Altcoins are not just an alternative to Bitcoin, but a whole class of crypto assets.

The cryptocurrency market initially seems like a confusing and intimidating maze. There is some logic to this — the industry is filled with a sea of specialized terminology that can scare off newcomers. Among all these concepts, one stands out: “altcoins.” Altcoins are the entire variety of digital assets that emerged after Bitcoin. However, understanding what lies behind this term will help you better navigate the world of cryptocurrencies and make more informed investment decisions.

In short, altcoins are cryptocurrencies and tokens that complement the Bitcoin ecosystem. They include Ethereum, utility tokens, stablecoins — each with its own unique role. The key point: altcoins are both an opportunity and a risk at the same time. They offer more functionality than the first cryptocurrency but are also associated with higher volatility and potential danger for investors.

Altcoins are everything except Bitcoin

To fully understand, you first need to grasp the basic definition. An altcoin is short for “alternative coin.” Essentially, altcoins are every cryptocurrency that appeared after Bitcoin and exists alongside it.

Bitcoin is the pioneer, the parent of all cryptocurrencies. Its creation in 2009 launched an entire industry. Everything that came after automatically falls into the altcoin category. Some analysts consider Ethereum an exception — the second most significant project in crypto history — but that’s more of a philosophical question.

Over more than 14 years of crypto industry existence, tens of thousands of altcoins have appeared. However, far fewer projects are active today. Many projects quietly disappeared from the market, unable to compete or losing investor interest. But those that remain perform a wide range of functions and solve various tasks.

Before Ethereum’s emergence, each new altcoin was either a fork of Bitcoin or launched its own blockchain from scratch. Ethereum changed this paradigm by creating a standard for building applications and tokens on top of an existing network. This opened the floodgates for a wave of innovation and literally exploded the number of new projects on the market.

Practical risks of trading altcoins

Before investing in altcoins, you need to understand the dangers you may face. The main risk is capital asymmetry. At the time of writing, most analyses show that Bitcoin attracts about 50% of the total crypto industry capital, while the remaining 50% is spread across thousands of altcoins. This creates a situation where altcoin prices can fluctuate by much larger percentages than Bitcoin’s price.

Low liquidity is another serious risk. Not all altcoins are easy to buy and sell. If you decide to get rid of an illiquid token, you may find it much harder to find a buyer than you expect. This can lead to forced sales at a loss.

Then there’s the risk of fraud. Scammers actively use altcoins as tools to plunder inexperienced investors. A typical scheme involves creating a project, promoting it through social media, attracting investors, who buy tokens — and then the project creators disappear with the funds. This is called a “rug pull,” and it occurs quite frequently in the market.

Additionally, there’s the risk of simply encountering an underdeveloped project. It may be fully legal but not competitive enough to survive long-term. Regulatory uncertainty also adds tension — no one knows what new restrictions might be introduced tomorrow.

Main types of altcoins: from utility tokens to memecoins

Altcoins can be classified by functionality. Let’s look at the main categories.

Utility tokens are needed to access services within a network. They can represent rights to data storage, discounts on transactions, or participation in voting on project proposals. Essentially, utility tokens are tickets that give you the ability to do something within the ecosystem.

Governance tokens allow holders to participate directly in project management. The community votes on changes, and developers implement them. This aims to achieve a deeper level of decentralization.

Memecoins are a fun class of altcoins born from internet meme culture. Dogecoin started as a joke; it wasn’t created for any real purpose, and its creators thought it would last only a few weeks. Instead, a loyal community grew around the coin, and it evolved into a full-fledged asset. Although memecoins usually lack technical utility, some projects in this space have begun to implement real functions and charitable initiatives.

Anonymous coins used to be very popular because they allowed for confidential transactions. However, the main feature of cryptocurrencies is transparency and openness for verification. In fact, regulators and exchanges have almost completely pushed anonymous coins off the market, considering they facilitate criminal activity.

Stablecoins are altcoins with a stable price. Most are pegged to the US dollar and typically cost $1. Some stablecoins are backed by real assets (physical dollars), others use algorithms to maintain the peg, and some rely on crypto reserves.

How to trade altcoins: proven approaches

If you decide to trade altcoins, there are several basic strategies worth considering.

The first strategy — “buy and forget” looks attractive at first glance: pick a coin, invest all your free funds, store it in a wallet, and wait for growth. You ignore dips and short-term fluctuations. This strategy can work for Bitcoin, but it’s risky for altcoins. There’s a high chance that the chosen altcoin will simply disappear from the market.

A safer second strategy is portfolio diversification. Instead of putting all your eggs in one basket, select several altcoins that you believe have potential. Allocate a certain portion of your capital to each. Diversification won’t eliminate risk entirely but significantly reduces it.

The third approach — active trading — involves regularly buying and selling altcoins to profit from price differences. Some traders hold positions for hours, others for days or weeks. Active trading requires good understanding of technical analysis and market dynamics.

Regardless of your chosen strategy, remember: mining altcoins today is considered economically inefficient due to high electricity costs. Instead, staking — locking tokens in smart contracts for rewards — is more popular.

Key recommendations for altcoin traders

Here are practical tips to help you avoid beginner mistakes:

• Always conduct your own research before investing. Study the project, its team, technology, and development roadmap.

• Familiarize yourself with the market. Understand how various events influence altcoin prices. Follow news and analyses from reputable analysts.

• Remember about volatility. The crypto market can turn around in hours. Never trade with sums you cannot afford to lose entirely.

• Use cold wallets for storage. This is called self-custody and is considered the safest method. If altcoins are kept on an exchange, you face additional risks.

• Don’t let emotions control you. Fear and greed are enemies of any trader. Stick to your trading plan.

• Start small. Until you master all the nuances of altcoin trading, work with minimal amounts.

• Be aware of taxes. In most jurisdictions, profits from crypto trading are taxable. Keep detailed records of your transactions.

• Avoid suspicious ICOs. If a project looks too good or promises unreal profits, it’s a red flag.

• Use stop-loss and take-profit orders. These tools automatically close your position at certain price levels, protecting you from catastrophic losses and locking in profits.

The future of altcoins in the Web3 era

Once, many traders considered altcoins a waste of time, assuming most projects wouldn’t survive. This bleak forecast may prove true, but with the development of Web3, such an outcome seems less likely. Many altcoins are finding their niche within the decentralized internet ecosystem.

The challenge is that choosing altcoins with real long-term potential is very difficult. The market’s future remains uncertain. It’s still immature, volatile, and susceptible to manipulation. Nevertheless, a proper approach — thorough research, prudent risk management, and healthy skepticism — can help you navigate this complex terrain without major losses.