In cryptocurrency, “altcoin” is a term used to describe any coin or token that isn’t Bitcoin. The market for altcoins can be pretty volatile at times, and it’s essential to know which ones are worth investing in. As we outline below, many factors go into determining whether an altcoin is good.
Cryptography
Cryptography is the process of encoding messages to make them secure. We use cryptography daily to do things like send an email online or buy something from a store with our credit card.
Cryptography also protects all data stored on databases and in blockchains so that it can only be accessed by those authorized to use it.
Altcoin Consensus Algorithms
This is tricky because there are so many different consensus algorithms. But for the sake of simplicity, let’s go over some of the more common ones:
- Proof-of-Work (POW) – This is used by Bitcoin and Litecoin, among others. It’s also known as “mining” and requires computers to solve complex mathematical problems to add new blocks to the blockchain. The miner who solves the problem first gets rewarded for their efforts.
- Proof-of-Stake (POS) – Instead of requiring miners to solve math problems to add blocks onto the blockchain, users stake their own coins against each other in an attempt to earn rewards through voting rights rather than mining power.
Altcoin Coin Cap
Less is more. The more coins there are, the lower their price will be. A good altcoin should have a low cap. That way, people who buy at the beginning will make money when they sell later.
Inflation Rate
The inflation rate is the number of new coins created annually. For example, if the inflation rate is 100%, the number of new coins will double yearly.
Most altcoins attempt to become deflationary. As such, their circulating supply reduces as more transactions occur. To be successful, the altcoin requires sufficient demand. Otherwise, no one will transact on the network.
Active Developers
An altcoin must have a large community of developers, users, and investors. While the coin’s developer can be one person or a group of people, they must be actively involved in the community.
The cryptocurrency community should be responsive to the developers’ ideas and suggestions and vice versa.
If you’re considering investing in an altcoin then take some time to get familiar with its developers and see if they have a clear roadmap for future development plans.
If an altcoin has these elements it should be good
- Cryptographic algorithms are the foundation of any cryptocurrency. They ensure that transactions are secure and that no one can interfere with them. They should be unique to your coin, so you shouldn’t copy someone else’s algorithm.
- Consensus algorithms allow multiple miners to agree on which blocks will be added to the blockchain next. These algorithms also help with speed and security and prevent double-spending (where someone spends their coins more than once). There are many different consensus algorithms out there. Still, some common ones include Proof of Work (PoW), Proof of Stake (PoS), Delegated Proof of Stake (DPoS), Byzantine Fault Tolerance Protocols (BFT), or Federated Byzantine Agreement Protocols (FBA).
- The coin cap is how much money will ever be issued by your altcoin. If an altcoin has a low cap, people will want their share because they know their investment won’t decrease in value too much. Instead, it has a high potential to appreciate.
Conclusion
In conclusion, an altcoin should have these four elements. Therefore, if you’re looking to invest in an altcoin, it’s essential to find one with these qualities.
Unfortunately, altcoins often require investors to compromise on 1/4 aspects or even more. Avoid those currencies unless you have a high risk appetite.
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