If you are planning on investing in cryptocurrencies you need to know the difference between Bitcoin and Altcoins. If you are ready to invest in cryptocurrency in 2021, it is important to understand where each cryptocurrency gets its value from. When you go to an online exchange to buy crypto in Canada, you will see that there are many different cryptocurrencies available.
Bitcoin is the cryptocurrency that made all other cryptocurrencies possible. In 2008 the pseudonymous Satoshi Nakamoto created Bitcoin, a purely digital currency that relied on decentralized computers approving transactions worldwide. The reason Bitcoin succeeded, unlike early attempts, is that its creators were able to effectively apply blockchain technology.
Blockchain is an encryption method that relies on thousands of individual computers that encrypt and securely decrypt transactions. Once Bitcoin proved that secure digital currencies were possible, many others followed suit.
In an estimation from CoinMarketCap, as of early 2020, there were more than 5,000 cryptocurrencies. And of these cryptocurrencies, altcoins accounted for over 30% of the market.
The main difference between Bitcoin and altcoins is where their value comes from. Bitcoin is often referred to as cryptocurrency “gold” because, like gold, there is nothing that backs its value. And, gold sets the standard for how other assets or currencies are valued, hence the “gold standard.”
Bitcoin gets its value as the originator of all digital currencies and from its limitless peer-to-peer potential. There is little doubt of Bitcoin’s staying power and its future value.
However, Bitcoin does have several limitations. For starters, it is very expensive. This is good news for early adopters, but for those who are trying to get it now, it is very expensive. At the time of this article, it is valued at over $50,000 USD. But a benefit of Bitcoin is that you can buy fractional amounts.
Other limitations are the result of the difficultly of completing transactions. One of the reasons for Bitcoin’s success is its encryption. This encryption relies on very complicated mathematical problems that competing computers must solve in order for each transaction to be completed. This is called hashing. Because of the difficultly, the energy it takes to cover the expense of making these transactions is huge.
As the energy required is so expensive, it is not an ideal currency for making small or basic transactions. This means that Bitcoin is typically held, rather than used as a currency for exchange, which was its original design.
Finally, Bitcoin is very volatile. Again, not necessarily a bad thing, but while BTC is up over $50,000 currently, but only 12 months ago, it was worth less than $10,000 USD. And with very little historical data and analysis, it is difficult to get a strong hold on the future of its value.
Investment Alternatives – Altcoins
There are many excellent alternative cryptocurrencies to invest in. In this section we explain what makes an altcoin, as well as the several of the kinds of altcoins available on the market today.
As mentioned, Bitcoin is very volatile. In an effort to reduce the volatility of cryptocurrencies, Stablecoins were created. Stablecoins are “stable” because they are backed by another commodity, asset, or fiat currency. Facebook’s prospective Libra is a famous stablecoin as it is backed by several banks, financial institutions and credit card companies.
Security tokens work much like IPOs and are often referred to as ICOs, initial coin offerings. These are tokens that are used to invest in new projects and hope to offer investors early investment offerings. Ethereum’s ETH was created using an ICO method. ETH is the most successful ICO to date.
Utility tokens, or sometimes native tokens, are often designed to work with a specific project, much like an ICO. You may need to purchase this kind of cryptocurrency to use their products or services. They can also be used as currencies for exchange. But their value is grounded in the success of a given project.
There is value in investing in both Bitcoin and Altcoins. Ethereum, Litecoin, and Ripple are examples of altcoins that have remained on top of the marketplace, following Bitcoin. Altcoins are an excellent way to diversify one’s crypto portfolio, as many altcoins are attached to very lucrative and promising projects.