What are Altcoins and how do they work?

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ALTCOINS are gaining in popularity as cryptocurrency fanatics look away from bitcoin to newer options.

Altcoin stands for alternative coin, a type of virtual currency that uses the so-called blockchain to allow secure transactions. 

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Altcoins are any cryptocurrencies that are not bitcoinCredit: Rex

Altcoin is a category of cryptocurrency rather than a currency itself, and there are more than 900 different altcoins available.

Cryptocurrency is an increasingly popular asset for people to put money into but it is very high risk. 

The price of these coins is incredibly volatile and can go down as well as up in the blink of an eye. If you put money into crypto there is a real risk you could lose all of your money

Crucially, cryptocurrencies are not regulated so there is no one to complain to and no protection in place if something goes wrong.

Newer coins can be riskier than more established tokens like bitcoin and ethereum. 

Tesla founder Elon Musk has been known to influence the price of cryptocurrencies with a single tweet. 

The billionaire recently sent the price of cryptocurrency Shiba Inu soaring when he tweeted a picture of his dog, which is the same breed the coin was named after. 

Should I put money in crypto?

Anyone considering putting money into crypto should do their research and make sure they understand the coin first, and only invest money you can afford to lose. 

It’s important to bear in mind that there can be higher fees and charges on crypto than other investments, and there’s no guarantee you can convert your cryptoassets back into cash, as doing so may depend on supply and demand. 

UK Crypto asset businesses must register with the Financial Conduct Authority – and you can check to see if they are on the Financial Services Register or if they are on a list of firms with temporary registration.

There is also a list of businesses not registered. If they are on this list then they may be operating illegally.

What are altcoins?

There are hundreds of Altcoins available to buy, and they are basically just any alternative to bitcoin. 

Simon Peters, crypto-asset analyst at eToro, said: “They build on the success of bitcoin by slightly changing the rules, economics or use cases to appeal to different users.

“Altcoins vary greatly in their use cases and practical application. They typically have a form of technology they underpin or provide a liquidity solution to a product or service.”

One of the biggest and most popular Altcoins include Aave, which is a decentralised lending system that gives users the ability to lend, borrow and earn interest on a range of cryptoassets.

Other well-known altcoins include Chainlink and Polygon, which is an “internet of blockchain” – technology designed to connect together different ethereum-based blockchain networks. 

Altcoins are becoming more popular as many investors look away from the first and best-known cryptocurrencies such as bitcoin, which some now even refer to as the “dinosaur of crypto”.

Some investors hope that by backing an earlier-stage coin, they will be able to make more money – but this is a risky strategy. 

Peters added: “Investors may feel that these altcoins, because they tend to be earlier in the development or adoption cycle versus bitcoin or have a potentially more innovative use case, present a better investment opportunity than investing solely into bitcoin at this moment in time. 

“Of course, anyone investing in these tokens should consider carefully their unique selling point, use cases and the long-term viability of the cryptoasset before diving in. 

“Altcoins tend to have a higher risk profile versus bitcoin and buying tokens purely on price movements or FOMO (fear of missing out) is a risky way to get into the market.”

What else should I know about altcoins?

Each type of crypto operate to its own rules. 

Myron Jobson, personal finance campaigner at interactive investor, said: “Some altcoins like Ethereum, operate a ‘proof of stake’ model that verifies transactions via other accounts within the network.

“There are also mining-based coins that are mined into existence. The method generates new coins by solving complex puzzles to create blocks which are added to the blockchain.” 

Jobson added: “Altcoins are also designed to address and improve on perceived shortcoming within the Bitcoin framework – be it reducing the energy requirement for mining or speeding up the transaction process.

“However, the value of altcoins is notoriously volatile – even more so than Bitcoin because they are newer. In addition, several new cryptocurrencies have been mushrooming since Bitcoin’s ascendency and it is difficult to keep an eye on the authenticity and performance of each one.”

One of the main problems with putting money into crypto is that it is difficult to ascertain the intrinsic value of a coin. 

Unlike when you invest in stocks and shares, where you can measures things like company profits and dividends, the price of cryptocurrencies depends on sentiment, which can change very quickly. 

Jobson added: “Crypto has not built up enough of a track record for any meaningful conclusions on trends and behaviour to be drawn.

“Cryptos are and remain a high-risk option for investors because of how much and how quickly their value can change unexpectedly. But, whatever your approach to risk, cryptos should only be a small proportion of a portfolio.”

Warning from the regulator

In January, the Financial Conduct Authority warned that Brits risk losing ALL of their money if they invest in cryptocurrencies.

The financial regulator said people need to be aware of the risks, ranging from prices going up and down suddenly, to the lack of protection if something goes wrong.

It comes after a ban on some crypto-related investment products.

People considering investing in Bitcoin or shares and stocks have also been warned over “risky” tips being shared on TikTok.

What are the risks of investing in crypto?

Below we round up five risks of investing in cryptocurrencies.

  • Consumer protection: Some investments advertising high returns based on cryptoassets may not be subject to regulation beyond anti-money laundering requirements. 
  • Price volatility: Significant price volatility in cryptoassets, combined with the inherent difficulties of valuing cryptoassets reliably, places consumers at a high risk of losses.
  • Product complexity: The complexity of some products and services relating to cryptoassets can make it hard for consumers to understand the risks. There is no guarantee that cryptoassets can be converted back into cash. Converting a cryptoasset back to cash depends on demand and supply existing in the market. 
  • Charges and fees: Consumers should consider the impact of fees and charges on their investment which may be more than those for regulated investment products.  
  • Marketing materials: Firms may overstate the returns of products or understate the risks involved.
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