Altcoin: its nature, classification, and how to trade it you need to know

If you’re new to the world of cryptocurrencies, you’re likely to encounter the term “altcoin” quite frequently. But what exactly is an altcoin? Why does it attract the attention of the global trading community? This article will explain in detail about altcoins, helping you better understand this digital asset class and how to approach it safely.

What is an altcoin? Not just “different coins”

Altcoin is short for “alternative coin”—all cryptocurrencies except Bitcoin. When Bitcoin was created in 2009 as the first cryptocurrency, all subsequent coins were considered alternatives. Today, altcoins include tens of thousands of projects, from smart contract platforms like Ethereum to meme coins built on internet culture.

Interestingly, before Ethereum, most altcoins were created as forks of Bitcoin or operated on separate blockchains. However, Ethereum changed the industry landscape by allowing developers to create new tokens without building an entire blockchain from scratch. This led to a wave of new altcoins, enabling rapid market growth and making altcoins an integral part of the crypto ecosystem.

Why are altcoins attractive to investors?

Every altcoin is created to solve a specific problem. The biggest appeal of altcoins over Bitcoin is that they often offer practical utility. Some altcoins enable users to participate in project governance through voting, while others provide services like staking or lending to earn passive income.

Additionally, altcoins open up new investment opportunities. The market capitalization of smaller altcoins is significantly less than Bitcoin’s. Recent statistics show Bitcoin accounts for about 50% of the total crypto market cap, with the rest shared among altcoins. This means altcoins have higher potential for price increases during bullish phases, especially when market sentiment is optimistic.

Most popular types of altcoins in the market

The altcoin market is highly diverse, with each type serving different purposes.

Utility tokens are designed to provide specific services on a network. For example, you might use a token to buy storage space, receive discounts on transactions, or participate in project voting. As long as a token represents a way to achieve something, it is considered a utility token.

Governance tokens allow holders to participate in project management. This is part of the industry’s effort toward decentralization—rather than a small group making all decisions, the community holds voting rights. Anything approved by the community is implemented by developers.

Memecoins emerged in 2013 with Dogecoin, initially seen as a humorous joke without real utility. However, Dogecoin proved surprisingly resilient, attracting a loyal community and continuing to grow. Today, memecoins remain a notable part of the altcoin market, with new projects constantly appearing on Solana and other blockchains.

Stablecoins are altcoins pegged to other assets. Most major stablecoins are backed by fiat currencies like USD, maintaining a fixed value of $1. This type of altcoin plays a crucial role in providing stability to the market.

There are also other types of altcoins, such as privacy coins, although many have been banned on most exchanges due to regulatory concerns.

Risks of trading altcoins: what you need to be careful about

While they hold potential, trading altcoins also involves significant risks.

High market volatility: Since altcoins have smaller market caps than Bitcoin, they are more susceptible to large swings. Good or bad news can cause prices to spike or plummet rapidly within a single day.

Fraud and rug pulls: Scammers have found ways into the crypto industry. They often use fake ICOs—launching a new coin with grand promises to attract investments, then disappearing with the funds. This is known as a “rug pull” and has happened multiple times in altcoin history.

Immature market: Altcoins typically trade with lower trading volumes, especially those with small market caps. This can make it difficult to buy or sell at desired prices.

Regulatory uncertainty: The future regulation of altcoins remains unclear. Policy changes by authorities can significantly impact their value.

Bad projects: Not all altcoins are scams, but many projects exist only on paper. If they fail to attract attention or show technical progress, they can become worthless.

Which strategies suit altcoin investors?

There are various approaches to trading altcoins, depending on your goals and risk appetite.

HODL strategy: Some traders believe in a particular altcoin and decide to hold long-term. They invest funds, lock coins in a wallet, and wait for the price to increase. While risky, this approach suits those who believe in the project’s long-term potential.

Diversification: A safer approach is not putting all eggs in one basket. You select 3 to 5 promising altcoins (based on technology, goals, or development stage) and split your investment among them. If one project fails, others may still increase in value.

Active trading: Instead of just holding, some traders buy and sell altcoins over days, weeks, or even hours to profit from price movements. This requires more technical knowledge and market analysis skills.

Practical tips for altcoin traders

If you decide to trade altcoins, keep these points in mind:

Research thoroughly: Before investing in any coin, spend time understanding the project. Check the technical details, development team, community, and history. Good altcoins don’t appear suddenly—they are usually built gradually with community support.

Understand the market: The crypto market is highly volatile. News, major events, or policy changes can impact altcoin prices. Stay updated on industry developments.

Use self-custody: For maximum security, don’t leave your altcoins on exchanges. Transfer them to a private wallet (self-custody). This reduces the risk of hacking or losing funds if an exchange faces issues.

Control emotions: During market rallies, everyone wants to buy; during downturns, everyone wants to sell. Try to stay calm and stick to your plan.

Start small: Don’t invest all your available funds into altcoins. Begin with an amount you can afford to lose if something goes wrong. As you learn more, you can gradually increase your investment.

Manage risks: Learn to use tools like stop-loss (to limit losses) and take-profit (to lock in gains). These help prevent impulsive decisions driven by emotions.

Be aware of taxes: Profits from altcoins may be taxable depending on your country. Research local regulations to avoid legal issues later.

Avoid suspicious projects: If an altcoin becomes too famous too quickly or makes unrealistic promises, be cautious. These are often signs of scams.

The future of altcoins

Once, crypto enthusiasts believed most altcoins would eventually die out, thinking only Bitcoin would survive long-term. However, with the growth of Web3 and new applications, that scenario seems less likely.

Many altcoins—though not all—are likely to find their place in the future crypto ecosystem. The biggest challenge is distinguishing which altcoins have long-term potential and which are just temporary fads.

The only certainty is that no one can predict the future with 100% accuracy. The altcoin market is still immature, full of variables and uncertainties. The best way to protect yourself is to conduct thorough research, understand your own risk tolerance, and always exercise caution before making investment decisions.