In the cryptocurrency world, bitcoin is not the only digital currency on the market. There are many alternative cryptocurrencies, commonly known as altcoins (alternative coins). It is an electronic currency with their own blockchain, miners and wallets. But how do they work, and why do they exist? There are different types of altcoins, with new ones coming all the time. Find out more so you can decide whether to invest in your own altcoin.
Why Do We Need Altcoins?
As the first cryptocurrency, bitcoin has its own special rules. As an example:
- New coins are produced every 10 minutes on the bitcoin network.
- Bitcoin is mined using a lot of computing power.
- Some special computer chips can be specially designed to mine bitcoin faster than others.
- There are only 21 million bitcoins.
- Bitcoin is designed to be a form of electronic money and nothing else.
These were all conscious choices made when the bitcoin protocol was originally designed, but there’s nothing to say those rules can’t change.
The software development team that governs bitcoin is very conservative and doesn’t like to make drastic changes to bitcoin software, or the rules therein. There are good reasons for this; bitcoin has a market cap in the billions of dollars, and many businesses now depend on it. Making too many changes can create problems for people who depend on a digital currency as popular as Bitcoin.
Alternative to Bitcoin
Instead, many people have taken the basic principles of cryptocurrency and developed their own versions, with different rules to suit their own needs. They make up the altcoin community, and there are a lot of them.
One of the most popular is litecoin, a cryptocurrency that changes the rules to attract different collections of people. Released nearly three years after bitcoin, litecoin creates a new coin every 2.5 minutes – four times faster than bitcoin – meaning that transactions made using litecoin can be confirmed faster than in bitcoin.
Litecoin also uses a different set of rules than bitcoin when it comes to mining. It deliberately tries to exclude new types of mining equipment such as minors ASIC from having an unfair advantage over more commonly available equipment such as the CPU in your computer. The idea is to keep things more egalitarian, and give everyone a chance, rather than rewarding those people with money to buy specialist equipment.
Beware of Scamcoins
Not all altcoins have a laudable purpose. There have been thousands of altcoins launched in recent years, and many of them fall into a category called scamcoins. These are altcoins designed purely to make a profit for their creators at the expense of devotees.
Usually, these coins will be announced on popular cryptocurrency forums with a little warning. They have often been pre-mined by their creators, meaning that they are already sitting down with a sizable number of coins.
Scamcoin makers are trying to gain community support for their altcoins, by encouraging them to use their computers to mine the coins. If they can find people to start trading their scamcoin, then they can spread a lot of rumors about their scamcoin to increase its value. At this point, the creators will sell all of their coins, take their money and exit the market, and let the scamcoin value weaken, without technical support.
This is known as the ‘pump and dump’ scheme and has become quite common in the altcoin world. However, many altcoins are valid, and have real potential. How do you find them? Here are a few things to look for.
Search for Various Functions
A valid altcoin will often change bitcoin rules adequately to do something that is uniquely productive and may have a specific application. Some coins have been designed as units of exchange for solar power production, for example, while others have formed the basis for new domain name systems on the Internet. If a coin is trying to do something that adds technical value, that’s a good sign.
Supported by a Solid Team
A good altcoin will have a solid team behind it. Beware of coins launched by people who have no track record in the community, especially if they appear to have recently been listed on forums. Some of the best altcoins form communities of volunteers and advocates, many of whom will be contributors to forums for a while.
Broad Market Support
Several coins took off. One of the most famous is Dogecoin, which was originally seen as a joke. The coin, which uses a cute dog as its mascot, went viral, and everyone started buying it. At the time of writing in February 2015, it has a market cap of over $ 14 million.
And that’s a little explanation about altcoins or alternative coins that you need to know, hopefully this article is useful and happy mining bitcoin or other digital currencies.