Altcoins are any cryptocurrency that is not Bitcoin.
These coins were created after Bitcoin and often present themselves as better alternatives to the first cryptocurrency. Altcoins make up nearly 40% of the total cryptocurrency market, according to CoinMarketCap.
“With over 5,000 altcoins available, it’s safe to say that most of them will never be able to materialize into anything useful or provide substantial long-term returns,” says Ben Weiss, director of the operation of CoinFlip. “Of course, there are many promising altcoins that are helping to facilitate exciting new advances in blockchain technology like Ether and Chainlink, both of which strive to bridge the gap between blockchain technology and the applications of the world. real.”
That said, altcoins are incredibly risky investments. You might be more likely to lose than to gain on an investment if you don’t do adequate research. Before you consider putting your hard-earned savings at risk by investing in altcoins, make sure you understand the risks and know exactly what you are getting into.
Should you invest in Altcoins?
Cryptocurrencies have some appeal as an investment.
“Altcoins offer an opportunity in that they have a much higher payout percentage advantage,” Weiss says. “On the other hand, they also have a much higher risk.”
He cites Dogecoin as an example. The cryptocurrency gained in value in late January 2021, apparently for no reason other than people starting to buy it, which caused the altcoin to go viral. Such investments can fall out of favor as soon as they do.
“There is a saying that the time spent in the market beats the timing of the market, which means that the timing of trades is difficult,” he says. It is better to invest in something that you believe in for the long term than to jump along with something that is suddenly popular because you stand to lose a lot when a pullback inevitably occurs.
“If you are investing in altcoins for the long term, you have to really believe in what you choose to be a good investment,” Weiss says. “Otherwise, you’re just playing.”[READ:Sign up for stock news with our Invested newsletter.]
So how do you know if an altcoin is a good investment? The simple answer, according to Ryan George, is you can’t. The Marketing Director of Docupace, which helps digitize operations in the financial advisory and investment industry, says beware of anyone trying to give you a definitive answer.
“But the same goes for almost all securities investments,” adds George. “The main difference with altcoins is knowing what protections are in place.”
When you invest in a security offered on a regulated exchange like the NYSE and Nasdaq, you have dozens of protections that have been built over more than 100 years of trading behind your back, such as SIPC insurance. While some initial coin offerings are securities that fall under the jurisdiction of the United States Securities and Exchange Commission, many are not. Plus, even those who fall under SEC regulation can still pose a significant risk of fraud.
“There are many, many players in the altcoin space, and (it’s) almost impossible to understand what’s true (and) what the risk is,” he says. “Unregulated” is just another way of saying no for the typical retail investor. “
In many cases, you don’t even know where exactly your money is going when you invest in an altcoin or who is on the other side of the exchange. Just do a quick Google search for “SEC and Cryptocurrency” to see the continuous stream of accusations of fraud or Ponzi schemes.
“Your invested funds can quickly travel overseas without your knowledge,” SEC Chairman Jay Clayton wrote in a 2017 statement on cryptocurrencies and initial coin offerings. “As a result, the risks may be magnified, including the risk that market regulators, such as the SEC, may not be able to effectively prosecute bad players or recover funds.”[See: 7 Things to Know Before Investing in Cryptocurrency.]
These risks cannot be ignored by any investor. The point is, no one can really be an expert when it comes to investing in altcoins because cryptos are too new and different versions are constantly emerging.
You should only invest in an altcoin that you understand and believe in from start to finish, says Weiss. “Any investor looking to buy altcoins should definitely do their due diligence and research who is behind the coin and its value proposition.”
With proper research and due diligence, Weiss believes it’s possible to find an altcoin that could be a profitable investment.
“An interesting altcoin to invest in should provide a service that you think is unique to that particular token,” he says. “If you are looking for a safer investment but want to get involved in altcoins, start with the first five or 10 coins by market cap, like Ethereum or Litecoin.”
Be careful with coins that have smaller caps, he says. While some coins find new ways to use blockchain technology, their low capitalization makes them very vulnerable to market manipulation and hacks.
Questions to ask before investing in altcoins
Clayton shared several questions on the sec.gov website that investors should ask before investing in altcoins. For example:
– Who issues and sponsors the altcoin? What is their experience and how do they make money from the transaction?
– Where does your money go and what will it be used for?
– How and when to sell your investment? How much will it cost to sell it?
– What specific rights are you entitled to with this investment?
– Are financial statements available? And are they audited? If so, by whom?
– What legal protections may be available in the event of fraud, hacking or malware?
– Who is responsible for reimbursing your money in the event of a problem? Will there be sufficient funds to reimburse you if your rights are violated?
If you are investing in altcoins, make sure you only invest the money that you can afford to lose. Nothing is guaranteed to invest, let alone with unregulated and new investments like cryptocurrencies.[Read: Bitcoin Cash vs. Bitcoin.]
“Investing in various altcoins is almost like voting for the technologies you want to see progress,” Weiss says.
George agrees that investing in altcoins is about putting your money where your beliefs about the future lie. “And the hard truth about beliefs is that they are just that: beliefs,” he says. “Thousands of years of currency fluctuations should tell us all that we have no idea how this will move.”