Altcoin vs. Stablecoin: Pros and Cons  

A cryptocurrency "compass"An altcoin has one of two definitions. It is either any cryptocurrency that is not Bitcoin, or any cryptocurrency that is neither Bitcoin nor Ethereum. Regardless of which definition you pick, this term refers in general to all of the “other” cryptocurrencies on the market. One segment of altcoins is a specific type of cryptocurrency called a stablecoin. A stablecoin is a type of cryptocurrency with a set, defined value. While not as useful for investing, the fixed price of a stablecoin makes it useful for cryptocurrency transactions. Here’s how they compare.

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What Is an Altcoin?

The phrase altcoin means any cryptocurrency that is not Bitcoin. It can also mean any cryptocurrency that is not Bitcoin or Ethereum, although that usage is much less common.

Cryptocurrency is dominated by one asset. At time of writing, the cryptocurrency market was worth more than $2.6 trillion in overall value. Of this, Bitcoin alone was worth more than $1.2 trillion. Bitcoin has always dominated the total cryptocurrency market. Often it is an overwhelming majority, with Bitcoin generally being worth between 45% and 70% of all crypto value at any given time.

Bitcoin also dominates the conversation around cryptocurrency. It was the first cryptocurrency issued, and it introduced the concepts of both blockchain and crypto to the wider world. Crypto is so thoroughly dominated by Bitcoin that, for many people, the two ideas are interchangeable.

  • The Lesser Use of Altcoin – While the value and culture of cryptocurrency is dominated by Bitcoin, the second-largest currency on the marketplace is Ethereum. Like Bitcoin, the comparison is not even close. At time of writing Ethereum was worth approximately 20% of the entire cryptocurrency marketplace, and this is around where its value usually fluctuates. Ethereum is also an important example of a transactional cryptocurrency. This asset is built to execute contracts and help computers share resources across a decentralized network. Many, if not most, transactions in the cryptocurrency and blockchain community take place using Ethereum’s network, making it a backbone of this technology sector.

The dominance of Bitcoin led to the term “altcoin,” which refers to any of the thousands of other cryptocurrencies for sale and trade. In 2021 investors could trade anywhere from 2,000 to 12,000 different cryptocurrencies. The speed, volatility and chaotic nature of this marketplace makes it very difficult to track how many cryptocurrencies actually exist at any given moment. In particular, without a centralized marketplace it’s all but impossible to determine exactly how many cryptocurrencies are being traded at one time.

All of them, however, make up the category known as altcoins.

What Is a Stablecoin?

A stablecoin is a type of cryptocurrency where each coin’s value is fixed to an external asset. By definition, any stablecoin is also an altcoin. The value of a stablecoin can be pegged to any asset, although most stablecoins are defined by the U.S. dollar or the euro.

“Fixing” one asset to another means that you always ensure the two values keep the same relationship. For example, say that you release a stablecoin called XYZ Coin. You decide to fix (or “peg”) the price at 1 XYZ Coin to $1. This means that once you release your coin, you intervene in the market as necessary to ensure that the price of the asset is always as close as possible to $1. This is a practice shared by some national economies around the world. While not common, developing nations will sometimes fix their national currency to a larger currency in order to avoid market disruptions. As with cryptocurrency, it is most common for nations to fix their money to the U.S. dollar.

There are several ways that a cryptocurrency project can ensure the stability of its value. Usually the most important step is a combination of guaranteed buyback and inflation production.

Take our example above. Say you have released XYZ Coin and would like to ensure that it remains at $1. First, you might guarantee to the market at large that you will always buy back XYZ Coins for exactly $1. This is called being “backed” by an asset. It means that you can convert between the two assets at a guaranteed exchange rate because the secondary asset literally exists in an account for that purpose.

Backing sets a minimum price for an asset, since anyone who wants to sell their coins least can always sell them to you for $1. Then, you might monitor the market price of XYZ Coin. Whenever the price climbs above $1 you might release more coins, expanding the supply and therefore reducing the price. However, since you have guaranteed the minimum price-per-coin, there’s no risk of inflation pushing the price below $1.

