Bitcoins, Altcoins and Stablecoins: How are they different?
It is important to distinguish between three major categories in the crypto world and understand each one of them.
Let’s start with the very first decentralized cryptocurrency bitcoin, which is the most valued and popular in cryptocurrency trading.
It was created as a reward for the process of mining in 2008 and to bypass the controls of the banking system. These are digital assets that are used as a medium of exchange for transactions, trading and for purchasing goods and services.
They work through cryptographic protocols and the transactions are recorded in a digital ledger called blockchain, without the presence of an intermediary.
A limitation of bitcoin, however, is the brainstorming necessary for the mining process to create blocks, which consumes tremendous time and effort.
Now as the crypto market pervaded the world, the need for creating other cryptocurrencies arose too, leading to the emergence of altcoins.
Altcoins are alternative cryptocurrencies to bitcoins, and thus the name. The largest altcoins in terms of market capital are Ethereum, Cardano and Binance. There are 9,000 such altcoins in the world being traded currently.
Altcoins work on the same core principles as bitcoins. They are based on blockchain technology that prevents the record of transactions from being manipulated or deleted. A digital wallet is needed to buy, sell and store Altcoins as well. They are also volatile in the face of market fluctuations.
However, altcoins differ from bitcoins in their process of mining called proof of stake, where the mining power of an investor is directly proportional to the number of coins they have.
The process reduces the time needed to create blocks and validate new transactions. For instance, a bitcoin takes 10 minutes to mine or produce 1 block or 1 bitcoin, whereas a litecoin takes 2.5 minutes to mine new coins, and a dogecoin can just take a minute to successfully mine any number of dogecoins. Some altcoins are also pre-mined like Ethereum and Ripple (XRP).
Altcoins can be mined from any computer, making mining more convenient unlike bitcoins that use expensive hardware to mine coins. Altcoins have attracted investors and created a bustling and competitive market in the world of cryptocurrency owing to these benefits.
The third most popular kind are stablecoins. Their name comes from the price stability they are known to provide besides security and privacy as they have combined properties of both cryptocurrency and fiat currency.
Fiat currencies are cryptocurrency whose price is pegged to fiat money such as dollars, rupees, or to exchange-traded commodities such as precious metals. Tether (USDT) and MakerDAO are examples of stablecoins.
Stablecoins are often viewed as an investment as they are tied to an external asset like legal tender. They are used by traders to store fiat currency before they are traded for another cryptocurrency or converted to fiat currency.
To sum up, stablecoins do not face volatility, which is a requisite for making profits in crypto trading. Given that altcoins and bitcoins are highly volatile, they are an exciting choice for booking large profits, though it makes them riskier too.