Bitcoin, the world’s largest cryptocurrency by market cap has seen its price skyrocket in the last few months to hit an all-time high of almost $42,000 (£31,000). But while Bitcoin is rightfully capturing most of the headlines, investors are also increasingly turning their attention to other cryptocurrencies – or altcoins – in the search for ‘the next Bitcoin’.
We take a brief look at altcoins and discuss whether you should buy them.
What is an altcoin?
In simple terms, altcoin is any alternative cryptocurrency to Bitcoin. It’s a combination of two words: ‘alt’ which means alternative and ‘coin’ which represents cryptocurrency.
Bitcoin was officially the first cryptocurrency. But as the first of its kind, there are several limitations associated with it. These include the speed of transaction (i.e. how long it takes to send or receive it), transaction fees and privacy.
Over time, other people have worked around some of these limitations to create their own cryptocurrencies – or altcoins – to compete with Bitcoin.
In fact, many altcoins have targeted Bitcoin’s limitations to provide stronger features, such as greater transaction speed, lower fees and improved privacy to users, hoping that theirs will perhaps be ‘the next Bitcoin’.
Which are the most popular altcoins?
There are currently more than 5,000 altcoins in circulation. The top 10 by market cap as of 14 January 2021 are:
- Ethereum (ETH)
- Tether (USDT)
- XRP (XRP)
- Polkadot (DOT)
- Litecoin (LTC)
- Cardano (ADA)
- Bitcoin Cash (BCH)
- Stellar (XLM)
- Chainlink (LINK)
- Binance Coin (BNB)
Like Bitcoin, you can buy most of these altcoins from cryptocurrency exchanges like Coinbase, which is among the most popular exchanges for UK crypto investors.
Should you invest in altcoins?
The jury is still out on whether investing in cryptocurrencies is a good idea. My personal view is that it depends on the kind of investor you are, that is, whether you prefer to take a risk or play it safe.
If you are a risk-taker and have already made the decision to dip your toes into the crypto world, I think there are two main reasons to consider including altcoins in your portfolio:
- They offer protection against Bitcoin. If the all high and mighty Bitcoin was to crumble (which is a possibility), altcoins would at least give you something to fall back on.
- There’s an opportunity for greater gains as a result of increased interest from public investors and financial institutions. As interest grows, prices are likely to rise. Since altcoins are much cheaper than Bitcoin, you can get a large share of the coins at a low price.
What are the risks?
You can put your money into altcoins as protection against potential Bitcoin losses, and in the hope that they will appreciate. But there’s no guarantee that they will. Your altcoin investment could very well end up failing rather than succeeding.
This risk is particularly compounded by the fact that altcoins lack the exposure as well as the general acceptance that Bitcoin is increasingly enjoying. Though this could change in the future, it definitely makes altcoins riskier than Bitcoin. That said, Bitcoin itself is not without risk, as we covered in our feature on reasons to be wary of investing in Bitcoin.
What’s the verdict?
My suggestion would be to approach altcoins with caution. More specifically, I would say don’t put in more money than you can afford to lose.
If you do decide to invest in altcoins, spread your risk and diversify your holdings. That means spreading your money over several altcoins, like ETH, XRP, LTC, BCH, LINK and others that you have selected after careful research.
This way, you put yourself in a position to reap from the strong performance of one coin while minimising any potential losses by spreading your investment in others.
What other options are there?
If you are looking for an investment with a much stronger and safer track record of making people rich, then consider the stock market.
Investing in stocks and shares is a tried and tested strategy that has, over the long term, helped many people build wealth. The great news is that it’s extremely easy to get started. With a top share dealing account, you can begin buying shares and stake a claim in big, high-performing companies literally in minutes.
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