1.6 Chapter – Altcoins
An altcoin, or alternative coin, is a general term for any digital currency that isn’t bitcoin. Ethereum, Litecoin, and Stellar Lumens are all altcoins.
Bitcoin has remained the world’s largest and most popular cryptocurrency since its launch in 2009. It’s always held a dominant market position – although bitcoin’s market dominance has gradually dwindled over the years. As of May 2018, bitcoin has a market dominance of around 40%. That means 40% of the market cap in the entire cryptocurrency industry is in bitcoin, while 60% is in altcoins.
Today, there are 2,000+ altcoins. Anything can be an altcoin. A digital currency that launched through a recent ICO is an altcoin. A major currency like Dogecoin is an altcoin.
Altcoins originally had a bad reputation. Many people saw altcoins like Dogecoin as a joke (which, admittedly, DOGE was). They saw altcoins as a way to capitalize on the success of bitcoin. Some people launched altcoins as a get rich quick scheme. Other altcoins – like Bitconnect and Hextra – were blatant Ponzi schemes or multi-level marketing-style scams.
Fortunately, most people no longer view altcoins as inherently bad or scammy. Today, there are plenty of altcoins with superior features to bitcoin – like faster transaction times, better security, and a more active development community. New altcoins are emerging on a near-daily basis. There’s no reason to think that a certain altcoin couldn’t be “the next bitcoin”.
What is an ICO?
Many altcoins launch through an initial coin offering, or an ICO. The name stems from an initial public offer, or IPO, which is a term used in the traditional finance industry. When a company wants to “go public” and offer their stock for sale to the public, they launch an ICO. Similarly, when a cryptocurrency developer wants to launch their coin to the public, they launch an ICO.
Why Are ICOs Controversial?
ICOs are controversial. 2017 was the year of the ICO: hundreds of companies decided to launch initial coin offerings. Some companies did so for benevolent reasons. They wanted to change the world with their product – they just needed money to get their product off the ground.
Other companies, however, launched ICOs for nefarious reasons. They wanted to capitalize on the hype of ICOs. Many of these companies were surprisingly successful, raising millions of dollars with little more than a 5 or 10-page whitepaper. Sometimes, these companies disappeared and pulled an immediate exit scam. In other cases, these companies still claim their product is in development – although it seems unlikely the product will ever be released.
There was another major controversy with ICOs. In many cases, the “coins” sold in ICOs weren’t just digital tokens. Instead, the tokens conferred real value to users. Some coins paid users dividends based on company profits, for example. Other coins gave users voting rights or a permanent share of the company. That may sound good – but there’s a big issue: it constitutes the sale of a “security”, and it’s illegal to sell a security if you haven’t registered with an organization like the Securities and Exchange Commission (SEC). By the end of 2017, many ICOs were blocking American IPs from participating.
Today, ICOs come in all different levels of quality. It’s up to you to make reasonable judgements before investing in a particular ICO.
How to Stay Smart When Buying Altcoins
Altcoins are a high risk, high reward type of investment. Some altcoins have enormous future potential and will skyrocket dramatically in price in weeks. Others will plummet in price soon after launch. How do you separate good altcoins from bad altcoins? Here are some things to keep in mind when analyzing various coin projects:
Check the Website and Whitepaper
The project’s whitepaper and website will display crucial information about the project. You’ll want to check the website and read the complete whitepaper before giving any of your money to a project during the ICO. If the website and whitepaper are filled with spelling mistakes or look unprofessional, then close the window and pick another altcoin. Seriously. An ICO project that doesn’t take the time to craft a good whitepaper or website probably isn’t worth your time.
Look for an MVP, Alpha, or Beta
Some ICOs will launch with just an idea. These ideas might have a great whitepaper. That whitepaper might explain how the team is preparing to develop a technology that will completely change the world. That all sounds good – but the idea has limited value until the technology is actually developed. Look for a minimum viable product (MVP), an alpha, or a beta version of the platform. If the company has a working version of their technology in place, then that’s a huge advantage over projects that are just at the idea stage. Investing in a project with no MVP available to the public is extremely risky.
Team information is one of the hardest parts of an ICO to analyze. Many ICOs inflate team qualifications. Furthermore, many teams are based around the world, and a PhD in one country might mean significantly less than a PhD in another country. However, transparent team information is an absolute must-have before investing in a company. Many ICO scams use fabricated team information – like stolen photos and identities – to make their project seem legitimate. Spend a few minutes researching the team to make sure they’re real people with strong backgrounds capable of seeing the project to completion.
The Market for the Product
What problems is the project trying to solve? How does the company plan to succeed? What market does the company hope to attract? Is there a legitimate market need for the project? Or is the company just piling onto an overcrowded industry? We’ve seen many currencies launch with fast transaction times and cheap fees, for example, but these currencies stand little chance of competing with bitcoin, Ethereum, and other options with better name recognition.
Ultimately, ICOs are risky endeavors. Investing in altcoins through ICOs can help you earn a lot of money – but you’re more likely going to lose most of it.
The altcoin industry has changed enormously over the years. Altcoins originally had a reputation for poor-quality, poor business models, and poorly thought-out strategies. Today, altcoins are launched by legitimate businesses seeking to add real value to various industries.