Purpose of Altcoins
- Altcoins – Any cryptocurrency that is not Bitcoin
What are Altcoins?
Altcoins are simply any cryptocurrency that is not Bitcoin. When the first altcoins came to market in 2011, they marked the dawn of rampant maximalist ideology in the blockchain space. These “maxis” believed that any cryptocurrency that was not Bitcoin would cease to exist for one reason or another. The discontent in the Bitcoin community for alternative coins was quite apparent, with community leaders and their followers often referring to altcoins as “shitcoins” – and sometimes for good reasons.
Many altcoins were merely forks of the Bitcoin software. Derivatives of Bitcoin forks began popping up as well. It was highly profitable to tweak a few parameters of an existing project and market the design change as something innovative. Most of these early projects failed to reach any substantial market adoption. Creators of some projects would also artificially inflate their project’s coin price through wash trading and other illegitimate practices. This behavior would lure in naïve investors as the project’s team dumped their token supply on the community and exited. Many projects never even saw a single line of code written for them and remained ideas in a whitepaper. It seemed as though Bitcoin maximalists had a point.
Not all altcoins turned out to be pump-and-dumps or pipe dreams. Actual research and development took place to create new cryptocurrencies from the ground up. The goal was to address the flaws inherent in Bitcoin and open the door for true innovation. Those who could see the potential of these new virtual currencies and avoid scams and fundamentally weak projects eventually went on to generate wealth.
- Maximalist – someone that holds extreme views and is not willing to compromise when presented with an alternative viewpoint
- Wash Trading – a form of market manipulation where a market participant buys and sells the same financial instruments to create the illusion of legitimate marketplace activity
Early Altcoin Successes
When it comes to investing in digital asset projects, we categorize project success as follows:
- Consistently delivering on project goals
- Having a loyal and growing community dedicated to the project’s overall success
- Balanced economic incentives that allow the project’s assets to retain value over time
While 90%+ of all altcoin projects fail, a few have gone on to become multibillion-dollar ecosystems. Some notable early projects today include Litecoin, Monero, and Cardano.
Litecoin is a fork of Bitcoin that came into existence in 2011. While both LTC and BTC function similarly, Litecoin had a few features that allowed it to thrive over the years.
For a while, Litecoin acted as a live testing environment for future upgrades to Bitcoin. Litecoin also enjoyed being touted as “the silver to Bitcoin’s gold.” At the time, one could use the Litecoin blockchain as a medium of exchange during periods of high traffic and fees on the Bitcoin network. Litecoin was a popular alternative due to its decreased block time from 10 to 2.5 minutes. The total supply of Litecoin is also 4x larger than Bitcoin’s 21 million coins. This difference in total supply made holders more likely to spend the cheaper currency (spending quarters vs. a dollar bill).
Something else to note is the difference in hashing algorithm used between Litecoin and Bitcoin. Hashing algorithms are used in cryptocurrency projects to validate transactions and create pseudonymous wallet addresses. Litecoin uses a process called Scrypt, while Bitcoin uses SHA256. This difference prevents Bitcoin miners from being able to attack the Litecoin network.
While Litecoin was a prominent cryptocurrency for many years, its use-case as digital silver has become less of a defining feature. The massive increase in altcoins means less bloat on any particular chain. Also, Litecoin has many forks that focus on the speed of transactions.
- Hashing Algorithm – A mathematical process of taking a data input of any arbitrary length and outputting a unique value that has a defined fixed length
Monero is a privacy-centric cryptocurrency introduced in 2014 as a fork of Bytecoin.
While Monero and Bitcoin are both decentralized financial systems, many features set the two apart. For starters, while Bitcoin uses pseudonymous wallet addresses and a public ledger, the ledger of Monero is private by default. Monero uses technologies such as ring signatures, stealth addresses, transacting over the Tor network (the same network utilized to access the Silk Road), and others to obfuscate transactions. While it may still be possible for law enforcement to use advanced surveillance techniques to link transactions, it is undoubtedly challenging to do so.
The block size of the Monero blockchain is also flexible compared to Bitcoin’s (which allows for greater throughput). Furthermore, Monero has an uncapped mining reward that aims to increase the total supply by less than 1% annually. When comparing mining to Bitcoin, Monero is much more user-friendly. Using the randomx mining algorithm, Monero is resistant to specialized ASIC mining equipment dominating the network (unlike Bitcoin). This distinction allows users to set up their personal computers to mine Monero versus needing complex mining operations to mine Bitcoin.
While Monero seems like it could be the evolution of privately held physical cash, the network has its challenges. For starters, due to the privacy-by-default nature of the ledger, it is hard to audit the token supply and ensure duplication bugs do not exist. The Monero blockchain also does not have transaction throughput speeds capable of competing with centralized entities like Visa. Lastly, central governments and authorities have gone to great lengths to prevent Monero from being listed on some exchanges. The narrative surrounding Monero is that its purpose is for nefarious transactions, which is the same narrative that surrounded Bitcoin early into its existence.
Starting in 2015, Cardano is a complex smart contract platform built from the ground up that utilizes a proof-of-stake (POS) consensus algorithm. Charles Hoskinson, a mathematician, came up with the original idea for Cardano.
Smart contracts allow for a more robust financial system outside of simply being able to move coin totals on a ledger. Using the Plutus Core scripting language, built by the Cardano development team, you can write computer programs (aka smart contracts) and execute them directly on the Cardano blockchain. Combining the functionality of these programs allows for the creation of more complex systems, known as decentralized applications or dapps. We will explore smart contracts further in our lesson on Ethereum, but for now, it is essential to note that smart contracts are the backbone of decentralized finance. While Bitcoin does have scripting capabilities, this functionality is minimal.
