Bitcoin may have been the first cryptocurrency, but it is certainly not the last. Hundreds of digital currencies known as altcoins such as Ether (Ethereum), Litecoin and Ripple have entered the market in the past decade.
So, what makes these altcoins different from Bitcoin?
Different economic models: Many altcoins exist as either “security” or “utility” tokens. Security tokens represent asset ownership such as company stock or debt. In other words, companies seeking to raise funds could sell equity in the company in the form of stock while bypassing regulatory agencies such as the U.S. Securities and Exchange Commission. However, security coins will need regulatory approval in the future once regulatory agencies begin to prosecute those who fail to distribute company equity in a legal manner. Utility coins, on the other hand, represent access to a future product or service, often at a rate discounted from the future sale price. For example, Filecoin provides utility coins for those who pledge to outsource unused hard-drive space for network usage, and in return they can exchange their filecoins for discounts on storage space elsewhere.
Different distribution mechanisms: The distribution model of Bitcoin is “proof of work”. On the Bitcoin blockchain network, network users (also known as “miners”) who solve complex mathematical computing problems earn Bitcoin by solving the problems first. However, altcoins such as Ether that operate on the Ethereum network utilize “proof of stake”. In a “proof of stake” network, users receive Ether as transaction fees by storing blocks holding transaction data.
Scamcoins: The contemporary historical moment is a proverbial Wild West for cryptocurrencies; with this moment comes a number of fraudulent get-rich-quick attempts from scammers. Want to prevent falling prey to an altcoin? Look for new coins with three components:
1.) A Strong Founding Team and Advisors: Coins created by reputable leaders with technical and business experience are likely more trustworthy than those without (or those who have anonymized their founding team)
2.) Intuitive Functionality: Does the altcoin’s value proposition make sense? Is it different enough from major cryptocurrencies? If so, the coin is probably a safer bet than one that does not generate any novel value.
3.) Broad support: Bitcoin has a number of volunteer developers working to maintain its blockchain. Although many coins will not have such extensive support, knowing that a team of people are actively working to ensure that the coin network is running well is a key factor in determining its authenticity.