Getting started with cryptocurrency investing can be overwhelming because there are a lot of technical terms to learn. One important distinction to understand is the difference between Bitcoin, altcoins, and stablecoins. Each of these types of crypto have their benefits and downsides.
In this article, we look at stablecoins and altcoins to see how they compare as crypto investments.
What Is An Altcoin?
An altcoin is simply any cryptocurrency that is not Bitcoin (BTC). Some people refer to altcoins as any cryptocurrency that is not Bitcoin or Ethereum (ETH). Bitcoin was the very first cryptocurrency, and is still the most dominant crypto. Usually, BTC is worth between 45% and 70% of the entire value of the multi-trillion dollar crypto market. In addition to its value and adoption, Bitcoin is the most widely known cryptocurrency around the world.
💡 For more details, check out: What Are Altcoins? A Guide to Bitcoin Alternatives
Although Ethereum is not as widely adopted as Bitcoin, it is also well-known and holds a large percentage of the market. Because the Ethereum network can be used to create smart contracts and other tokens, many blockchain and crypto transactions use the Ethereum network.
Because Bitcoin is such a dominant part of the crypto sector, all other crypto tokens have become known as altcoins. Thousands of altcoins are available for trade on various exchanges. It’s impossible to know exactly how many altcoins there are, as the industry is so decentralized and global, and anybody can create an altcoin. Industry watchers have observed patterns in the relationship between Bitcoin and altcoins. If Bitcoin increases a lot in value, often that is followed by altcoin season, in which altcoins also increase in value.
Bitcoin and altcoins have the same basic characteristics. They are digital currencies that use blockchain-based ledgers to keep track of transactions in a secure and transparent manner. However, each altcoin has different features that can make it a potentially attractive alternative to Bitcoin. For instance, some altcoins use different types of staking or proof systems; they can claim more anonymity than Bitcoin, or they have faster transaction times.
What Is a Stablecoin?
A stablecoin is a cryptocurrency whose value (of each coin) is pegged to an external asset — such as the U.S. dollar, the Euro, and even a commodity or another cryptocurrency. All stablecoins are also altcoins. They were originally brought to the crypto market in 2015.
💡 For more details, check out: What Are Stablecoins?
How Stablecoins Work
As the price of each coin is pegged to a particular asset, the price of the coin is always the same as the current market price of the asset. For instance, if a stablecoin is pegged to the U.S. dollar, the price of each coin will always remain as close as possible to $1. In order to maintain a stable price, the coin’s developers — or in some cases a government agency — can intervene, which generally takes the form of launching inflation production along with a guaranteed buyback.
For example, if a stablecoin XYZ is created and pegged to the U.S. dollar, the coin creators could hold the amount of USD that they have released in the token form in an account. This way, they can always guarantee that they could buy back XYZ coins for $1, even if they need to buy 100% of them back. Although backing guarantees a minimum value for XYZ, the market price of the coin could still go up. In order to keep it at $1, the creators can release more XYZ coins to reduce the price. Unbacked stablecoins are also known as non-collateralized stablecoins or “seigniorage-style” stablecoins.
Although this system works in theory, it takes a lot of capital to back 100% of a stablecoin. There is a risk that stablecoin developers claim to hold more than they really do. If enough people try to sell their stablecoin and there isn’t sufficient cash to back it up, the stablecoin price could collapse.
Another way that stablecoin developers can maintain a stable pegged token price is to use a system of algorithms that guides the expansion and contraction of a stablecoin’s money supply. In other words, algorithms can tell governments and economists when it might be beneficial either to inject money into or withdraw money from the economy.
Under certain conditions, creating new money within a particular country is cheaper than the money’s current face value. When this occurs, a government can claim as revenue the difference in price between printing new money and the current face value of the money.
In financial services, the revenue a government receives by creating new money is called seigniorage. The seigniorage strategy only uses supply as a regulating tool. If the price of XYZ drops below $1, the developers buy back coins from the market to increase the price, and vice versa. Although this requires less capital than the backing method, it tends to be slower, so the stablecoin may not hold quite as stable a price.
Stablecoins vs Altcoins
Although all stablecoins are altcoins, not all altcoins are stablecoins. Let’s look at some similarities and differences between the two.
