalued. In this case, undervalued assets are more ideal while overvalued assets should be avoided. The main reason for this is that overvalued assets has less intrinsic value but were overvalued because it was able to get a high dose of hype. However, the asset dips back to its real value over time.
On the other hand, undervalued assets do hold some potential for massive growth and become more profitable consistently with the right hype for the values they hold. So, to make the best investment decisions, there is a need for a thorough fundamental analysis.
Below are the step-by-step guidelines that will help analyze the crypto assets before considering investing in them.
- Analyze the Whitepaper and uncover the Value Proposition
To lay hold of relevant information about a particular token, there will be a need to scrutinize the token’s whitepaper. Information like the vision of the team, goals, and the use cases of the project are all recorded (or supposed to be recorded) in the token whitepaper. This will give an accurate picture of the value proposition of the token to the investors.
For example, the value proposition for Bitcoin (BTC) is as follows; “[BTC is] a decentralized digital asset/currency, without any central administrator or bank, that can be transferred from one user to another through a peer-to-peer (P2P) network without involving any intermediaries.” For Polkadot, it is to “create a blockchain network that hosts, builds, and connects blockchains”, and for Ethereum, it was simply created as “an open-source, decentralized blockchain with a new functionality called smart contracts.”
Before making any investment decision, you need to be more familiar with the project’s whitepaper until you are able to explain the value they intend to add to the world in layman’s terms. Inability to do this means you still need more research on the project. Also, in the whitepaper, a section of great interest is the road map of the project to show the futuristic disposition of the project depending on the time they are as at when you are interacting with the document.
You will need to explore and satisfy your curiosity; answer all the questions you have before staking your money on the project.
The reason for understanding the value proposition of the crypto project is to help you set up a thesis (or hypothesis) on why the value of the project will rise. This is because you will want to avoid projects that only rise based on hype and cannot sustain the value over a certain period of time. Another similar reason is that you want to know when the project has stopped dispensing the value they promised; either they lost focus, or it was part of the plan in the first place (to look serious for a start just to onboard investors).
The value proposition of an altcoin, however, will be the needed guide for other information needed for the other process of the analysis.
- Consider the tokens with stable or decreasing supply and increasing demand
Considering the demand and supply of tokens is a good way to assess the right token to invest in. After discovering the value proposition of the token to the users through the whitepaper, you will want to understand the navigation of the token through its demand and supply.
To better put, every good altcoin in the crypto space should have a system of incentives that contribute to the increase in the demand of the token such that the supply decreases continually or remain stable. This is because the prices of these assets go up when the demand ousts the supply and eventually leads to more demand for the token.
Have you always wondered why the price of Bitcoin and Ethereum has been soaring (and will still keep increasing)? It is because they have successfully created more demand than the supply of the token to communicate scarcity. This is a basic phenomenon in economics that when demand outgrows the supply of a particular commodity, the price soars.
For bitcoin, they achieve this through its solid monetary policy that decreases the mining rewards over time and also with a capped total supply. Also, Ethereum achieved this after the activation of the EIP-1559 upgrade that now burns ETH tokens for every transaction made. This slowly reduces the total supply of ETH in circulation while the demand is increasing or kept stable at least.
There are various resources in the crypto space that helps you access this, like the Cointelegraph’s Market News and Price Indexes, CoinMarketCap data, and Coin 360’s HeatMap.
- Carry out a complete assessment of the development team and other stakeholders behind the project.
After getting a full grasp of what the project is all about, it is very essential to carry out a complete and extensive assessment of the development team handling the project. Such information about the dev team can be found in the whitepaper of the project, but it is also important to carry out extra independent research on the team outside the information available in the whitepaper because some details can be intentionally concealed or the information in the whitepaper can be misleading.
The basic go-to place to get extra information on the dev team is always on the team page on the official website of the project including their social media pages including LinkedIn profile page where their details and lifestyle are accessible to the public.
When assessing the team, asking the following project will help you dig more into their background:
- What has their work engagement been like in the past? Have they worked on any successful and reputable business before?
- What are their credentials like?
- What has been their contribution to the crypto space? Can they be considered reputable members of the cryptocurrency community and the entire blockchain ecosystem?
The essence of this understudy and assessment of the team is to know how experienced and composed they are, and also to know how many experts are among the team. To supplement your assessment research, you can look into blockchain explorers and on-chain analytics platforms. Also, you can sniff out some more information on their social media pages like Twitter to know the kind of conversations they give themselves to.
