TL;DR
Any coin other than Bitcoin is considered an altcoin, and they range in size from large market-cap blockchains to small new projects. Altcoins are often considered an essential part of crypto portfolio diversification. By investing in good altcoins, you can reduce your portfolio’s overall risk. Investing across different classes of altcoin is a responsible investment strategy. These classes include platform tokens, stablecoins, DeFi tokens, even meme coins.
Introduction
While Bitcoin has usually dominated the cryptocurrency news, altcoins now have their fair share of headlines. Whether it’s Dogecoin’s price rise or Ethereum’s updates, it’s good to learn more about what’s on offer when investing or crypto trading. There’s a massive amount of altcoins available, so let’s look at some of the top projects across different crypto asset classes.
What is an altcoin?
An altcoin is any cryptocurrency that isn’t Bitcoin. As Bitcoin originated the cryptocurrency industry as we know it, other coins and tokens are have become the alternatives. There’s a huge variety in the altcoins available, from large-cap coins like Ether and BNB to tokens from newly launched projects. Altcoins have traditionally been associated with ERC-20 tokens on Ethereum and the native tokens of other large blockchains.
Why should I invest in altcoins?
While Bitcoin (BTC) is the largest market cap coin and the most well-known cryptocurrency, you should diversify your investment portfolio as a responsible investor. To do this in the crypto world, you’re going to need to purchase altcoins. You can reduce your overall risk by exposing your cryptocurrency portfolio to different coins and sectors in crypto, like Decentralized Finance (DeFi) or GameFi. This way, if Bitcoin crashes in price, your other crypto investments may balance out some of the losses.
Platform tokens
Some blockchains allow users to create their own projects, tokens, and even interoperable blockchains. Ethereum is the best-known platform and one of the most popular, but others have followed its lead and provided an infrastructure for new innovative projects.
Ether (ETH)
Ether is the native token of the Ethereum platform, created in 2015 by Vitalik Buterin and his team of co-founders. Ethereum was a huge technological development in the cryptocurrency ecosystem and is known as the original second-generation blockchain.
It took Bitcoin’s principles of decentralization and increased its utility with programmable code. These scripts, known as Smart Contracts, are self-executing and run according to a developer’s set of rules. They are also immutable, meaning that developers cannot change them once they’re deployed to the blockchain.
Ether is used as the blockchain’s utility token. All transactions and interactions with smart contracts require the user to pay Ether. Each type of activity requires a certain amount of gas that measures the computational power needed. Using a complicated smart contract will need more gas than sending a simple ERC-20 token from one wallet to another. The fee you pay for gas is set based on the block you’re adding it to and is known as the base fee.
You can also stake Ether as part of its planned upgrade to Ethereum 2.0 in return for interest. However, once you’ve staked, your Ether will be locked until Ethereum 2.0’s release in approximately two years. Ether also has no supply cap, but transaction fees are burned as a deflationary mechanism.
Solana (SOL)
SOL is the native token of the Solana blockchain launched in March 2020. Solana concentrates on scalability and uses a novel consensus mechanism called Proof of History. Proof of History replaces the time stamp of a block and instead uses a hashing function to measure time. This mechanism significantly increases the speed of the network. Solana also has smart contract capabilities.
SOL acts as a utility token for users to pay transaction fees or gas when interacting with smart contracts. The network burns all a percentage of each transaction fee as a deflationary measure. The blockchain will mint 489 million SOL tokens in total. You can also become a network validator if you hold SOL and participate in its Proof of Stake consensus mechanism. Validators and stakers are rewarded with SOL tokens for work in adding new transactions to a block.
Polkadot (DOT)
DOT was first minted in 2017 as the native token of Polkadot. The blockchain was developed by Ethereum co-creator Gavin Wood, Robert Habermeier, and Peter Czaban. DOT focuses on creating interoperable blockchains, and it has three main use cases: governance, staking, and bonding.
