The Role of Altcoins in the Cryptocurrency Ecosystem

Altcoins and Cryptocurrency

Cryptocurrency, the new digital currency that seems to be on the brink of being adopted into countries around the world, is beginning to see many projects appear.

The most infamous digital asset today is Bitcoin (BTC) which is known because of its high value and ‘digital gold’ like properties of limited supply. However, there are other coins known as “Altcoins” that share some of the same fundamentals but are often vastly different.

So what is an “Altcoin”?

Altcoin Fundamentals

An altcoin is essentially any other cryptocurrency that is not Bitcoin. Bitcoin has been highlighted as the only true cryptocurrency to many because it was the first cryptocurrency to be created.

Bitcoin is built on the Proof-of-Work (PoW) mechanism that is used to create blocks that store cryptocurrency transactions. However, this system does have its disadvantages because of the energy intensity that is required.

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Altcoins on the other hand often use a Proof-of-Stake (PoS) mechanism to provide higher transactions in less time and decrease the energy usage across the network.

Each cryptocurrency has its roles, Bitcoin is deemed as a ‘store of value’, while altcoins projects might be trying to utilize smart contracts or decentralized finance (DeFi) applications.

How to Invest

Investing in cryptocurrencies is comparable to investing in stocks, except you’re investing in the technology and not a company. They are also extremely volatile, so you’ll need to be able to stomach 50% drops in a matter of days or weeks.

Various exchanges will allow you to buy or sell cryptocurrencies such as Coinbase, Binance, Gemini, and more. It’s become very simple to obtain a piece of your favorite digital currencies.

Finding your favorite cryptocurrency is difficult, but what most people do is research the top cryptocurrencies since they are more established and there are often communities willing to help you understand what you’re getting yourself into.

Investing in these assets is considered high-risk, so proceed with caution.

Succeeding Altcoins

As stated previously, it’s difficult to pick altcoins. However, there is already an extremely developed altcoin out there. It’s called Ether (ETH) which is supported on the Ethereum Network.

Ether is a peer-to-peer payment technology like Bitcoin, except it is also integrated into a vast ecosystem of DeFi applications that take Ether as payment. It’s essentially the currency in a digital economy. It is also in the phase of switching from a PoW mechanism to PoS to become more energy-efficient and sustainable while also increasing transaction capabilities.

Other currencies can be hosted on the Ethereum Network, such as Stablecoins, which mirror the quantity and value of a traditional currency like the dollar. Projects can be hosted on the network, effectively creating a digital ecosystem.

Ether may be a great backbone to a cryptocurrency portfolio as it is far more established than many other altcoin projects and doesn’t run as high of a risk of failing compared to others. Although, the price of Ether is still very volatile. This is a given because cryptocurrency is still in the early adoption phase.

The Takeaway & Closing Thoughts

It’s important to note that many altcoins are risky, same with Bitcoin, so due diligence and research are always recommended. These assets can fluctuate in price quite dramatically and panic investors who don’t hold enough confidence to ride out the volatility.

Overall, cryptocurrency can make a great addition to a portfolio as long as risk is accounted for. It’s never a guarantee that a digital currency will succeed. What you’re essentially betting on is that the technology involved prevails and becomes integrated into our global economies at some point in the long-term future. It may be best for some to remain conservative with portfolio allocation to cryptocurrency, even with extreme optimism.

Cryptocurrency being a new asset class is very volatile and risky. Speculative trading makes crypto investing a very lucrative opportunity. But Investors should always bear caution and never risk more than you can afford to lose in accordance with your risk appetite. Remember always consult with a licensed professional that can help you reach your investment goals with strategies tailored to your specific financial needs.

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Andre Mitchell
Andre Has been trading financial markets for 5+ years. Has consistently grown small account sizes to medium sizes. Andre is a long term income investor that primarily operates in the stock options market and loves sharing his insight and experience with people who love investing and growing their financial wealth.
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