FUNDAMENTALS OF CRYPTO

Altcoins Explained: Going Beyond Bitcoin

What are Altcoins?

The term altcoin is short for “alternative coin.” In simple terms, altcoins encompass all cryptocurrencies and tokens that are not Bitcoin. While some interpretations exclude Ethereum, the key idea is that altcoins are created by developers who want to build on Bitcoin’s limitations or provide new functionality. They often use different consensus mechanisms or architectures and may be forks of existing chains or entirely new blockchains. Examples include Ethereum’s ether (used to pay transaction fees and stake in the network) and Ripple’s XRP, designed to facilitate faster cross‑border payments.

Altcoins are intentionally diverse. Some serve as mediums of exchange, while others power decentralised applications, represent ownership of real‑world assets or simply exist as internet memes. Because Bitcoin has dominated the market for over a decade, many altcoins are niche and carry higher volatility and lower liquidity compared with BTC.

Why Altcoins Exist

Bitcoin prioritises security and decentralisation, but it deliberately sacrifices speed, programmability and flexibility. Developers created altcoins to address perceived shortcomings or unlock new use cases. For example:

Higher throughput and lower fees. Solana and other high‑performance chains process thousands of transactions per second and charge fractions of a cent, whereas Bitcoin is slower and more expensive to use.
Smart contracts. Ethereum introduced programmable smart contracts, enabling decentralised finance (DeFi), NFTs and myriad applications. These innovations rely on altcoins for gas fees and governance. Learn more about Smart Contracts here.
Industry‑specific solutions. Tokens like XRP aim to streamline cross‑border payments for banks, while supply‑chain tokens track goods and verify authenticity.
Privacy enhancements. Some altcoins, such as Monero, emphasise privacy by default.

Altcoins also represent experimentation. Projects often fork existing codebases to test new consensus algorithms, tokenomics, or governance structures. Litecoin, created in 2011, was the first altcoin and used a different proof‑of‑work algorithm (Scrypt) that allowed faster block times and lower energy consumption than Bitcoin.

Coins vs Tokens

Understanding the distinction between coins and tokens clarifies the broad meaning of altcoin. Crypto Coins are digital currencies that run on their own blockchains (e.g., Bitcoin, Litecoin, Ethereum, Solana, XRP). Crypto Tokens are built on existing blockchains and may represent assets or grant access to services. Stablecoins peg their value to a fiat currency for reduced volatility. Altcoins is a broad term that covers all cryptocurrencies other than Bitcoin; some altcoins operate as standalone chains while others exist as tokens.

Categories of Altcoins

Altcoins span a wide spectrum of purposes. Here are the major categories and what sets them apart:

Payment Tokens

Payment tokens are designed to facilitate peer‑to‑peer transactions. Bitcoin itself is considered a payment token, and many altcoins attempt to offer faster settlements or lower fees. Examples include Litecoin (LTK) and Bitcoin Cash.

Stablecoins

Stablecoins aim to reduce volatility by pegging their value to an asset such as a fiat currency, gold or a basket of investments. They typically hold reserves to maintain parity; for instance, USDC and USDT are backed by U.S. dollar reserves. Algorithmic stablecoins adjust supply via smart contracts but remain riskier due to potential peg breaks. Learn more about Stablecoins here.

Security Tokens

Security tokens represent ownership or fundraising interests in a project. They may entitle holders to a share of profits or dividends and therefore fall under securities regulations. Regulators like the U.S. SEC use the Howey Test to determine whether a token counts as a security. Projects such as GMX and Synthetix reward token holders with a portion of trading fees.

Utility Tokens

Utility tokens provide access to network services or serve as gas to pay fees. Filecoin is used to purchase storage space, while Ethereum’s ether pays for computation. Utility tokens drive the functioning of a protocol rather than primarily serving as investments.

Meme Coins

These tokens begin as jokes or internet memes but can gain significant speculative traction. Dogecoin, forked from Litecoin, gained popularity through social media hype. Meme coins often have unlimited or massive supply and derive value from community enthusiasm rather than intrinsic utility.

Governance Tokens

Governance tokens grant holders the right to vote on protocol changes or treasury decisions. They are often used in decentralised autonomous organisations (DAOs). MakerDAO’s MKR token allows holders to vote on parameters of the DAI stablecoin system. Governance tokens highlight crypto’s shift toward community‑driven management.

Play‑to‑Earn and Gaming Tokens

These tokens incentivise participation in blockchain games. Players can earn native tokens through gameplay and use them for in‑game purchases or trading. Axie Infinity’s AXS and Smooth Love Potion (SLP) are notable examples.

