Last editedJul 20212 min read
Most people are aware of the existence of cryptocurrencies without fully being aware of what they are or how they work. The most well-known digital currency is probably bitcoin, but many other alternatives are available, and these alternative cryptocurrencies are pooled together under the label of altcoins.
As well as having a different name, altcoins differ from bitcoin in several different ways. Some, for example, use different methods to record and validate transactions, while others attempt to differentiate themselves from the market-leading bitcoin by offering extra features such as smart contracts.
The number and range of altcoins available
At the time of writing there are believed to be as many as 9,000 cryptocurrencies to choose from, with altcoins taking up 40% of that figure. As things stand, the link between altcoins and bitcoin is such that altcoins generally track bitcoin in terms of any shifts in price or value.
As the market for trading in cryptocurrencies matures, however, and new investment systems and patterns emerge, it is expected that this situation will shift. Over time, the value of altcoins will begin to move independently of that of bitcoin.
How altcoins work
The term “altcoins” is fairly simple to understand, being a combination of “alt”, or alternative, and “coins”. It covers all alternatives to bitcoin, and the basic working framework of the two types of cryptocurrency is similar. Both act as peer-to-peer systems sharing code, for example, or as so-called “mega computers” processing huge volumes of data and transactions. Some altcoins have also been designed to offer a direct alternative to bitcoin for the average user by providing an affordable means of carrying out digital transactions.
Differences between altcoins and bitcoin
Although bitcoin was one of the first cryptocurrencies it is not without flaws, and many of the altcoins that are available have been developed in order to find a way around those issues. The consensus mechanism used by bitcoin is called proof-of-work (PoW). For example, and is used to create the blocks on which bitcoin trading is based. This method, however, is notoriously time-consuming and energy-intensive and has led many people to question the green credentials of a cryptocurrency that relies on vast amounts of computing and processing power.
Many of the altcoins available seek to offer an alternative to this by being based upon a proof-of-stake (PoS) method of consensus, which cuts the time and energy required to create the blocks needed and validate any transactions.
Other examples of how altcoins differentiate themselves from the current market leader include examples such as stablecoins, which avoid the volatility often seen in the price of bitcoin, making them suitable for day-to-day transactions.
The different types of altcoin
There are several different types of altcoin, distinguished by factors such as the functions they offer and the consensus mechanism used. The options include the following:
These cryptocurrencies use the aforementioned PoW method, and examples include Litecoin, Monero and Zcash.
The value of stablecoins is linked to a basket of goods that might include precious metals or conventional fiat currencies. This helps to keep any price fluctuations within a narrow range. The altcoin created by Facebook, Diem, is an example of a stablecoin.
We Can Help
If you’re interested in finding out more about altcoins, or any other aspect of your business finances, then get in touch with our financial experts. Find out how GoCardless can help you with ad hoc payments or recurring payments.