There's an abundance of altcoins. What are they and why are they such risky investments?

Altcoins are aptly named. They’re an alternative to the principal player in the realm of cryptocurrency, Bitcoin. Beyond the assortment of parody and meme coins, tons of failed ventures, Bitcoin clones and elaborate scams, you may discover some genuine investment prospects.

Altcoins are bound by the blockchains they were designed to operate on. A significant proportion of these enterprises are forked (split) from the original blockchain networks that run Bitcoin and Ethereum. These splintered offspring are typically the by-product of a band of like minded developers that join together to create their own separate coin/s as an alternative to the vanguard.

Litecoin, forked from the Bitcoin blockchain in 2011, was the first altcoin to hit the market. Litecoin operates a unique proof-of-work (PoW) verification process, known as Scrypt, that claims to be faster and more energy-efficient than its predecessor's PoW consensus mechanism.

There are thousands upon thousands of coins currently in circulation. New digital currencies are constantly being introduced, many attempting to offer investors a unique store of value or establish some sort of online or real-world application.

However, those reluctant to invest in the cryptocurrency industry cite intense volatility, minimal evidence of practical adoption, and high-risk exposure concerns as rationale for their hesitancy.

So, which altcoins are ripe for investment?

There is clearly an appetite among investors for these kinds of innovative technology projects. The fundamental nature of cryptocurrency is to destabilise traditional payment systems with the hopes of bringing about a global financial revolution.

Investing in altcoins could be a way to support this potential future fiscal ecosystem. Holding onto coins, rather than trading them for cursory profits, may deliver long term growth.

The popularity of altcoins can perhaps be determined by their listed value on digital exchanges, such as CoinMarketCap. The vast majority of cryptocurrencies in the top 50 coins by market capitalisation each have a total market value of assets over $1 billion.

The top 20 altcoins by market capitalisation:

Source: CoinMarketCap. Data accurate as of 20 September 2022.

The altcoins listed above have a variety of different objectives and use cases. Among them are stablecoins (USDT, USDC) intending to offer an equable market pair with fiat currencies; meme coins (DOGE) that may have begun as jocularity but have evolved to popular digital assets; governance tokens (DAI) endowing exclusive network voting privileges; and utility tokens (ETH) to consolidate transactions on the blockchain.

Investing in a company based solely on their market capitalisation isn’t an advisable strategy. There are many factors that determine whether an investment is worthwhile or well-timed.

Here are six altcoins that might be worth considering if you’re interested in investing in more than just Bitcoin.

Raising risks to rally rewards: the uncertainty of altcoins

The most inherent risk associated with any cryptocurrency investment is collapse.

Alternative cryptocurrencies have a remarkably high failure rate. In 2018, He Baohong, a director at the China Academy of Information and Communications Technology (CAICT) estimated that 92% of all blockchain projects fail.

Baohong noted that of the more than 80,000 blockchain businesses that had been launched since the technology’s breakout role as Bitcoin’s digital ledger in 2008, only 6,400 (8%) were still actively maintained. He estimated that the average lifespan of a blockchain project was just 1.22 years.

While there have been a slew of successful altcoins launched since 2018, these statistics are unlikely to have fluctuated greatly. This struggle for survival and lack of longevity speaks to the infancy of the industry and the inexperience of investors.

If you invest in an altcoin that fails, you’re likely to lose all your vested interests. There are a finite number of insurers offering limited protections, such as theft cover. Comprehensive policies are difficult to come by and if you’re only staking a small amount of capital the costs may not be justifiable.

Bitcoin’s overwhelming influence

It’s also important to realise that, while often unintentional, the value of altcoins is often inextricably linked to the market performance of Bitcoin. Compliance and regulatory issues discourage many cryptocurrency exchanges from allowing fiat to crypto trading. Due to its distinction as the original and largest cryptocurrency by market capitalisation, Bitcoin is the leading market pair traders use when investing in altcoins.

Therefore, if Bitcoin suffers a negative price movement it’s likely that the majority of altcoins will similarly experience a depreciation in value. There are stablecoins, such as Tether, that can be used as an anchored fiat/crypto currency pair.

Costs of regulation and the proliferation of scams

The federal government will soon carry out a comprehensive review of the regulatory practices required to oversee developments and provide adequate consumer protections for Australia’s burgeoning cryptocurrency industry.

However, any government oversight will likely engender additional tariffs and taxes.

The Australian Securities & Investments Commission (ASIC) doesn’t recognise cryptocurrencies as financial products and have little-to-no-capacity to protect investors against oft-encountered pitfalls such as fraud and scams.

More than half of all losses to scams that occurred during the first four months of this year were attributed to investment scams involving crypto, according to the Australian Competition and Consumer Commission’s (ACCC) Scamwatch.

Sorting the best from the bunch

Conducting extensive research, setting an investment budget, regulating your trading frequency, and establishing short and long term financial goals can help to reduce your risks and furnish you with a comprehensive investment plan.

It might also be advisable to consult a financial advisor, particularly one with expertise in digital asset investment and management. They may also be able to assist those interested in developing a more vast portfolio of crypto assets, from altcoins to cryptoart.

Please note – every investment is a risk. Past performance is not a reliable indicator of future performance. Before investing in cryptocurrencies, equities, or any other assets, consider seeking financial advice to determine the best options for your financial situation and goals.

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