Asset‑Backed and Liquidity Provider Tokens

Some altcoins are backed by real‑world assets such as real estate, commodities or company shares. Liquidity provider tokens (LP tokens) represent a share of funds deposited into a decentralised exchange pool, giving holders a claim on pool fees and the underlying assets.

Non‑Fungible Tokens (NFTs)

While technically a type of token, NFTs represent unique items or digital property. Each NFT has a distinct ID and cannot be exchanged one‑to‑one like a coin; they’re widely used for art, collectibles and gaming. Learn about the world of NFT’s here.

Altcoin Market Cycles and “Alt-Season”

Altcoin performance is highly cyclical. During bullish phases, capital tends to flow from Bitcoin into large‑cap altcoins, then into smaller, riskier tokens. Altcoin season is considered to begin when 75% of the top 50 cryptocurrencies outperform Bitcoin over a 90 day period. When Bitcoin dominance (its share of total crypto market cap) declines, altcoins may rally as investors seek higher returns. Conversely, during downturns, funds return to Bitcoin or stablecoins, leaving illiquid altcoins vulnerable to steep drops.

The altcoin share of market cap fluctuates with sentiment and macro conditions. Recognising these cycles helps investors avoid buying altcoins at peak hype and encourages disciplined profit‑taking during exuberant periods. Our “Market Cycles & Human Behaviour” resource talks about this further.

Evaluating Altcoins – Key Factors

With thousands of altcoins in existence and many more launching daily, due diligence is essential. Consider these factors when researching a project:

Purpose and Utility

Ask whether the project solves a genuine problem or offers a needed service. Caleb & Brown recommend evaluating what problem the project addresses and whether there is real‑world utility. Tokens lacking a clear use case are unlikely to hold value over the long term.

Developer and Community Support

Strong developer engagement and an active community increase the probability of continued growth. A declining developer count or inactive community can signal trouble.

Tokenomics and Supply Dynamics

Analyse total supply versus circulating supply, emission schedules, and unlock events. A large gap between market cap and fully diluted value may indicate significant token unlocks ahead.

Liquidity and Trading Volume

High liquidity allows for easier entry and exit, whereas illiquid tokens can experience extreme price swings. Larger‑cap coins like ETH and SOL generally have deeper markets.

Regulatory Environment

Projects issuing security‑like tokens must comply with securities laws. Without proper registration, regulators may take action, affecting token value.

Research and Documentation

Read the project’s white paper and examine audits or code reviews. Look for red flags such as anonymous teams, unrealistic promises, or poorly articulated roadmaps.

Alignment with Personal Values

Consider whether the project aligns with your values or interests. Some investors prefer eco‑friendly projects or those with social impact.

Learn more about how to research Altcoin projects here.

Risks and Challenges

Despite their innovative potential, altcoins, depending on whether you’re involved with coins or tokens, come with their own notable drawbacks:

Lower liquidity and smaller markets. Altcoins generally have a smaller investment base than Bitcoin and are therefore more prone to sharp price swings.
Complexity and information overload. The sheer number of altcoins and overlapping use cases make it difficult to distinguish legitimate projects from scams.
Regulatory uncertainty. Security tokens and tokens that promise profit distributions may be subject to securities laws.
Developer abandonment and scams. Many altcoins lose community support, stagnate or turn out to be fraudulent. Learn to spot & avoid crypto scams here.
High failure rate. Investopedia notes that thousands of altcoins exist, but the market is likely to consolidate around a few projects with strong utility. Investors should expect a high attrition rate.

Understanding these risks encourages cautious position sizing and diversification rather than overexposure to any single altcoin.

Future Outlook

The truth is that 99% of all Crypto Altcoins won’t survive the next 5-8 years. Relating the idea of altcoins to that of the dot com bubble back in the 90’s, only those projects with solid fundamentals & proven real world utility stand a chance to survive once the crypto bubble bursts. It’s with this prediction that thorough research & risk management must go into electing which altcoins project you invest capital into.

Final Thoughts

Altcoins broaden the scope of crypto beyond Bitcoin, offering technological innovation, niche applications and investment opportunities. However, their diversity comes with complexity and risk. Successful participation in altcoin markets requires understanding the distinctions between coins and tokens, recognising the categories of altcoins, following market cycles and approaching each project with critical analysis. By focusing on utility, strong tokenomics and community engagement, and by acknowledging that most altcoins will not endure the test of time, investors can navigate this dynamic landscape more strategically.