As crypto becomes more popular over the years, it has captured the interest and imagination of an increasing number of investors and users. Currently, Bitcoin continues to reign supreme in the world of cryptocurrency. However, as any smart investor knows, diversity is key to developing a successful portfolio. Fortunately, individuals seeking to dive into crypto have numerous options to choose from besides Bitcoin–these cryptocurrencies are called altcoins.
That said, considering the volatile nature of the crypto market, investors may be wondering if altcoins are worth investing in at all. As of January 2022, CoinMarketCap, the most-referenced price-tracking site for crypto assets, reports that Bitcoin accounts for 40 percent of the entire crypto market amongst thousands of other coins. Hence, it begs the question: do altcoins stand a chance? Are they a good investment?
To answer these questions, here is a quick rundown of what altcoins are and the pros and cons of investing in them.
What are Altcoins?
The term “altcoin” stems from two words: “alternative” and “coin.” As its etymology suggests, altcoins refer to any cryptocurrency that can serve as a possible substitute to Bitcoin. Hence, all coins that are not Bitcoin fall under this category.
While altcoins naturally aim to get into mainstream use, the reasons for their development can vary greatly from one altcoin to another. Some aim to address any perceived limitations in Bitcoin, such as using up too much energy for transactions or restricted smart contract capabilities. Other altcoins, however, focus on improving upon Bitcoin’s features. For example, Bitcoin offers a degree of anonymity online for users, but it is not foolproof. Privacy coins like Monero improve upon this feature by adding functions that offer users complete anonymity. As such, people who value their privacy can search for the best XMR wallet and use Monero to transact online.
Overall, Bitcoin, as the first crypto, has set the benchmarks by which all other cryptocurrencies are measured. By addressing Bitcoin’s perceived issues or improving select features, altcoins give themselves an edge in the market and offer financing solutions that could benefit different kinds of users worldwide.
Do Altcoins Make Good Investments?
Backing altcoins is a lucrative investment option for many. After all, an individual can reap greater returns by investing in something that does not cost as much as other more popular coins. However, great rewards come with great risks, so it is crucial for investors to carefully weigh the pros and cons of adding altcoins to their portfolios.
Pros of Investing In Altcoins
Investing in crypto is always tricky because of its volatility, but there are some perks in investing in coins other than Bitcoin. Some of the pros include:
Diversification. Risk management is a crucial part of building a successful portfolio, and one way to accomplish that is through diversifying assets. This includes crypto assets. By investing in different coins besides Bitcoin, they can decrease the risk of losing all their investment entirely in case one crypto asset flops.
Improved Features. Since Bitcoin served as the first model in crypto, it stands to reason that the next batch of coins will have features and functions that exceed those of the initial model. More energy-efficient frameworks, higher levels of privacy, and increased smart contract capabilities are only some of the perks legitimate altcoins offer to their users.
Potential for Mainstream Use. While Bitcoin occupies a large part of the crypto market, some altcoins are slowly gaining the same traction. Ethereum, for example, is the leading altcoin and accounts for almost 15 percent of the market. Thus, it becomes clear that some altcoins do have significant investment potential.
Cons of Investing in Altcoins
While altcoins offer several advantages from a portfolio-building point, there are cons that potential investors must take into account before investing. These are:
Increased Risk. As of January 2022, there are over 16,000 altcoins in the market, and unfortunately, not all of them will last. After all, not all altcoins are made equal. Some coins merely mimic Bitcoin but offer nothing new. Others simply exist to scam investors into giving their hard-earned money.
Lack of Acceptance. While an altcoin may hold a lot of potential, it is not a guarantee that it will be widely accepted. Moreover, some smaller altcoins are illiquid, which means that users cannot easily convert them back to cash if they need it.
Lower Market Value. Many altcoins aim to become the next Bitcoin, but when carefully considering the odds, their market value might not ever reach the latter’s peaks. As such, individuals may have smaller returns than what they expect or become stagnant, contrary to their expectations.
All in all, altcoins do have a lot of investment potential, but large returns are not guaranteed. The crypto industry is still in its infancy, and it is difficult to gauge how future developments or guidelines may change the market for altcoins. The best course of action for investors is to research their altcoin prospects in-depth, so they can discern the altcoins with the most potential for profit from those which are not.