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What Are Altcoins? Bitcoin Alternatives, Explained

Altcoins encompass everything that isn't Bitcoin, but don't be tempted to lump them all together.

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Chris Davis is a Managing Editor on the Investing team. He has passed the Series 65 (Uniform Investment Adviser Law Exam) and covered the stock market, investing strategies, investment accounts and cryptocurrency. His work has appeared in The Associated Press, The Washington Post, MSN, Yahoo Finance, MarketWatch, Newsday and TheStreet.

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Head of Content, Investing & Taxes

Arielle O’Shea leads the investing and taxes team at NerdWallet. She has covered personal finance and investing for nearly 20 years, and was a senior writer and spokesperson at NerdWallet before becoming an editor. Previously, she was a researcher and reporter for leading personal finance journalist and author Jean Chatzky, a role that included developing financial education programs, interviewing subject matter experts and helping to produce television and radio segments. Arielle has appeared on the "Today" show, NBC News and ABC's "World News Tonight," and has been quoted in national publications including The New York Times, MarketWatch and Bloomberg News. She is based in Charlottesville, Virginia.

Table of Contents

Table of Contents

Altcoins are a class of cryptocurrency that refers to everything other than Bitcoin. There are tens of thousands of altcoins that meet this definition, the most popular of which is Ethereum.

Since Bitcoin currently makes up less than 60% of the total crypto market cap, that means more than 40% of the crypto market’s value is made up by altcoins.

Because there are so many altcoins, they vary wildly in price, function and potential investment value. They range from established products to obscure projects that were never meant to be taken seriously.

Altcoins vs. Bitcoin

So with so much variety, what's the purpose of putting all of these altcoins in a single category?

The main difference between Bitcoin and altcoins is that while Bitcoin can be incrementally changed to deal with the evolving ways people use blockchain technology, altcoins offer developers an opportunity to depart more quickly from the path laid by Bitcoin.

There are a few things that make altcoins different from Bitcoin, but the most glaring is that Bitcoin is a lot older and as mentioned earlier, makes up a larger share of the crypto market.

This also means that Bitcoin has more of a track record, which may be more appealing to long-term investors who may see newer altcoins as a riskier investment. That said, because altcoins aim to be more advanced than Bitcoin, they may be the preferable option for some.

Understanding altcoins and how they work

To understand altcoins, it helps to first have a firm grasp on Bitcoin (read up on Bitcoin for beginners). It’s also helpful to know the basics of blockchain technology, on which most cryptocurrencies operate.

Altcoins have the same premise as Bitcoin: to use the blockchain as an incorruptible, distributed public ledger, which allows and records a transaction only if there’s consensus that the transaction is legitimate.

But many altcoins have taken this premise and either used it to achieve different goals or sought to improve a perceived flaw in Bitcoin.

Litecoin, for example, started out as a clone of the Bitcoin blockchain's source code, but it included changes to speed up transaction times and improve storage efficiency.

Litecoin’s purpose is the same as Bitcoin’s — to be a peer-to-peer internet currency — but its founder sought to improve the way Bitcoin went about it.

Ethereum, on the other hand, saw an opportunity in Bitcoin’s blockchain technology beyond just recording financial transactions; the Ethereum blockchain also records agreements in the form of “smart contracts.”

Ethereum advocates say these smart contracts — computer programs that automatically execute an agreement if certain conditions are met — could upend industries that currently rely on costly middlemen, like insurance, banking and copyright management

» Ready to invest? Here’s how to buy Ethereum.

One other way that some altcoins have departed from Bitcoin is by moving away from cryptocurrency mining, a complex and energy-intensive way of validating transactions and creating new coins.

While some altcoins have retained the "proof-of-work" system that enables mining, others are using "proof of stake," which uses a more efficient process known as crypto staking.

Categories of altcoins

Besides the ones mentioned above, other altcoins have emerged that promise to be even faster, more decentralized, more scalable, more secure or a combination of all these core cryptocurrency tenets. The result is a dizzying ecosystem of altcoins that’s hard to categorize, but can be roughly broken down into these four buckets:

Native cryptocurrencies.

Tokens.

Stablecoins.

Forks.

Meme coins.

Native cryptocurrencies

Native cryptocurrencies are the coins that were originally created to run on a specific blockchain network. Bitcoin is a native coin (you’ll see native coin, currency, cryptocurrency and token used interchangeably; it’s the “native” part that’s important here) because it is the currency that’s used on the Bitcoin blockchain.

Ether, the second-largest cryptocurrency by market cap, is the native coin of the Ethereum network. To run applications like smart contracts on the Ethereum network, you’ll need to pay a transaction fee in ether.