For instance, the Ethereum network invests so strongly in its community because of a strong dev team. Every individual behind the project works tirelessly to create value for the Ethereum holders. This makes for the interest of top investors, community builders, developers, and other amazing talents in onboarding the projects related to the Ethereum network despite having issues around slow transactions and high transaction fees.
The ripple effect a project can create is the logic behind putting together a strong core team to back the project. For example, popular platforms like OpenSea and AAVE are built on the Ethereum blockchain. When a project is known for a strong and extraordinarily talented dev team who are forward thinkers, even other projects will be more interested to pitch their tents on their network. This is because the team is more concerned with improving the platforms and also executing initiatives that have more value to the project and this automatically translates more value for the currency holders.
Outside the team, you want to consider other stakeholders like the whales on the network. Whales are the biggest holders of a particular token. The reason why this is needful is that those persons can easily influence the value of the project. Compare Dogecoin and Ethereum, for the former, the top 11 holders of the token hold 47% of the entire supply while for Ethereum, the top wallet only holds barely 1.65% of the supply. It is always dangerous to have a project monopolized because the value responds to a singular person’s emotion.
Altcoin Platforms with Extraordinary Potentials
When you are considering investing in altcoins, you are presented with diverse options in the space, and you have to be meticulous in scrutinizing them to verify their potential for you to conclude you made a smart investment. This guide, however, was written for this reason. The motivation is to present you with possible ways to identify good projects and help you make a safe investment decision. But, a disclaimer to this is that, though this content guides you, it will not be responsible for whatever conclusion that led to your investment decision.
With that said, here are some altcoin platforms considered with extraordinary potentials;
- Ethereum: beyond any shadow of a doubt, there are reasons the crypto community named Ethereum the “King of Altcoins.” Ethereum was created by a Russian-Canadian programmer, Vitalik Buterin in 2013, and it was created as a smart contract platform that can be used to create more decentralized applications (DApps). The founders successfully engineered a new programming language for smart contracts native to the network called Solidity. It has been discovered that the majority of the innovation in the decentralized finance (DeFi) space are relying on the Ethereum blockchain, and the native currency, Ether (ETH) is seeing more evolution in its usefulness day by day.
- Chainlink: beyond Ethereum, Chainlink took the world of smart contracts to a whole new level by having real-world data incorporated into it. With the effort of Chainlink, Ethereum was able to make its smart contracts interact with other application programming interfaces, including its impact on global occurrences and the prices of other assets. The value of Chainlink including its native currency, Chainlink (LINK), has continued to soar as the network continually onboard strategic stakeholders. Recently, the network onboards the former CEO of Google, Eric Schmidt, as part of its advisory board.
- Aave: In no time since inception, Aave has grown to be one of the famous leading lending protocols in the crypto space, and it continues to offer anonymity and security to borrowers. Though because of the popularity of the platform, you will be required to offer collateral with more value than the amount you are borrowing from them. But then, the collateral is safe in the hand of an escrow all through the duration of a loan. In any case of a default, the lender is paid automatically through a smart contract.
- Stellar Lumens: The aim of the Stellar network is to unite the banking systems globally through its decentralized platform. To achieve this, the platform uses different disconnected payment methods like Single Euro Payments Area and Alchemy Pay. Then, the stellar network connects the systems through a decentralized ledger. A perfect competition with Steller is the Ripple network which has been made vulnerable with the legal battle it has with the SEC. This Ripple’s fallout with the SEC has placed Stellar in a prime position that makes it the top payment network across the globe.
Conclusion
There are members of the crypto community who are not a fan of Bitcoin, either because they felt it is too late to hop on, or there is a drawback that doesn’t appeal to them. It is for this reason that the altcoins surfaced, and they have created alternatives to ensure BTC ensuring that the network doesn’t create a monopoly in the crypto market even though it has the highest dominance.
Also, for any project you want to invest in, you will want to consider the time. It is really possible to at the wrong time, and this is the reason you need to get your research right. Consider investing in a project-driven by hype and you enter at the time the hype is fading only for the price to remain redundant [almost] forever.
Lastly, the essence of this guide is to help people make the best altcoin investment decision. However, as a means of emphasis, the content nor the author will not be responsible for any financial decision you make from engaging this guide as it was written only for educational purposes.
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