How to choose or analyze altcoins?
What are altcoins?
The word “altcoin” is derived from “alternative” and “coin”. Altcoins refer to all alternatives to Bitcoin. Altcoins are cryptocurrencies that share characteristics with Bitcoin (BTC). For example, bitcoin and altcoins have a similar basic framework. Altcoins also operate as peer-to-peer (P2P) systems and share code, much like Bitcoin.
Of course, there are also stark differences between bitcoin and altcoins. One of these differences is the consensus mechanism used by these altcoins to validate transactions or produce blocks. While Bitcoin uses the Proof of Work (PoW) consensus mechanism, altcoins generally use Proof of Stake (PoS). There are different categories of altcoins, and they can be best defined by their consensus mechanisms and unique features.
Here are the most common types of altcoins:
Based on mining
Mining-based altcoins use the proof-of-work method, popularly known as PoW, which allows systems to generate new coins through mining. Mining involves solving complex problems to create blocks. Monero (XMR), Litecoin (LTC), and ZCash (ZEC) are all examples of mining-based altcoins.
Stablecoins aim to reduce the volatility that has plagued crypto trading and usage since the beginning. The value of stablecoins is therefore pegged to the value of a basket of assets, such as precious metals, fiat currencies or other cryptocurrencies. The basket serves as a reserve in case the cryptocurrency runs into trouble. Dai (DAI), USD Coin (USDC), and Tether (USDT) are all examples of stablecoins.
True to its name, a security token is similar to traditional securities traded on stock exchanges. They look like traditional stocks and represent equity, either in the form of ownership or dividends. Security tokens attract investors due to the high probability that their price will appreciate rapidly.
Memecoins are so called because they represent a silly version of well-known cryptocurrencies. They are usually hyped by popular celebrities and influencers in the crypto space. The popular coins Dogecoin (DOGE) and Shiba Inu (SHIB), for example, often have their prices raised by Tesla CEO and well-known crypto enthusiast Elon Musk.
Utility tokens are used to provide services such as rewards, network fees, and purchases within a given network. Utility tokens do not offer equity, but security tokens do. Filecoin (FIL), for example, is a utility token used to purchase storage on a decentralized storage network.
How do you rate altcoins?
Fundamental Altcoin analysis involves reviewing and evaluating all available information about an altcoin. It’s about looking at the use cases of the cryptocurrency and its network, as well as the team behind the project, to fully understand and evaluate the best altcoins to buy.
When analyzing altcoins, or any cryptocurrency for that matter, the goal is to understand whether the asset in question is overvalued or undervalued. Overvalued assets should be avoided, while undervalued assets are more ideal. Indeed, overvalued assets will likely underperform and return to their true value. Undervalued assets, on the other hand, have more growth potential and are still profitable.
Thorough analysis will help you make the best decision regarding your investment decisions.
Here are some useful guidelines on how to analyze cryptocurrency before investing:
Step 1: Analyze the white paper and find the value proposition
Reviewing a token’s whitepaper will provide a lot of relevant information such as its use cases, goals, and the team’s vision for the project. The whitepaper should give you a good picture of how the altcoin will bring value to its users.
The value proposition for Bitcoin, for example, is: “a decentralized digital currency, with no central bank or single administrator, that can be sent from user to user on a peer-to-peer network without the need for intermediaries “.
An altcoin’s value proposition can guide you as you continue to analyze other information about it.
Step 2: Look for increasing demand and stable (or decreasing) supply
Looking at supply and demand is one of the best ways to assess your next crypto investment. Now that you have a clear idea of how the altcoin adds value to its users, it’s time to examine how it manages supply and demand.
Simply put, the altcoin should have incentives that will facilitate the increase in demand in such a way that the supply decreases or is permanently stable. When demand exceeds supply, prices rise, which further fuels demand.
Step 3: Assess the team and stakeholders behind the project
Now that you have a good understanding of what the project can offer, it is also important to thoroughly assess the team behind the project. You can find information about the team in the project’s white paper, but also try to do some independent research on them. You can check out the team page of the official project site as well as their LinkedIn profiles which they should have made public and accessible to everyone.
Ask the following questions when reviewing each member’s background:
- Have they worked on other reputable and successful projects in the past?
- What are their references?
- Are they reputable members of the crypto community and blockchain ecosystem?
The goal is to know if the team behind the project is experienced and made up of experts who know what they are doing. You can check out on-chain analytics platforms and blockchain explorers to complete your research on this. You can also sniff their social media profiles or check Twitter for the conversations they engage in.
Ethereum, for example, has such a strong investment community because every individual working on Ethereum creates value for Ethereum holders. Despite issues like high fees and slow transactions, developers, community builders, and other top talent still want to participate in Ethereum-related projects.
Platforms like AAV and OpenSea, for example, are built on Ethereum. The logic behind ensuring a strong core team supporting the project is that it creates a ripple effect. A project with a strong and talented team attracts even more credible forward-thinkers, allowing even more projects and improvements to be built on the platform, much like Ethereum. These people strive to continually improve available platforms and project-related initiatives, thereby creating even more value for currency holders.
Which altcoin platforms have the most potential?
When it comes to investing in altcoins, you can choose from a variety of options. However, it’s always prudent to know which ones have the most potential to ensure you’re making a smart investment.
- Ethereum: There is a reason why Ethereum is dubbed by many as the “King of Altcoins”. Created in 2013 by Vitalik Buterin and his co-founders, Ethereum is a smart contract platform used to create decentralized applications (DApps). The founders designed Solidity, Ethereum’s own programming language for smart contracts. The majority of the current decentralized finance space is built on the Ethereum blockchain, while the native Ether (ETH) token continues to evolve in its day-to-day usefulness.
- Chain link: Chainlink takes smart contracts to another level by incorporating real-world data. Thanks to Chainlink, Ethereum smart contracts can now call other application programming interfaces, as well as act on global events and other asset prices. Chainlink’s value continues to skyrocket as it onboards valuable stakeholders including former Google CEO Eric Schmidt as one of its advisors.
- Stellar lights: Stellar aims to unite global banking systems through its decentralized platform. As such, it uses disconnected payment methods like Alchemy Pay and Single Euro Payments Area. The Stellar network then connects these systems through a decentralized ledger. Competing with Stellar is Ripple, whose break-in with the SEC made him vulnerable. This puts Stellar in a prime position to take the reins and become the leading global payment network.
- Aave: Aave is already one of the best lending protocols today and continues to provide security and anonymity to borrowers. Due to its popularity, borrowers are required to post collateral greater than the amount they are borrowing. Collateral is securely held in escrow for the duration of the loan. In the event of default, the lender is automatically paid via the smart contract.