How to choose an Altcoin to invest in
Each alternative cryptocurrency – altcoin – has a unique history and user community. There are many altcoins, but not all of them are good for investment purposes. Some may prove beneficial and desirable for a variety of projects, which may, in the long run, lead to a considerable price increase. However, some others may prove to be useless or even fraudulent.
What exactly are altcoins? How do you decide which one to invest in? Keep reading if you want to find out!
What is an Altcoin?
Altcoin is a contraction of “alternative coin”. It refers to cryptocurrencies other than Bitcoin (BTC) – it’s as simple as that. If it’s not BTC, then it’s an altcoin. Ethereum, Cardano, Shiba Inu, Polkadot, Avalanche, Solana and thousands of other cryptocurrencies are all altcoins.
Altcoins are usually created to achieve specific goals within their blockchain community. Some are used for transactional and payment purposes, much like Ether in the Ethereum ecosystem. Some cryptocurrencies, such as Trumpcoin and Bananacoin, were developed to collect donations for philanthropic causes.
The 6 types of altcoins
The thousands of altcoins in the cryptocurrency market can be categorized into different groups. Although there are other variations, these are six of the most common types of altcoin.
These tokens grant ownership rights to the company that holds them. Holding them gives the holder the opportunity to acquire a certain number of shares in the company that is the legal owner of the token. Security tokens are considered securities by regulators, just like stocks, ETFs, bonds, and other types of securities.
According to the Howey test, a token can be classified as a security or not if it answers “yes” to the following questions.
- Is there a monetary investment?
- Was the money placed in a joint venture?
- Did you expect to make a profit?
- Is the profit generated by the promoter or by a third party?
Blockchain Capital, Tzero, 22x Fund and Sia Funds are some examples of tokens classified as security tokens. Bitcoin, Ethereum, and many other alternative cryptocurrencies do not qualify as security tokens because there are no investment joint ventures or promoters or third parties who intend to profit from them.
These coins generally don’t have a wide variety of use cases and are usually designed from a joke perspective. They usually become well-known in a short time, thanks to internet hype and the actions of crypto influencers. The two most used meme coins are Dogecoin and Shiba Inu.
Meme coins are not the best choice if you are interested in making long-term investments or storing wealth. They are generally not considered serious projects and as a result they usually lack a strong community of developers to help keep them secure and up to date.
They are also particularly prone to pump and dump schemes where large coin holders promote the currency and persuade others to buy and inflate the price in a short period of time before withdrawing their holdings from the market. Just look at Elon Musk’s influence on the price of Dogecoin to see this in action.
Meme coins often have little starting capital required, but can generate big gains in a relatively short period of time. Therefore, you need to do a lot of research to understand any meme coin you might want to invest in.
A stablecoin is a class of cryptocurrency that aims to reduce the price volatility of cryptos. The value of a stablecoin is usually tied to other assets like fiat currencies (USD, EUR, GBP), commodities, or even other cryptocurrencies in the case of Wrapped Bitcoin.
Tether is one of the most popular stablecoins, but there are loads of alternative stablecoins out there, including USD Coin (USDC), Binance USD (BUSD), and Dai (DAI).
The most popular stablecoins are pegged to the US dollar (USD) and are designed to track their value. Stablecoins, as the name suggests, are generally not used for investment purposes as they are designed to be more stable. Instead, people save or send money with them. That’s not to say you can’t take advantage of stablecoins, as you can earn interest on them by lending them out or participating in savings protocols made available by your exchange.
Utility tokens are used to pay for services within a network. Network users transact while posting artwork, minting tokens, and performing certain transactions within a network. During these transactions, utility tokens are how payments and settlements are made. Utility tokens are unregulated and they help maintain the internal economy within a blockchain ecosystem.
Some examples of utility tokens are Basic Attention Token (BAT), Chainlink (LINK), Zilliqa (ZIL), Binance Coin (BNB), and Aurora (AOA).
Besides the regulatory challenge, another problem with utility tokens is that they can be expensive to spend depending on the activities within their blockchain.
Payment tokens are digital assets that allow crypto users to transact directly with each other in decentralized marketplaces, bypassing the need for an intermediary as is customary in conventional financial and banking systems. The vast majority of cryptocurrencies, whether secure or utility-based, fall into this category. However, not all utility tokens have the ability to function as payment tokens.
Examples include Bitcoin, Ethereum, Litecoin, Dash, Bitcoin Cash, and Monero, as well as various cryptocurrencies that can be used as payments in certain contexts.
Governance token holders enjoy special privileges within a blockchain, such as voting on proposed changes to protocols or participating in the decision-making process of a Decentralized Autonomous Organization (DAO). They are considered utility tokens; however, since they are usually native to a private blockchain and used for blockchain-related reasons, it is common to recognize them as a separate type of token.
The Maker Token (MKR) is an example of a governance token. Holders of this currency have the power to vote on decisions made regarding the decentralized finance (DeFi) technology on which DAI is based.
What to consider before investing in an Altcoin
Knowing what types of cryptocurrency tokens exist and what they are used for is not enough. Other areas of research are important to consider before choosing an altcoin.
The crypto community is a group of people who share ideas and work together to improve the solidarity and unity of a blockchain. Community members include developers, analysts, token holders, and writers. They are responsible for educating and informing their immediate surroundings. The exchange of information about a cryptocurrency is essential to its large-scale adoption and innovation.
The actions of stakeholders or sponsors in disseminating information about a cryptocurrency contribute to its consistency and popularity. Social media platforms such as Facebook, Twitter, Instagram, Telegram and Discord have proven useful for these purposes. You should look in the community of your favorite cryptocurrency to see its strength and if you are convinced enough to invest in it.
Blockchain technology and the consensus algorithm
Understanding an altcoin’s core technology, such as the type of blockchain and consensus algorithm it uses, will help you understand how it stands out from its competitors. You can also spot new technologies that will add value to the industry.
The project white paper
If you want to invest in cryptocurrency, you should read the whitepaper first. Not only will this help you understand the purpose of the cryptocurrency project and the technology behind it, but it will also help you determine if you have enough confidence in the project to invest in it.
The white paper associated with a cryptocurrency will usually include all the important information about that currency. It should include a detailed plan for the future growth of the coin and a strategy to ensure that its value is maintained. Having a white paper gives a piece an air of professionalism and makes it appear to be more legit than it would otherwise be. A lack of understanding of a project’s goals after reading the white paper could be a red flag to avoid investing in it.
However, while this is a useful indicator, it is not the be-all and end-all of legitimacy. During the ICO boom of 2017, many projects with well-written white papers turned out to be absolute junk.
Investing in a cryptocurrency that you have no prior knowledge of is not a good idea. A look at the coin’s price history will show you how it has fluctuated over time, as well as its most consistent patterns. You can use this information to make predictions about the future in some cases.
Checking price history can also help you identify important points in the market, such as support and resistance, key demand and supply levels, etc. Using the information obtained can help you make better trading and investment decisions.
How to Make the Right Altcoin Investments
Investing in altcoins may or may not be a good idea for you, depending on your knowledge of cryptocurrencies and your financial goals.
Cryptocurrency investors should always do their own research on altcoins before deciding whether or not to buy them. You should also note that investing in a new altcoin is riskier than an established altcoin, and please never invest more than you can afford to lose, especially in markets also volatile.
Why is Bitcoin falling? What drives the value of crypto down?