Another substantial difference between Cardano and Bitcoin is Cardano’s use of a POS (proof-of-stake) consensus algorithm versus POW (proof-of-work). In POS, transaction validators make blocks based on the amount of cryptocurrency the network participant holds. This consensus method allows many more network participants to contribute to the validation process and earn a passive income without enduring the high overhead costs of mining equipment and electricity usage. Regarding energy consumption, POS is much more efficient at validating transactions. Most of the largest smart contract platforms already are (or want to transition to) a POS-based system.
Cardano seems to have a bright future ahead of it. POS-based smart contract platforms may be the infrastructure of choice for building dapps. However, there is intense competition to become the dominant global financial infrastructure. POS-based systems also have security risks. However, the team working on Cardano claims that the Cardano network is provably as secure as the Bitcoin network.
- Decentralized Applications (dapps) – A computer application that can run autonomously (mostly by using smart contracts) on a decentralized blockchain network
- Proof-of-stake (POS) – Consensus method in which transaction validators are selected based on the number of coins or “stake” that they hold; reducing energy expenditure as compared to proof-of-work
- Scripting Language – A specific type of computer programming language that can be used to give instructions to other software but is not able to be compiled into an executable program on its own
- Smart Contract – A program stored permanently on a blockchain that automatically runs when predetermined conditions are met
Early Altcoin Failures
While there are cryptocurrency projects that push innovation to the edges and fight for a more fair world, the altcoin space was and continues to be rife with scams.
Bitconnect was all the rage in 2017. The Bitconnect project promised users consistent returns on their deposited funds with its proprietary trading software. The potential to access a money printer during the 2016 – 2017 cryptocurrency bull run was enticing. By manipulating the price of the Bitconnect cryptocurrency, there appeared to be massive demand to use the Bitconnect platform early on. At its peak, the Bitconnect project raised $2.4 billion from investors.
The deception did not end with price manipulation. Early cryptocurrency influencers were going viral and becoming famous for talking positively about Bitconnect. However, the rewards platform participants gained were not from the Bitconnect software. The funds were coming from deposits from later investors into the platform. In reality, Bitconnect was an elaborate Ponzi scheme that went viral. The website was abruptly shut down a year after inception, as the Bitconnect cryptocurrency’s value plummeted from a high of around $470 to $0. The founder of Bitconnect is facing federal charges.
- Bull run (finance) – a period where investor confidence is high, buyers outweigh sellers in the market, and prices of assets rise
Another infamous project from 2017 was Titanium Blockchain Infrastructure Services, a supposed SaaS company. The CEO of Titanium, Michael Stollaire, falsified having ongoing business relations with multiple well-established entities, including the Federal Reserve, Paypal, Verizon, and Boeing. The objective was to raise investor capital during the cryptocurrency’s initial coin offering (ICO).
A charismatic character, Michael took to social media to promote the project himself. The CEO went as far as to compare the project to getting in early on Intel or Google. The ICO managed to rake in $21 million from investors. The SEC filed a complaint against Michael Stollaire and his company.
- Initial Coin Offering (ICO) – A fundraising method in which a project’s cryptocurrency is given in exchange for investor funds
- Software-as-a-service (SaaS) – A business model in which software is centrally controlled and licensed on a subscription basis
Persisting Altcoin Scams
To date, scams have been the cause of multiple billions of dollars of lost investor funds. The decentralized nature of web3 makes it challenging for law enforcement to police the blockchain industry. Careful due diligence is essential for every investor to eliminate such risk.
- Web3 – The idea of an iteration of the World Wide Web that includes decentralized blockchain-based systems and token economies
If you feel prepared, take our Introduction to Bitcoin and Blockchain quiz:
About monero. getmonero.org, The Monero Project. (n.d.). Retrieved October 17, 2022, from https://www.getmonero.org/resources/about/
Admin, C. T. (2022, October 14). What is a hashing algorithm and how does it work? CrossTower. Retrieved October 17, 2022, from https://crosstower.com/resources/education/what-is-a-hashing-algorithm-and-how-does-it-work/
BitConnect founder indicted in global $2.4 billion cryptocurrency scheme. The United States Department of Justice. (2022, February 25). Retrieved October 17, 2022, from https://www.justice.gov/opa/pr/bitconnect-founder-indicted-global-24-billion-cryptocurrency-scheme
Fields, R. Q. (2022, September 9). Cardano (ADA) proof-of-stake Smart Contract Platform. Dark Water Research. Retrieved October 17, 2022, from https://dwresearch.com/cardano-ada-dark-page/
Learn about plutus. Cardano Docs. (n.d.). Retrieved October 17, 2022, from https://docs.cardano.org/plutus/learn-about-plutus
Notice of claims process and claims bar date. tbis.io. (n.d.). Retrieved October 17, 2022, from https://tbis.io/
Open source P2P digital currency. Litecoin. (n.d.). Retrieved October 17, 2022, from https://litecoin.org/
Titanium Blockchain Infrastructure Services, Inc., EHI Internetwork and Systems Management, Inc. aka EHI-INSM, Inc., and Michael Alan Stollery aka Michael Stollaire (release no. LR-24160; Jun. 7, 2018). Titanium Blockchain Infrastructure Services, Inc., EHI Internetwork and Systems Management, Inc. aka EHI-INSM, Inc., and Michael Alan Stollery aka Michael Stollaire (Release No. LR-24160; Jun. 7, 2018). (2018, June 7). Retrieved October 17, 2022, from https://www.sec.gov/litigation/litreleases/2018/lr24160.htm