Altcoins are cryptocurrencies other than Bitcoin. Bitcoin was the first one, and it’s the most famous and valuable. But since then, many alternatives have been created, and we call them altcoins.
Think of Bitcoin, Litecoin, and Ethereum as the original gang (coins), and then there are others (altcoins) that are like their cousins or friends, using the same digital system but doing different stuff. Because Bitcoin is like a digital piggy bank, while many altcoins do different things or have special features that Bitcoin doesn’t.
They come in different types depending on how they work and what they’re for. Let’s look at the main six types.
- Smart Contract Platforms
These are like digital contracts that automatically execute themselves. Imagine these platforms as digital architects. They create smart contracts, which are akin to self-executing agreements. Just like when you sign-up for Netflix or Spotify, it automatically renews each month without you having to do anything. Ethereum was the first one to bring this idea to life, allowing developers to construct entire digital cities (or apps) on its blockchain. Binance Smart Chain, on the other hand, is like a newer, more streamlined architect, offering faster and cheaper services compared to Ethereum. - Privacy-Focused Coins
These focus on keeping transactions private and anonymous. Monero (XMR) keeps transactions confidential and untraceable. Zcash (ZEC) also keeps transaction details private using technology called zk-SNARKs, hiding transaction details while still operating in the open. - Stablecoins
These are cryptocurrencies that are pegged to the value of a regular currency like the US dollar to avoid big price swings, such as Tether (USDT) and USD Coin (USDC), both backed by US dollars. They’re tied to the value of regular money. You can of course choose any currency in the world to back your stablecoin, and it will follow that currency’s trajectory. - Utility Tokens are tokens used for specific purposes within a certain ecosystem. Chainlink (LINK) is used to connect smart contracts with real-world data while Basic Attention Token (BAT) is used in the Brave browser to reward users and content creators.
- Payment Coins are used for making payments and transactions. Litecoin (LTC) is faster and cheaper transactions than Bitcoin while Ripple (XRP) aims to make international payments faster and cheaper.
- Platform Coins are cryptocurrencies that provide a platform for building other applications, such as Cardano (ADA) which focuses on scalability, security, and sustainability. Polkadot (DOT) which enables different blockchains to work together.
Each of these altcoins has its own purpose, strengths, and weaknesses and can’t really be compared against eachother.
But how does it actually work? Let’s use an analogy for this.
Imagine you’re at a lively amusement park, just entering through the gates. The park has a bunch of cool attractions, games, and services. Now, let’s connect this amusement park to the world of cryptocurrencies.
The Amusement Park is like the entire crypto ecosystem—a lively space with different projects, each serving a unique purpose. When you buy a general admission ticket to the amusement park, you get access to all the basic rides and attractions. Similarly, Bitcoin (BTC) is like the general admission ticket to the crypto world. It’s widely recognized and acts as a store of value. Owning Bitcoin lets you step into the broader crypto space.
Utility tokens are akin to special ride passes that give you access to specific attractions within the park. Each utility token is linked to a particular project or platform. Holding these tokens lets you take part in specific activities or use certain services.
Examples of Utility Tokens:
- Ethereum (ETH): Picture Ethereum as the roller coaster ride. Holding ETH allows you access to the Ethereum platform, where you can create and interact with smart contracts. These contracts automate tasks, just like the roller coaster takes you on an exhilarating journey.
- Binance Coin (BNB): BNB is like the express pass. It allows you to skip the regular lines and trade with reduced fees on the Binance exchange.
- Chainlink (LINK): Think of Chainlink as the treasure map. It connects the amusement park (blockchain) to real-world data (like weather conditions or stock prices) through oracles. Holding LINK tokens ensures accurate information for smart contracts.
Let’s say you want to ride the roller coaster (deploy a smart contract) or get real-time weather updates (use an oracle). You’ll need the specific utility token associated with that service. Just as you exchange your ride pass for a thrilling experience, you use utility tokens to access specific features within their respective platforms. Utility tokens get their value from being useful. The more people want to ride the roller coaster or access the treasure map, the higher the demand for those tokens. Unlike general admission tickets (Bitcoin), utility tokens serve practical purposes beyond mere speculation.