DOT’s governance model allows for users to make decisions on network fees, upgrades, and parachains. Each parachain is a customized blockchain for a project that attaches to the main blockchain known as the relay chain.
Polkadot also has a Proof of Stake consensus mechanism that requires users to stake DOT to participate in. Staking DOT provides a disincentive for bad actors to manipulate the network, as they can lose their tokens.
DOT is also used in Parachain Slot Auctions. Users stake DOT behind projects who want to win a parachain slot. If the project succeeds, the DOT is bonded until the parachain lease is over, and in return, stakers receive tokens from the project.
BNB
BNB is the native token of Binance Smart Chain and Binance Chain (they became BNB Chain in 2022). The coin launched in 2017 on the Ethereum blockchain in an ICO to raise funds to develop Binance’s exchange services.
In 2019, BNB moved to Binance Chain with a mechanism to convert the token from an ERC-20 token to a BEP-2 token. Binance DEX (decentralized exchange) was built on Binance Chain and uses BNB as a utility token to pay reduced fees. Users must also pay BNB to make transfers on Binance Chain in its gas-based transaction system.
In September 2020, Binance Smart Chain (BSC) was launched as a parallel blockchain to Binance Chain. BSC is a fork of the Ethereum blockchain and provides Smart Contract capabilities. BNB is also BSC’s native token using the BEP-20 protocol and is used to pay gas fees for transactions and smart contract interactions.
Other use cases for BNB include taking part in its Proof of Staked Authority consensus mechanism with BNB staking and paying smaller fees on Binance Exchange. Binance also burns amounts of the token every quarter as a deflationary mechanism. These burns will continue until 100,000,000 BNB have been burned, representing half of BNB’s total supply.
Meme coins
While meme coins traditionally haven’t provided much value for investors, they’re increasingly offering high returns. If you do add one to your portfolio, be aware that they’re especially high-risk investments.
Dogecoin (DOGE)
Dogecoin was created by Jackson Palmer and Billy Markus in December 2013 as a parody of cryptocurrencies like Bitcoin. Its blockchain is primarily based on Litecoin’s work, but its Proof of Work consensus method is not compatible with SHA-256 mining rigs.
Although Dogecoin is a satire of the speculative nature of crypto, it has over the years become an investment opportunity with significant gains. It has no use case other than to facilitate payments. Online communities on Reddit and other platforms used Dogecoin as a way to give tips. It’s seen an enormous increase in its popularity and online community due to its rise in value and meme-worthy Shiba Inu mascot. Elon Musk has also shown a lot of support for the project, spurring on its community and increasing its “meme” factor.
Dogecoin originally had a limit of 100 billion coins, but this hard cap has now been removed. This makes the coin inflationary as miners mine five billion new Dogecoins per year.
Stablecoins
Adding a stablecoin to your portfolio has benefits in your portfolio’s liquidity and stability. They’re low risk and can also be used in products to earn constant passive income. For example, Binance Earn offers multiple ways to stake your stablecoins and get yield in return. You can benefit from the properties of fiat currencies or other stable assets all on the blockchain. Stablecoins are also useful to investors for their ability to hedge against price volatility which we’ll discuss later.
BUSD
BUSD is a fiat-backed stablecoin pegged to the US dollar created by Binance and Paxos. Unlike some other stablecoins on the crypto market, BUSD maintains its peg with a 1:1 ratio of US dollars held in a bank account. It’s regulated by the New York State Department of Financial Services, and the stablecoin completes regular audits to ensure it is fully collateralized.
You can purchase BUSD either on the open cryptocurrency market or by sending USD to Paxos, who will then mint new BUSD for you. Binance also offers fiat gateways for purchasing the stablecoin. You can also convert your BUSD back into dollars using the same methods. BUSD exists on BNB Chain and Ethereum.
