What are Altcoins, and are they worth getting into?

The term altcoin, or alternative currency, is an imprecise method of labeling a wide variety of cryptocurrencies possessing entirely different functions and technological value. As a whole, the altcoin market has served as an important testing ground for new concepts and applications that, while outside the core function of bitcoin itself, are absolutely vital for realizing the potential of the blockchain. Many coins represent the work of a host of extremely talented developers, who together with their teams expand the cryptocurrency horizon and offer previously unthought of technological applications. Regardless of whether altcoins as a whole will thrive or be killed off by advances in sidechain technology, these coins represent a large contribution to shaping the future of the cryptocurrency marketplace.

Others are the work of opportunists looking to make a buck on the back of an early-stage technology, releasing coins with no real value or innovation, which in most cases will disappear along with the monies of naive investors.  We group altcoins into three categories, explained just below the toplist.

Alternatives

Alternatives are altcoins that develop entirely different networks with their own blockchain technologies and currencies that are meant to correct perceived deficiencies in bitcoin. These perceived deficiencies could be anything from bitcoin’s neglecting to incorporate alternative uses for the blockchain, to the insecurity of the mining network, or the inefficiency of mining from a cost perspective. The most notable alternatives are Ripple, Ethereum, NXT, litecoin, and Bitshares. Ripple actually predates bitcoin, and offers decentralized ledger solution facilitating the transfer of fiat currency. The technology has been picked up by a few banks, and a number of extremely smart and influential leaders in politics and economics have joined the board of directors.

Ethereum and Bitshares, developed respectively by Vitalin Buterin and Daniel Larimer, endeavor to deliver, in a nutshell, a smart contract solution to the market. Both believe that bitcoin’s design does not provide the optimal foundation for the technology, and thus have devoted their sizable talents to the development of alternative networks instead. Mr. Larimer’s product launched mid-2014, and the market is still waiting for it to deliver on its promise. Ethereum is meant to launch Q2 2015, and has secured over $13 million in financial backing.

Enhancers

Enhancers create protocols that sit on top of the bitcoin network, utilizing the blockchain directly while offering users additional features with different coins. These features could be anything from trading different sorts of assets to facilitating the creation and distribution of “tokens”. The most notable enhancers would be CounterParty, MasterCoin (omnilayer) and Colored Coins. Some of these networks, like CounterParty and Mastercoin/Omni, are considered by some to be parasitic, as they basically live on the bitcoin network, utilizing its core functionalities, but drain bitcoin from the ecosystem and contribute no value in return aside from transaction fees. Additionally, their method of storing information within the blockchain contributes to bloat, and has been described as a misuse of the technology which could have unintended consequences. Supporters of these enhancers counter that they keep bitcoin relevant, as bitcoin’s singlehanded focus on value transfer at the expense of alternative applications threatens to marginalize bitcoin in the future.

Applications

Applications utilize enhancers or alternatives for a number of purposes, including crowdfunding, monetization, and exchange services. For instance, Storj, a p2p file storage solution, utilized the Counterparty to create its own coin called SJCX, which was then sold in an initial public offering. SJCX is the unit of value used to compensate peers offering storage space and paid by peers that would like to purchase storage space. Factom is a storage mechanism for mountains of data – worldwide medical records for instance – utilizing the blockchain to offer the data in an accessible, auditable format. They utilized the mastercoin protocol for the issuance of their tokens, but have improved on the mastercoin method of inserting transactions in the blockchain.

Tether offers tokens that correlate on a 1 to 1 and auditable basis with actual dollars, and thus provide a mechanism for transferring fiat currency over the blockchain. Their tokens were created using the counterparty technology.

Scam Coins

Scam coins have no redeeming quality and are created with the intention of making a quick buck (or bitcoin?) on the backs of naive investors. These coins are offered for sale on crypto to crypto exchanges like Cryptsy, Poloniex or Bittrex who at times are more concerned with offering a wide variety of coins rather than ensuring they are not facilitating a pump and dump.

There are a number of way to differentiate between a legitimate altcoin and a scam coin, and we detail these below. We should note that scam coins can, of course, be very profitable to those who recognize both when a “pump” is taking place, and can determine when to get out before the inevitable “dump”.

Additionally, there might be the rare case in which our scam coin net captures a legitimate coin. In our opinion, it is better to miss out the odd speculative victory and save yourself from the much more frequent burnings. If you have some extra cash burning a hole in your pocket, best to just stick it in bitcoin.

Premining

Premining is the practice of privately mining a new coin prior to public invitation. In the most blatant example, a coin developer sets an extremely low mining difficulty level, mines a certain amount of the coin, and after a chosen period of time announce publicly the launch. There are less blatant methods of achieving a premining affect, like a last minute announcement of the launch through an obscure publication. An honest coin launch should clearly set a date and time mining will commence through a mainstream source, as well as a reasonable starting difficulty level.

Premining is particularly indicative of a scam when coupled with a proof of stake mining method. In proof of stake, new transaction blocks are mined based on proof of coin ownership. The mining deck is effectively stacked in the favor of the pre-miner, who has claimed ownership to a large percentage of existing coin prior to public release. After mining has commenced and a coin economy has been created on one of the crypto exchanges, the coin developer/miner typically dumps his premined holding to speculators, who are quickly stuck in a market with a worthless coin.

Though not 100% correlative, premining is one indicator that a new coin could indeed be a tool in a pump and dump scheme, and prospective investors in new coins must do their homework. There are cases in which premining is acceptable – for instance, perhaps the premine will be distributed amongst users as a reward for support or as a method to gain publicity. In such cases, the premine percentage and rationale should be clearly stated up front.

Obscure or Anonymous Developers

Serious alternative coins will most likely be backed by a distinguished developer with a solid reputation in the cryptocurrency community. Preferably, the developers should have made tangible contributions to reputable projects, either directly related to bitcoin or with an innovative alternative currency. Coins with anonymous management should simply be avoided – if you would like a gamble, just check out our casino section instead. If you are unsure of the developers behind a particular project email us, or roll up your sleeves and do your google detective work.

Lack of Innovation

If the coin does not contribute anything new of value there is no reason for its existence. There are literally dozens of coins that make big marketing noise, attempting to define themselves by a particular niche – there was a scam coin created with the purpose of blowing the whistle on scam coins, for instance – but beneath the surface there is no technological value add. Many coins, for example, will employ minor tweaks to proof of work mining, which is presented as fulfilling a special need. Others offer different transaction speeds or various levels of anonymity. In the best case these coins are a bad investment, in the worst case, developers are planning a pump and dump.

Of course, defining a coin as legitimate does not attest to its potential for future value, it simply means it is likely not fraudulent. The coin’s longevity, mining support, trading liquidity and size and caliber of its supporting community are useful indicators as to its potential value.

Check out our article on the best altcoin exchanges to find a spot to buy these and hundreds of other altcoins.