Purpose and Types of Altcoins

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interests include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency ecosystems. 

What is the Purpose of Altcoins?

Altcoins serve a similar purpose as Bitcoin but usually serve this purpose differently or uniquely. For example, altcoins operate by way of a secured blockchain but may create new coins either by mining or perhaps by way of a different method.

Altcoins may also offer certain advantages over Bitcoin and its operating platform. For example, they may offer a more scalable platform or one that can process more transactions per a given timeframe. Other altcoins are described as having a more decentralized or more secure platform.

In addition, other altcoins have been developed that can perform activities that Bitcoin is not capable of performing. The execution of smart contracts by way of the Ethereum blockchain is just one example of how second-generation blockchains provide enhancements over the Bitcoin blockchain.

What are the Different Types of Altcoins?

As already noted, quite a few altcoins are circulating in the marketplace. Most of these altcoins can be classified into one of four different types of coins or tokens.

Security Tokens

The most common type of altcoin is the security token. Security tokens often referred to as equity tokens grant the token holder some type of ownership right in a company or organization. For example, this might be a right to profit-sharing, or even a right to vote on certain organizational issues.

Security tokens are similar to how US securities or company shares operate on a major stock exchange. Gains in the pricing of security tokens are the primary driver behind investor interest in these types of tokens.

Because they operate similarly to US securities, security tokens are regulated by security laws. What this means is that there are stricter guidelines on the sale, purchase, and transfer of security tokens than with other types of altcoins. This regulation provides a greater sense of security to investors and purchasers of these types of assets.

A popular security token is The INX Token, which was the first SEC-registered blockchain security token. With a market cap of about $250 million, the INX Token is also the most valuable security token as of today.

INX token holders receive an astonishing annual 40% distribution of any positive net operating cash flow generated by the INX organization.

Mining Type Altcoins

Altcoins can be bought like traditional currency but they can also be mined. In short, mining requires the user (or miner) to validate a transaction. Block validation ensures the block’s authenticity and updates the blockchain after each validation. Miners are rewarded for maintaining the blockchain by earning these new coins.

Most mining-based altcoins use the PoW consensus mechanism, similar to Bitcoin.

Examples of mining-based altcoins include Litecoin, Monero, and ZCash. Most of the top altcoins in early 2020 fell into the mining-based category.

The alternative to mining-based altcoins is pre-mined and often part of an initial coin offering (ICO). Such coins are not produced through an algorithm but are distributed before they are listed in crypto markets.

Stable Coins

Cryptocurrencies are a volatile form of currency where valuations fluctuate based on investor perceptions, potential regulatory threats, and even social media statements. The result is that cryptocurrencies undergo severe volatility, with price changes occurring over days or even in a matter of hours.

Take Bitcoin for example. In 2017, Bitcoin started at $2,000 and skyrocketed to $20,000. Its price then plummeted 75% over the next 12 months only to then push its way back up to an all-time high of over $68,000. However, its current price has now dropped by more than 30% from its all-time high.

Stablecoins are designed to dampen these types of volatile price fluctuations. To stabilize its value, a stablecoin is linked or “pegged” to an underlying stable asset.

Stablecoins use this underlying stable or non-volatile asset as a form of collateralization. For example, a stablecoin may be linked to a popular financial asset like a fiat (government-backed) security or a commodity, like gold. However, other forms of collateralization may also be used.

Tether (USDT) is the number one stablecoin based on a market cap valued at $82B USD. This stablecoin is pegged to the US dollar and is collateralized by an asset pool comprising commercial paper, fiduciary deposits, cash, money market funds, and treasury bills.

Utility Tokens

Utility tokens provide a user with access to a product or service.

For example, BNB is both a cryptocurrency coin and a utility token. With BNB, Binance users who pay with the BNB token receive a substantial discount on certain trading fees. These tokens can also be used to pay for all sorts of goods and services, including hotel expenses, airline tickets, entertainment, and virtual gifts.

Another popular utility token is offered by Decentraland. Decentraland is the most popular metaverse that is built on the Ethereum blockchain. Decentraland has two utility tokens: MANA and LAND. MANA are fungible tokens that operate as Decentraland’s currency and can be used to pay for several virtual items including avatars, names, wearables, and digital art in the Decentraland metaverse. LAND are non-fungible tokens that can be used to purchase plots of land or estates.

Meme Coins

Most altcoins have some degree of utility. That is, they have some type of use case: they solve a problem or they offer a new service or an enhanced product.

Not so with meme coins. The genesis of a meme coin is typically a meme, a joke, trend followers, or an Internet fad. Or even the Twitter statements by someone famous, like Elon Musk.

Take, for example, Dogecoin. Dogecoin was one of the first meme coins created based on a popular meme of a Japanese Shiba Inu dog. It was intended to poke fun at Bitcoin. Publicity stunts have helped drive community awareness of the coin.

Dogecoin’s sibling meme coin is Shiba Inu. Like Dogecoin, Shiba Inu is based on a meme featuring a Shiba Inu dog and calls itself the "Dogecoin killer."

Meme coins have certain common traits. For example, meme coins typically have an unlimited or uncapped token supply. For example, Dogecoin has an uncapped supply and already has over 100 billion tokens in circulation.

And Shiba Inu has a total supply of 1 quadrillion tokens. That’s 1,000 trillion coins! Compare that to Bitcoin which has a capped supply of 21 million coins.

An unlimited or massive coin supply is perhaps a primary reason why the price of meme coins is so low compared with other altcoin types. For example, take a look at the chart below of the top meme-styled coins and compare these prices to today’s price of other altcoins, like Ethereum ($3,022) or Salano ($101).

Top Memes Tokens by Market Capitalization (source: coinmarketcap.com)

Another common trait among meme coins is that they are very volatile since their value is mostly community-driven. Statements made on social websites can affect these coins at a moment's notice, either going to the moon or tanking quickly.

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity whatsoever with which Thomas Wettermann has been, is currently, or will be affiliated.

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