Cryptocurrency: What are altcoins and why should you care?

This is our third instalment of crypto basics. In this series, you'll learn about what crypto is and how it comes into the world.

So we’ve already looked at what cryptocurrency is and how it actually works (you could explain blockchain to anyone now, right?), but how many cryptocurrencies exist? And if they don’t start with ‘Bit’ and end with ‘coin’, should we even care?

Short answer: yes, we should.

You’ve probably heard of at least a few cryptocurrencies other than Bitcoin — Ether (the token that powers the Ethereum blockchain) is easily the second biggest coin in the market, and we’d bet you’ve seen a meme or two about Dogecoin by now — but there are actually thousands of different cryptos out there. These alternative cryptos are, fittingly, known as altcoins.

But first, a reminder

While we believe that crypto should be accessible to all, we also know that crypto trading isn’t for everyone. The prices of crypto can be very volatile, which means there are always going to be risks involved when buying or selling crypto. Past performance isn't an indicator of future performance, and cryptocurrencies are unregulated. Your capital is at risk, so please consider your personal circumstances and do plenty of research before getting involved.

Now, let's dive into the world of altcoins, shall we?

Types of altcoins

Altcoins can generally be split into three categories: protocol coins, app tokens and meme tokens.

Protocol coins

Protocol coins such as Bitcoin and Ether are low level coins, and native to their blockchains. They help secure their blockchain network as part of the mining process and are rewarded to miners for participating in this process.

Early altcoins were essentially alternative protocol tokens, usually cloned (commonly called forking) from Bitcoin, but with certain key parameters changed, such as the maximum supply of the coin or the size of blocks on the blockchain. Examples include Litecoin (which has a maximum supply four times larger than that of Bitcoin) and Bitcoin Cash (which has larger blocks than Bitcoin). Dogecoin, for example, is actually a fork of an old altcoin called Luckycoin (which randomised miners block rewards unlike Bitcoins fixed block rewards) which itself was a fork of Litecoin.

As the space has progressed, other Protocol coins have been created which are not Bitcoin clones. They have been created entirely from scratch along with completely new blockchain technology underneath. These include cryptos such as Ether and its blockchain Ethereum, and Ada and its blockchain Cardano. These new protocols were created to provide functions that Bitcoin wasn’t intended to support, such as native smart contracts for building blockchain based apps.

App tokens

App tokens sit one level up from protocol tokens: they are not used to secure the blockchain network and are issued usually in order to power an app built with smart contracts on top of the blockchain.

The Ethereum blockchain was designed to allow people to build apps on top of it using smart contracts. Many of these apps use app tokens to power their apps in certain ways. One such example is the Aave token, which powers the Aave app. The Aave app itself allows users to earn interest on crypto deposits and for borrowing crypto. The Aave token provides holders with discounted fees when using the Aave app, and also serves as a governance token — giving holders a say in the future development of the Aave protocol.

Meme tokens

Meme tokens sit at the same level as app tokens but are normally issued for fun rather than trying to add utility to a smart contract based app.

Who knew that one day internet comedy would become currency? Well, it did. For example, one of the most popular Ethereum meme tokens, SHIBA, is based on the popular Shiba Inu meme. It was issued via a smart contract, but it doesn’t power an app. It can be sent and received by users on top of the Ethereum network and traded on various exchanges for fun, but its value is mainly in the eye of the beholder.

Keeping up with altcoins

So, we’re left with two important questions: exactly how many altcoins are there? And why do they matter? There are thought to be more than 9,000 cryptocurrencies in circulation at the moment, with new ones being created all the time. It’s likely that you’ll never hear about most of them, but there could be some out there that will change the crypto game one day. Others will probably crash just as spectacularly as they rise. It all remains to be seen as the crypto space continues to advance at lightning speed.

Okay, but why are altcoins important?

Together, altcoins make up more than 40% of the crypto market (depending on when you check). Ethereum has the second largest market cap after Bitcoin and makes up a decent chunk of that 40%, but other altcoins are on the rise.

As with Bitcoin, the prices of altcoins are extremely volatile, often even more so (just look at Dogecoin’s price chart for an example). But as more and more of these coins are created, either to solve real world problems or maybe just for fun, another one could come along that completely revolutionises another aspect of our financial world. Bitcoin re-invented the concept of a hard store of value and is disrupting how we send and store assets. Ethereum is re-imagining the way we create and use financial tools, applications and services. So the possibilities are almost endless.

Sadly, there’s no way to know if or when that will happen. But one thing’s for sure: altcoins aren’t going away anytime soon.

This article doesn't aim to provide financial advice. Please do your own research before committing to a purchase or sale. Nomics will give you updated data on all of our tokens. If you're unsure, please consult an independent financial advisor.