What are altcoins and is investing in them actually a smart thing to do?
Should you prefer them over traditional investing methods like the stock market?
Altcoins are any cryptocurrency that aren’t Bitcoin. These coins were created after Bitcoin and market themselves as worthy competitors to the original. But are these coins a viable alternative to traditional stock market investing? Is this a sustainable investment venture or a bubble that is destined to pop any second now? And what exactly are the benefits of cryptocurrency coins?
In this article, we’re going to dive into the world of cryptocurrency and take a look at what makes these coins so appealing to the modern investor. So stick around till the end to find out!
The Basics.
When it comes to the cryptocurrency market, altcoins make up nearly 40% of the total. The rest is the original cryptocurrency that started everything—Bitcoin. This market share is not restricted to one or two coins but shared among a pool of numerous alternatives, each with its own strengths and weaknesses. In a saturated market like this, there are bound to be some concerns from potential investors regarding which coin to opt for.
And industry experts have already expressed their thoughts on the issue. Ben Weiss, chief operating officer of CoinFlip, had this to say about the altcoin explosion over the last few years:
“With more than 5,000 altcoins out there, it is safe to say that most of them will never be able to materialize into anything useful or provide substantial returns in the long term. Of course, there are many promising altcoins out there that help facilitate new and exciting advances in blockchain technology like Ether and Chainlink, both of which strive to bridge the gap between blockchain tech and real-world applications.”
As you can see, he is rather ambivalent about the success of most of these coins unless they have new features that could help bring about real and tangible change in the way the global financial market functions.
From this, it is pretty obvious that altcoins are incredibly risky investments. But hey, almost the same thing has been said for every stock that has risen exponentially over the last decade. Risk is something that an investor has to accept as part of the deal. The key now is judging how to mitigate that risk and increase your risk-to-reward ratio.
And the answer is almost disappointingly simple: research. As cliche as it may sound, the biggest difference between the people making money on cryptocurrency and the people losing it boils down to the simple fact of not doing their homework. You may be more likely to lose than win on an investment if you don’t do adequate research. Before you decide to break the bank by staking your savings on a coin, at least make sure you have an understanding of the precedents and the current market trends.
Elvis was right when he said only fools rush in. Don’t be one.
Should You Invest in Altcoins?
With that said, there is a lot of appeal in investing in altcoins. You can start off by investing a very small amount and potentially rake in returns worth several times your initial investment. As Ben Weiss said:
“Altcoins offer an opportunity in that they have a much higher upside in terms of percentage gain. On the other hand, they also have a much higher risk.”
You can take a look at Dogecoin as an example. The cryptocurrency that started off as a joke based on an internet meme took off in value in late January 2021 for seemingly no reason other than people started to buy it, causing the altcoin to go viral. It became so popular that Elon Musk tweeted in its favour multiple times, leading to a huge increase in interest and investment. But, such investments can fall out of favor as quickly as they gain it.
So how can you tell if an altcoin is a good investment? The simple answer is you can’t. If someone is trying to tell you the opposite, it’s bad advice at best, and an attempt to swindle you out of your money at worst. The thing with investments is that you can never be sure which ones are reliable, and that goes for all types of investments, not just cryptocurrencies. The big difference is in what securities are in place to prevent scams.
When you invest in a security offered on a regulated exchange like the NYSE or Nasdaq, you have dozens of protections that have been built over 100-plus years of trading at your back, such as SIPC insurance. And while some coin offerings are securities that fall under the U.S. Securities and Exchange Commission’s jurisdiction, most of these altcoins don’t. What’s more, even those that do fall under SEC regulation can still pose a significant risk of fraud.
These risks cannot be ignored by any investor. The fact is, no one can really be an expert at investing in altcoins, as the cryptos are too new and different versions constantly emerge. Even the guys at SEC are confused with how to proceed in such a rapidly changing environment.
So again, it’s best if you only invest in an altcoin that you understand and believe in through and through. And it’s not that hard. With proper research, it’s possible to find an altcoin that could be a worthwhile investment. And people are making money off the market so there is a set precedent.
Are Altcoins Good Investments?
Since the market for altcoins is relatively new, there is an unequal pairing at the moment. The number of altcoins listed in cryptocurrency markets has increased rapidly over the past few years, and if you think that’s the peak, you are in for a very big surprise.
What we have right now is a group of retail investors betting on the small-time price fluctuations in limited-time trades to secure a short-time profit. Pump money in at a dip, hope for the price to rise, and take it out at a suitable time. But these investors usually don’t have the capital required to generate market liquidity. What this does is lead to wildly swinging prices that go up and down and back up again like the waves of an angry ocean.
Consider the case of Ethereum’s Ether, which reached its prior peak of 1,299.95 US dollars on January 12, 2018. Less than a month later, it was down to 597.36 dollars, and by the year’s end, Ether’s price had crashed to 89.52 dollars. Yet the altcoin reached record prices of above 4,500 dollars two years later in the fall of 2021.
Timed trades can provide traders with a wealth of profits. But there is a problem. Cryptocurrency markets are not yet mature. Despite several attempts, there are no defined investment criteria or metrics to evaluate cryptocurrencies. For the most part, the altcoin market is driven by speculation. Several cases of dead cryptocurrencies, those that failed to gain enough traction or simply vanished after collecting investors’ money, exist.
Therefore, the altcoin market is for investors willing to take on the outsized risk of operating in an unregulated and emerging market that is prone to volatility. They should also be able to handle stress resulting from wild price swings. For such investors, cryptocurrency markets can offer great returns.
The Future of Altcoins.
Discussions about the future of altcoins and, indeed, cryptocurrencies, have a precedent in the most unbelievable of places: the circumstances that led to the issue of a federally-issued dollar in the 19th century.
Back then, there were various forms and types of local currencies circulating in the United States. Each had unique characteristics and was backed by a different instrument. For example, gold certificates were backed by deposits of gold at the Treasury. U.S. notes used to finance the Civil War were backed by the government.
In those days, local banks were also issuing their own currency, in some cases backed by fictitious reserves. That multiplicity of currencies and financial instruments parallels the current situation in altcoin markets. There are thousands of altcoins available in the markets today, each one claiming to serve a different purpose and market. But what we have to see is whether that multiplicity is a boon or if it’s just a matter of time before the market weeds out the weaker altcoins from the race.
Altcoins are good alternatives to cryptocurrency market investors interested in diversifying their portfolios. Though some, like Ethereum’s Ether, are recognizable by name, a majority of the more than 10,000 altcoins out there still have yet to make a mark. Altcoins are representative of the potential for cryptocurrencies to reshape modern finance. But investors should do their research before investing in them. The risks associated with altcoins are similar, or in some cases greater, than those for stock market investing. The best you can do is peg your hopes on a coin like Ether or Doge and wait for it to shoot.