Both stablecoins and altcoins are cryptocurrencies that use the blockchain to record and keep track of transactions. They are digital currencies that can be traded on exchanges and stored in different types of hot or cold storage crypto wallets.
The main difference between stablecoins and altcoins is that stablecoins always remain at the same value, whereas altcoins can spike or dip in value.
Stablecoins provide a stable investment that will always remain the same value. Altcoins, on the other hand, offer different types of functionality, which makes them an attractive alternative to Bitcoin.
|Both are cryptocurrencies||Stablecoins’ value usually remains the same|
|Built on blockchain||Altcoins’ value can rise or fall|
|Can trade on crypto exchanges|
|Stored in different types of crypto wallets|
Examples of Altcoins and Stablecoins
Below are examples of altcoins and stablecoins an individual can buy.
Some types of altcoins include mining-based altcoins, security tokens, utility tokens, and stablecoins.
• Mining-based altcoins: This type of altcoin can be earned by users through a computer-based process known as mining. Bitcoin also uses a mining system for the minting of new coins and to keep the network running. Examples of mining-based altcoins are Ethereum and Litecoin.
• Security tokens: These altcoins are similar to buying stock in a company. They are issued by businesses and released to buyers through an initial coin offering (ICO). Buyers who own security tokens can earn dividends or partial ownership in the issuing company. Examples of security tokens include Sia Funds, Blockchain Capital, and Science Blockchain.
• Utility tokens: These tokens serve a use case within a specific ecosystem, such as a video game or an ecommerce store. They enable the owner to take certain actions in the network, such as buying a digital good within a video game world. The token is created just for use in that ecosystem and can be traded in the broader crypto market; but it only has real use within that ecosystem. Some examples of utility tokens are Basic Attention Token and Binance Coin.
Some popular stablecoins are: Binance USD (BUSD), Dai (DAI), Digix Gold (DGX), Paxos Standard (PAX), and TrueUSD (TUSD).
Potential Advantages/ Disadvantages of Altcoins
Altcoins can be a great way to diversify away from Bitcoin, and they offer features that can be attractive to investors. It’s impossible to know which altcoins will ultimately survive and be mass adopted, so altcoins do come with some risk, but there are several altcoins that have already become widely used.
|Potential Advantages||Potential Disadvantages|
|Room to grow||Can be volatile|
|May offer unique functions||Limited usage|
|Can have lower fees||No guarantee that they’ll survive|
|Can have quicker transactions||Hard to compete with Bitcoin for market share|
|Can offer more anonymity||Can have low liquidity|
|Can offer lower energy usage||Second choice for many investors|
Potential Advantages/ Disadvantages of Stablecoins
Stablecoins make it easier to trade cryptocurrencies on an exchange. Instead of buying bitcoin (or another crypto) with fiat currency directly, traders often exchange fiat for a stablecoin — and then using the stablecoin, they execute a trade for another cryptocurrency. During times of market volatility, some investors might choose to park their money in stablecoins. However, stablecoins don’t offer the same potential upward price movement as altcoins.
|Potential Advantages||Potential Disadvantages|
|Fast processing time||Require a third party|
|Lower fees||Require external auditing|
|Transparency||Low return on investment|
|Borderless transactions||Locked to the value of an external asset|
|Easily programmable changes|
|Safer asset in which to store funds during volatile markets|
|Many are securely backed by external assets|
|Convenient to trade on an exchange|
Crypto Investing With SoFi
Cryptocurrencies are an exciting new investment, and there are countless options to choose from. Stablecoins and altcoins are two popular types of crypto investments. If you’re looking to start investing in crypto, an easy way is to use the online trading platform, SoFi Invest. The SoFi Invest app lets you research, track, buy, and sell a range of cryptocurrencies and other assets, right from your smartphone.
SoFi Invest also offers automated recurring investing if you want to invest the same amount into a particular cryptocurrency each week or month. Investors can trade cryptocurrencies with as little as $10. If you have any questions, SoFi has a team of professional financial advisors available to help you at any time.
Is XRP considered a stablecoin?
No. XRP is an altcoin, but it is not a stablecoin.
Can stablecoins be mined?
Yes, some stablecoins can be mined.
Are altcoins and stablecoins mutually exclusive?
All stablecoins are altcoins, but not all altcoins are stablecoins.
Photo credit: iStock/akinbostanci
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