What are altcoins and why should I care?

This blog is targeted to users who are new to bitcoin and cryptocurrency in general. For someone deeply immersed in the world of cryptocurrency, this may seem like a lot of information that you already know. However, I believe that in a space that so full of hype, speculation and drama, it’s good to slow down and evaluate why altcoins exist and see if your thoughts line up with my own.

Since we opened our first bitcoin store in 2013, I’ve always gotten a lot of questions about alternative cryptocurrencies (altcoins). At first it was Litecoin, then came Dogecoin. Lately most of the questions I get have been about Dash, Monero or Ethereum. In between, I’ve heard about all kinds of other coins that range from tokens with vague, pipe-dream aspirations to outright scams. Its perfectly normal for people to see the massive success of the bitcoin price and think that other similar projects might have similar value someday. It’s important to take your time and consider what really gives any coin or token it’s value. Investment into any altcoins should be considered very high risk(even more so than bitcoin) and should only be undertaken with a clear understanding of the risks involved.

In the increasingly chaotic world of digital currencies and tokens, bitcoin is clearly the leader. Amid a sea of information and speculation about the price and the technology, it’s important to understand the key to the whole concept:

There are a number of different alternative cryptocurrencies (altcoins) that are attempting to improve upon what bitcoin brings to currency technology. Though there may be some technical merit to some of what these coins bring to the table, so far none of them have achieved a significant enough network effect or level of real world utility to be called a real challenger to bitcoin’s status as the digital currency king.

Many of these coins are pushing the limits and expanding what we know about how digital currencies function. Some coins like ZCash and Monero are adding innovative privacy features and other improvements over the technology currently in use on the bitcoin network. This may be the single most important function of these altcoin currencies, they function as a real world research development ecosystem for digital currency.

It is also possible that one or more of these altcoin currencies could someday evolve to work as an additional layer to the bitcoin network, providing extra functionality on top of the secure store of value provided by bitcoin.

The majority of the current value of any currency based altcoin is derived purely from speculation.

This bring us to the second group of altcoins, tokens that hope to accomplish something beyond currency. Once the ability to securely store and transfer value online had been established via bitcoin, it opened the door to an entire world of other applications. Since every cryptocurrency rests on an incentive system of some kind, They all need a secure store of value that they can fall back upon.

I am personally interested in quite a few projects in this space. Both for their potential as investment opportunities and for the technologies they may one day bring to the world.

The largest and most well known of these projects is called Ethereum. Ethereum bills itself as the “World Computer” . It’s basically a blockchain-based platform upon which other applications can be built and run. A staggering amount of research and development is currently going into the Ethereum ecosystem. Many of the world’s most promising blockchain projects are currently being developed on Ethereum.

Ether, the main token on the Ethereum network was distributed by a crowdsale in 2014. Crowdsales are an important concept for anyone looking to invest in altcoins. New tokens are created and sold on a first-come first-serve basis, usually for bitcoins or ether. This allows investors to get an early crack at the coin and allows the project developers to raise funds for ongoing operations.

Crowdsales can be very high risk as the space is largely unregulated and there is no guarantee that any development will take place. However if you can find a good token, launched by reputable developers, they can be an amazing opportunity to get in on the ground floor of a good project.

In future articles I’m going to get into some of the tokens and/or projects that I think are worth looking at.