5 Steps to Understanding These New Altcoins
In 2008, Bitcoin introduced blockchain technology to the world. The digital currency was unique because it solved the double-spend problem and allowed secure transactions to happen without a trusted third party in the middle.
Fast forward to 2018 and there are over 1,500 cryptocurrencies and their combined market cap is approaching $400 billion dollars! So how did this happen in 10 years and what do you need to know about this new, growing market?
Well, here are 5 steps that will help you understand these new altcoins.
Step 1: What is an altcoin?
You can think of Bitcoin as the original cryptocurrency, it introduced the first public blockchain. As new coins started to come out, people started to speak of them as “alternatives to Bitcoin” or “altcoins” for short. So strictly speaking, an altcoin is any cryptocurrency that is not Bitcoin.
In casual conversations, people tend to know the name of the few largest cryptos -- like Bitcoin, Ethereum, Ripple, and Bitcoin Cash but refer to smaller and newer coins as altcoins.
Step 2: Why are people launching their own coin/token?
Like raising venture capital money for their companies, there are several reasons why a company or foundation would want to launch their own coin/token. The main reason to launch a coin or token is to fund further development of their product. With this new capital, the core team can hire more developers, testers, and start doing their first real marketing push.
That said, other people use coins or tokens to incentivize behavior. For example, Steemit is a blockchain alternative to Reddit. Individuals contribute to the website and as their posts get “upvoted”, they earn money for their effort. The network’s goal is to incentive good behavior (e.g., helpful posts and comments) while also punishing those behaviors, such as posting spam or harassing other users.
Even still, some open source token projects incentivize developers around the world by paying them into the altcoin itself. For instance, if you’re working on a new protocol to verify banking information, there could be tasks each with a corresponding altcoin amount. Developers around the world can contribute and when their contributions are merged with the master branch, they are paid with altcoins.
Step 3: How do businesses and individuals benefit from altcoins?
Individuals often invest in altcoins, like Ethereum or Ripple, to make money as prices rise. (Or, at least, that is the idealized version of the story.) That said, there are still opportunities where you can participate in a decentralized protocol, network, or application.
And in the latter case, a coin/token is used to provide value for your service. One example of this is Filecoin, which allows you earn tokens by letting others borrow your unused hard drive space. In this way, to borrow a phrase from Ramon Recuero, we can say that “tokens coordinate efforts in the network and motivate responsible participation” (Y Combinator).
Another example is LeadCoin, a decentralized marketplace for business leads. This blockchain startup allows you to buy hot leads for your business, and sell less relevant leads on their marketplace. This transaction is facilitated by the LDC Token, a token that is used when purchasing leads and paying fees inside the LeadCoin Network.
Step 4: Who is investing in altcoins? Are they good investments?
When investing in altcoins, there are a number of factors to consider. The first is the merit of the idea: Is it a good idea? If this thing scales, what is the tangible benefit that will be received?
Second, there are a number of factors to consider around ability to execute. When evaluating #2, you should look for a strong technical team, a well-written white paper, realistic plans for the future, and appropriate capital raises.
Many altcoins posted huge returns in 2017, but, as is always the case with finance, past performance is not a promise of future returns. It is better to engage with coins and tokens you understand and derive a benefit from, either personally or for your business.
Step 5: What is the future of altcoins?
We expect to see more altcoins being launched in the future, and more standardization to form in the industry. Again, like investing in private tech companies, altcoins provide capital to areas of the market that have been traditionally underserved (e.g., open source software, protocols).
Recently, government agencies across the world have been debating how to regulate cryptocurrencies, initial coin offerings (ICOs), and crypto trading. Earlier in February, the chairmen of both the US Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) provided testimonies in front of Congress.
Their remarks were generally positive and led Bitcoin prices to rise. That said, token buyers should be mindful of new regulations and the safekeeping of the cryptocurrencies.
We are in the early days of the cryptocurrency era. Late 2017 estimates found that roughly 0.5% of the global population holds any cryptocurrencies. As a result, we will see plenty more discussions around cryptocurrencies, both major names like Bitcoin and Ethereum but also newer altcoins that have promising offerings.