Main Differences between Bitcoin and Altcoin
Bitcoin, being the OG of cryptocurrencies, is akin to the solid and reliable rollercoaster you’ve known for years. It tends to have steadier movements compared to the newbaby hcomers. This is because lots of people use Bitcoin, it’s recognized worldwide, and it’s been around the longest. Bitcoin has been around for a lot longer than any other altcoin, thus its price is also, most of the time, higher than any altcoin through history so far.
Bitcoin is like the reliable old car – it’s stable, everyone knows it, and lots of people use it. Altcoins are more like trying out new rides; they might do something special or give you a better experience, but it’s a bit riskier. Altcoins attract folks who like to gamble a bit. If people think an altcoin is going to be the next big thing, they might buy in bulk hoping to make some quick money. This can make prices jump all over the place.
From the differences in the table above, it can be seen that Bitcoin is more dominant and less volatile in the crypto market, hence why it is more talked about in the financial market and why most investors that have less tolerance towards risks prefer Bitcoin over Altcoins.
When trading in the crypto market, bitcoin can be the number one thing to look for . But that does not mean that you need to stop at Bitcoin to be safe.
To understand how the money flows, we need to take a look at the dominance index of Bitcoin and how the money moves in the crypto market.
Bitcoin Dominance VS Altcoins
When looking at potential opportunities in the crypto market, you have to know that Bitcoin and Altcoins moves in a certain way.
To understand this, you have to look at what is called the BItcoin Dominance Index, which is a data that shows how much money is in Bitcoin relative to the whole crypto market capitalization compared to money on Altcoins.
This data can be accessed from tradingview, and it can be used to predict where Altcoins is going to go, overall giving potential profits when trading Altcoins.
There are six movements that usually happen that can be used as a cheat sheet when trading Altcoins and Bitcoin itself. Here is a summary of the cheat sheet,
- When Bitcoin Dominance increases and the price of Bitcoin increases, the price of Altcoins usually goes down.
- When Bitcoin Dominance increases but the price of Bitcoin goes down, then the price of Altcoins usually goes down way more than Bitcoin.
- When Bitcoin Dominance increases but the price of Bitcoin is in consolidation, then the overall price of Altcoins will usually go into a consolidation as well.
- When Bitcoin Dominance decreases and the price of Bitcoin increases, then the price of Altcoins usually increases more than Bitcoin.
- When Bitcoin Dominance decreases and the price of Bitcoin goes down, then the price of Altcoins will usually go into a consolidation with very little price gains here and there.
- When Bitcoin Dominance decreases but the price of Bitcoin is in consolidation, then the price of Altcoins will usually increase.
You can use this cheat sheet when analysing the whole market before deciding on what crypto you want to trade specifically in the Altcoins category.
How to Trade Bitcoin and Altcoins
Note that the cheat sheet will not always be correct all the time as some Altcoins have a way to move in a more volatile matter, disregarding the condition of Bitcoin and the overall crypto market, such as meme coins.
But, the cheat sheet can be used in conjunction with another cheat sheet where it is used by traders and investors to analyse where the money is going. The summary of the money flow cheat sheet goes like this,
- Money goes into Stablecoins
- Stablecoins goes into Bitcoin
- Profit from Bitcoin goes into Ethereum
- Profit from Ethereum goes to Altcoins with larger market capitalisation ranking in the 10 to 100 spot.
- Profit from those Altcoins goes into Altcoins with medium market capitalisation ranking in the 100 to 500 spot.
- Profit from those Altcoins goes into Altcoins with lower market capitalisation such as memecoins.
There is a general flow of money when the market condition is positive, where usually it starts with investors buying and sending stablecoins in and to exchanges.
The condition of the stablecoin itself can be seen from data providers such as Glassnode or CryptoQuant for more precise information.
The data to look at is the Stablecoin inflow and stablecoin reserve, which represents how many stablecoins are going into the exchange and how many stablecoins are in exchanges.
The data represents how many stablecoins are there in exchanges ready to purchase more cryptocurrencies.
After looking at the data and confirming the positive bias that you have on the crypto market, you can then refer to the previous cheat sheet while exploring your favourite cryptocurrencies.
Overall this is only a guide to help you , but in reality, it will not go as smoothly as what the cheat sheet states.
Conclusion
Differentiating Bitcoin and Altcoins is the first step to becoming an advanced crypto investor or trader.
By differentiating Bitcoin and Altcoins not only will you become more technically proficient when discussing cryptocurrencies, you can utilise your knowledge to earn more by using the strategy explained above.
