What Is An Altcoin, And Why Does It Matter?
Mar 11, 2021
An altcoin or “alternative coin” is a term used to describe any cryptocurrency that is not Bitcoin. Since the first digital currency ever created was Bitcoin, any coin that came after it is referred to as an “altcoin”.
There are approximately 5000 altcoins in existence, many of these created as adjusted copies of Bitcoin through a process known as a “fork”. Altcoins work in a similar manner to Bitcoin, using a cryptographic private key a holder is able to send a payment to another user’s digital wallet. Altcoin transactions are also recorded on an encrypted blockchain, where the transactions are permanently and publicly recorded.
Altcoins use the same decentralised blockchain technology as Bitcoin but some of them take things a step further with their unique functions. Most importantly, altcoins have improved on their overall functionality, allowing them to process transactions much faster than Bitcoin. It is, however, important to note that not all altcoins are just alternate versions of Bitcoin.
There are some altcoins that are extremely different to Bitcoin and others that are strikingly similar. Some use different algorithms to the Proof-of-Work algorithm used by Bitcoin. For example Cardano (ADA) uses a Proof-of-Stake (POS) algorithm and makes use of stakers instead of miners. Stakers are people who verify transactions for a reward similar to miners, they are selected one by one and take turns to verify blocks. The POS algorithm uses much less electricity as there is no need for thousands of miners to use electricity to verify the same block.
Ethereum is another example of an altcoin that is very different to Bitcoin. Ethereum was not designed, like Bitcoin, to be used as a digital currency. It was instead, it was designed to be used as a platform for building software applications on a blockchain.
Is the altcoin market affected by Bitcoin?
It is difficult to give this question a solid “yes” or “no” answer. The altcoin market’s performance has often been very closely correlated to that of Bitcoin. For many years there has been a so-called correlation between the performance of Bitcoin and other altcoins. It is often correct to say that when Bitcoin rises or falls in price, it causes the altcoins to do the same.
This is, however, not always the case. Most of the trading that occurs in the crypto market is between Bitcoin and altcoin pairs, and Bitcoin is more often than not used as the base currency for buying altcoins. Due to these factors, a bullish movement from Bitcoin can also drive altcoin holders to convert their altcoins into Bitcoin.
And considering that Bitcoin is the most traded and the largest digital asset by market cap, when it’s price starts to fall, it often causes the price of altcoins to follow suit.
Bitcoin has acted as a safe harbour for crypto investors over the past few years, and it is unlikely that this will change, but having said that, it is impossible to argue that it will never be thrown off its perch.