Tokens

A token is a unit of value that operates on an existing blockchain and can be used for specific purposes within that environment. Using tokens is similar to going to an old-school arcade: You exchange your U.S. dollars for tokens that are only accepted by those video games.

Chainlink, for example, is built on top of the Ethereum blockchain, and developers can use it to convert real-world data into a blockchain-friendly format that can be read by smart contracts and vice versa. LINK is the token that’s used to pay for Chainlink’s services. So, if an investor believes demand for smart contract-based services is going to rise, they might buy LINK; the more Chainlink technology is used, the thinking goes, the higher the demand for LINK, which could send its value higher.

Another example is the Uniswap platform, a decentralized exchange built on top of the Ethereum system. Centralized exchanges (such as the stock market or Binance.US) require deposits into an account or wallet that’s connected to the exchange. However, a decentralized exchange enables direct peer-to-peer trading from one personal wallet to another. UNI is the token of the Uniswap exchange, and it’s what’s known as a “governance” token — holders of UNI can vote on proposals that determine how Uniswap will operate, similar to the way traditional shareholders have a say in corporate governance.

Another form of token is the nonfungible token, or NFT, which is not a cryptocurrency per se but a unique digital asset that can function as a collectible or a way to record ownership of a piece of content.

Stablecoins

Stablecoins were developed to offer the advantages of cryptocurrencies and tokens without the price volatility. They accomplish this by tying their value to an existing fiat currency, one for one. Tether, the largest stablecoin by market cap, is tied to the U.S. dollar; one tether will always equal one U.S. dollar.

You won’t earn any profit through price appreciation with stablecoins, but there are plenty of applications for a coin whose value doesn’t rise and fall by the minute. For some, stablecoins offer a way to hold funds in a crypto exchange and easily convert them into another cryptocurrency, rather than converting from U.S. dollars. Others may use stablecoins to easily send and receive funds globally.

But perhaps the most popular use for them today is in decentralized finance, or DeFi. Essentially, DeFi platforms let users lend stablecoins to others and earn interest in return, all without the need for an intermediary like a bank. What’s more, some platforms incentivize users by offering tokens, such as the governance tokens outlined above, on top of the interest they receive.

Many exchanges have greatly simplified this process. On Coinbase, for example, it’s currently free to convert U.S. dollars into the stablecoin USD coin (USDC), after which it will start earning 4.1% APY. (Note that this rate is subject to change.)

Forks

In a cryptocurrency blockchain, groups of recorded transactions (the public ledger) are organized into blocks, and each block is connected to the next via complex cryptography. For a new block to be appended to the existing chain, all the previous transactions in all the previous blocks must also be verified, and there must be a consensus that all is right with the chain.

This consensus is required for the list of transactions as well as the rules that govern the blockchain network. And when a group decides it wants to change the rules, it can validate a split in the chain; this is a fork. A new chain emerges, ready to start logging transactions under the new rules agreed upon by those who chose to validate the fork. Meanwhile, the other prong of the fork keeps going on as normal.

Forks can happen over and over again, creating new protocols and cryptocurrencies all the while. Bitcoin cash is a fork of the original Bitcoin blockchain, while Ethereum Classic is a fork of the Ethereum system.

So, as an investor, if you like the ideas, rules and changes found in a fork of an existing blockchain, you could buy that fork’s currency in the hope that it rises in value.

Meme coins

Meme coins are minor cryptocurrencies that represent internet memes, and are usually created as a joke.

Although they generally lack any real purpose, meme coins often experience great volatility (and may spike in price if they go viral on social media). As a result, meme coin gamblers can bank big gains on these joke cryptocurrencies — or big losses.

Dogecoin is perhaps the best-known meme coin, in part due to its promotion by Elon Musk — and is a rare example of a meme coin that is sometimes accepted as a payment method by crypto-friendly vendors, including Tesla. Shiba Inu is another of the largest meme coins.

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What to consider before buying altcoins

Before diving into any altcoin, take the time to read through what the organization behind it is trying to accomplish. Ask yourself:

Does the altcoin seem like a plausible way to improve upon Bitcoin?

If it’s a token, does it have real-world application?

If it’s a stablecoin, how are you going to use it?

If it’s a fork, why was it created and do you agree with that decision?

If it's a meme coin, are you comfortable treating your investment as a gamble with a substantial risk of total loss?

Be warned that this is a nascent market where shakeout is inevitable. Some of these projects will fail — there’s already a crowded graveyard of dead altcoins — and some will succeed.

That’s why financial pros often put altcoins in the “alternative investments” column: something you might dabble in if you’ve already got a healthy, diversified investment portfolio.

Disclosure: The author owned ETH, BTC and USDC at the original time of publication. NerdWallet is not recommending or advising readers to buy or sell any cryptocurrency.

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