Investing in Altcoins – Hidden Gems Or Risky Bets?

To be a winning altcoin investor, one must know what are the risks involved, assess each carefully, widen your research by looking at different market sources, be updated with the market, and most importantly track investments with budgeting and doing of records.

Whether you’re interested in social impact, fun coins, high speed coins or penny tokens, altcoins are a great way to build a balanced risk/reward portfolio for your cryptocurrency portfolio and actually benefit from the crypto trend of the future.

What is an Altcoin?

Altcoin (a portmanteau of ‘alternative’ and ‘coin’) are simply any cryptocurrency that isn’t Bitcoin. Altcoin can enable you to diversify your cryptocurrency portfolio, bag a piece of nascent technology that will take off (or grow alongside subsequent iterations of a company), and sometimes yield extraordinary returns. But you might also end up losing funds you can’t really afford to lose.

Furthermore, while investing in altcoins can be a lucrative venture, your money will also indirectly support all those entrepreneurs working on new solutions for scaling blockchains or creating decentralised apps. Many of the firms investing in altcoins are right on the cusp of the latest wave in innovation in the space.

While some altcoins are proposed purely for novelty and fun, like Pepe or Axie Infinity, others carry more serious, world-changing intent, such as Polkadot or Cardano. Meanwhile, others will achieve broad appeal over time as new, succeeding technologies emerge – and these altcoins deserve a spot in your portfolio, too.

How do Altcoins Work?

They are called altcoins because, well, alt- stands for anything other than Bitcoin, and Bitcoin is the first cryptocurrency. Altcoins make up most of the volume of the crypto market, with thousands of them present. From their inception, there have been altcoins aiming for specific sub-niches, improving aspects of Bitcoin in terms of transaction speed or energy efficiency or something else.

So-called ‘altcoins’ include Ethereum (ETH), XRP (XRP), Dogecoin and Litecoin. They use proof-of-work algorithms to create consensus about adding new blocks onto the cryptocurrency’s blockchain, while others have moved to faster and more efficient approaches known as proof of stake.

Altcoins tend to be particularly volatile; investors should thoroughly research them, and never put in money that they cannot afford to lose. Stablecoins, tethered to fiat currencies or precious metals, are less volatile than most altcoins, but their main purpose – to serve as a stable bridge-currency between cryptos and the legacy financial system – means that the functionality of their blockchain protocols often lags far behind those of normal cryptos.

What Are the Risks of Investing in Altcoins?

Cryptocurrencies are subject to wild swings in the price, and investors must be prepared to buy and sell at a moment’s notice. In addition, liquidity – that is, the ease of buying and selling particular assets – is limited. This structural liquidity problem means that investors who want to sell or exchange a significant number of a particular cryptocurrency will drive down the liquidity for that coin.

Another consideration is regulatory uncertainty; new regulations might have an enormous impact on the viability and life of projects. Altcoin investors should follow regulatory developments closely – as this allows them to anticipate risk developments so they can react quickly if things go awry.

Being on lookout for security issues is thus a continued risk for the cryptocurrency markets, meaning that investors must be extra vigilant in preventing falling prey to scams or other forms of cybercrime. Wise investors diversify their portfolios, and do generous amounts of research before committing to altcoins and in that way, it is possible to enjoy the upside of investing in altcoin without taking on excessive risks.

How Can I Invest in Altcoins?

Investing in altcoins therefore provides another way to gain exposure to the crypto market’s growth story. However, like any investment, it is important that you do your research and fully understand the risks before you make a decision.

Perhaps the most important consideration in deciding whether to invest in altcoins is their volatility, which could be heavy due to their generally less mature status and much smaller market capitalisation than those of, say, bitcoins.

Cryptocurrency investments also carry the risk of being fraudulent, as most of these transactions take place unchecked. Even mentioning the name of cryptocurrencies with the highest price gains sparks speculation as to what the next big thing will be. To insulate yourself from these price swings, keep your portfolio diverse. Only invest what you are comfortable losing, and take precautionary steps such as using hardware wallets and two-factor authentication to increase your security.