Traders and investors use BUSD to lock in gains, improve liquidity, and avoid price fluctuations common with cryptocurrencies. When purchasing crypto through the Binance exchange or other BSC Decentralized Exchanges (DEXs), you’ll find that BUSD is very common in cryptocurrency pairs. This feature makes it a valuable key for investing in other BEP-20 tokens.
DAI
DAI is a crypto-collateralized stablecoin created in December 2017 that tracks the US dollar. A Decentralized Autonomous Organization (DAO) called Maker managed the running of the token. Each DAI token is overcollateralized with crypto to make up for its volatility and to ensure that DAI’s price remains relatively stable.
For example, if ETH is $3000, you need to provide 1 ETH for perhaps 2000 of DAI. This calculation is based on the assumption that you need 1.5x for collateral, but this changes according to the market.
If the price of your collateral falls below a certain level, you’ll incur a fee or be liquidated. Many users provide more collateral than needed to be safe. If the peg falls below $1 to say $0.99, users can retrieve their collateral for a lower price.
Based on our previous example, suppose we need to exchange 2000 DAI for $3000 of ETH. We can purchase the DAI for $1980 on the open market, saving us $20. As the price of DAI decreases, this discount becomes even greater. All DAI traded in is then destroyed, also reducing the supply. Both of these factors help bring DAI back up to $1. When DAI is above $1, the opposite situation occurs, making it cheaper to mint DAI, increasing its supply in the market.
DeFi coins
DeFi projects are increasingly issuing their own tokens for governance, staking, and profit-sharing. Due to their multi-use, the coins are versatile and offer many ways to earn rather than just holding. If you decide to purchase DeFi coins, you can usually influence the project’s development using your voting power.
UNI
UNI is Uniswap’s native token, an Automated Market Maker (AMM) and DEX on Ethereum. Although Uniswap launched in November 2018, the UNI token was minted later in September 2020, with a total supply of 1 billion UNI.
There was no ICO or coin sale, which is uncommon for DeFi projects. The platform distributed 40% of the tokens to founders over time, 150 million UNI tokens to previous users, and the rest to liquidity mining pools. The Uniswap model is incredibly popular and has been forked onto many different blockchains.
UNI provides holders with governance rights, allowing them to create and vote on proposals changing the platform. You need to own at least 1% (10 million UNI) of the total supply to make a proposal. However, anyone holding UNI can vote once their wallet is designated as having voting rights.
Your voting power is decided by how much UNI you hold. These proposals could include changes to the fee structure, new pools, or flipping the protocols fee switch. If enough users agree to the fee switch, 0.05% of all Uniswap’s swap fees can be used according to whatever the governance system decides.
CAKE
CAKE is PancakeSwap’s native token launched in September 2020. PancakeSwap is an AMM and DEX on BNB Chain that has seen a huge increase in its popularity. It is, in fact, a fork of Ethereum’s Uniswap. The project has a complex tokenomic design that balances the emission of new coins with the burning of old ones. CAKE has no max supply and is minted with every block generated. New tokens are distributed to users through farms, lotteries, and Syrup Pools.
PancakeSwap also burns CAKE regularly through a long list of mechanisms. For example, the project burns all CAKE spent on minting NFTs, 100% of CAKE raised in Initial Farm Offerings (IFO), and 0.05% of every trade made on PancakeSwap V2.
CAKE also acts as a governance token that lets users vote on proposals and changes to PancakeSwap. Like most DeFi platforms, a user’s voting power is determined by the amount of CAKE they hold. You can also stake CAKE to earn more CAKE rewards and project tokens in Syrup Pools.
Closing thoughts
Investing in altcoins can be a good option if you want to diversify your crypto portfolio. If you’re new to cryptocurrencies, looking at some of the largest projects mentioned here is a good starting point. Large market-cap cryptocurrencies will typically be lower-risk than smaller, more recent projects. Overall, the best advice we can offer is to always do your own research on whatever token or coin you invest in.
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