The first thing that people normally hear about when they learn about cryptocurrency is Bitcoin. As they become more involved in the space, they might be surprised to discover that there are a great deal more cryptocurrencies than just Bitcoin, these currencies are known as ‘altcoins’.
The word altcoin is simply a combination of ‘alternative’ and ‘coin’, it signifies a category of cryptocurrencies that are alternatives to Bitcoin, the very first cryptocurrency. However, the general use of the word altcoins has evolved to indicate cryptocurrencies that have low market capitalization. The second largest cryptocurrency by market capitalization, which is Ethereum (at the time of writing), would typically not be considered an altcoin, even though strictly speaking, it is an alternative to Bitcoin.
Following the success of Bitcoin, other peer-to-peer currencies have emerged to achieve similar levels of success. Altcoins are typically created in order to capitalize on any perceived limitations of Bitcoin. For example, the creation of cryptocurrencies such as Dash and Monero stem from the argument that Bitcoin does not thoroughly anonymize users when transacting on the network. Dash and Monero aim to capitalize on this limitation of Bitcoin by offering a cryptocurrency and blockchain that comprehensively protect user privacy. However, there are also many altcoins that do not offer any real innovation to the existing Bitcoin model. Worse than this, some altcoins are created purely to generate a profit for their creators, otherwise known as scamcoins.
Scamcoins can normally be identified using some tell-tale signs. Firstly, scamcoins are likely to be premined by their creators, so scamcoin creators will already have in their possession, a significant amount of their coins already. Scamcoin creators typically then attempt to generate community support for their coin and project, encouraging others to mine and buy their cryptocurrency. Increased community support for their coin will drive its price upwards. At a certain price point, creators of the scamcoin will then exit the market and sell all their coins, taking their profits and leaving their coin to wither away. The use of a cryptocurrency in this manner is known as a ‘pump and dump’ scheme.
In the fast-paced world of cryptocurrency, it is very easy to be taken in by the pace of innovation that is occurring within the space. Even though we should be encouraging innovation that many altcoins are bringing to the market, we should also be diligent in making sure that we are not fooled. What appears to be an innovative altcoin, might really just be an elaborate scam.