This is not, however, an exact science. While backing an asset is the most reliable way to ensure stability, it also requires enough cash reserves to make good on that $1 per coin guarantee. Given the largely unregulated atmosphere in which cryptocurrency operates, many industry analysts suggest that leading stablecoin projects actually have far less cash on hand than they claim. This could lead to a collapse of the stablecoin if people ever try to sell it back and cannot receive their guaranteed purchase price.

The alternative is called algorithmic stability. In this process, a stablecoin will attempt to regulate its price through pure supply. When the coin’s price drops too low, the project will buy back and remove its coins from circulation to tighten the supply. When it rises too high, the project will release new coins into circulation. An algorithmic approach is cheaper than backing, but it also guarantees some degree of variation in the stablecoin’s price and may not always keep up with the speed of market pricing.

Why Do Altcoins Matter?

While a minority of the market by value, by definition altcoins make up almost the entire cryptocurrency marketplace. This makes them essential to any interested investor. In particular, altcoins are valuable to investors looking for opportunities such as:

More Affordable Investments

Altcoin key on a PC keyboard

As the market leaders, Bitcoin and Ethereum are both expensive assets. At time of writing Ether (the coin associated with Ethereum) sold for more than $4,200 per token, while Bitcoin sold for more than $62,000 per token. This can deter many investors who don’t want to buy into such a high-priced asset. Altcoins, on the other hand, tend to be inexpensive. Other cryptocurrencies can sell from hundreds of dollars per token to a fraction of a cent. This allows investors to access cryptocurrency without having buy high-priced assets.

Emerging Assets

By definition any new cryptocurrency will be an altcoin. Investors who would like to buy into a new or innovative product will need to track altcoins. This is particularly important for investors seeking potentially explosive returns. The kind of gains that come from investing early in an undiscovered asset can only come from altcoins. This is as opposed to Bitcoin and Ethereum. Although these assets are both highly volatile, they are as established as any cryptocurrency can get.

Portfolio Diversity

Most cryptocurrency investors put their money into Bitcoin and, to a lesser extent, Ethereum. This is why these two assets dominate the cryptocurrency market. Chasing this value also will limit your investment portfolio. In order to diversify your assets, you will need to invest in altcoins. There are, however, limits to how useful diversification can be in cryptocurrency. Most of the market still moves in tandem with Bitcoin, meaning that even a well-diversified portfolio will still likely mimic that one asset. This doesn’t mean that diversification is useless, but it is worth being aware of.

Why Do Stablecoins Matter?

Stablecoins are … difficult. In fact, they encapsulate one of the biggest problems with the cryptocurrency market as a whole.

The idea behind stablecoins is that they allow you to move money in and out of cryptocurrency. Despite the promises of industry evangelists, no cryptocurrency has yet emerged as a true spendable asset. Prices are too volatile for either users to spend or merchants to accept, and it generally takes a long time to process a transaction by modern standards. This is also a problem if you want to cash out your cryptocurrency. Unless you transfer all of your holdings to cash all at once, you’re left with an asset that might be worth radically different values from day to day.

As a result many traders convert their investments to a stablecoin, then hold those stablecoins until they want spendable money (such as dollars and euros) or until they want to reinvest in other cryptocurrency assets. The promise that a stablecoin will hold one, fixed value allows that system to work.

This makes stablecoins a potentially essential utility for cryptocurrency investors. However, they are not an investment asset in and of themselves, since the value of a stablecoin will rarely fluctuate. If it did, that would create an almost immediate opportunity for arbitrage. To see how that works, let’s look at an extreme example. Say you had the following trade values for XYZ Coin:

  • 1 XYZ Coin::$1.
  • 1 XYZ Coin::0.5 Bitcoin
  • 1 Bitcoin::$57,022 (accurate at time of writing)

This means that for $1 you can buy one XYZ Coin and vice versa. For one XYC Coin you can buy half of a bitcoin, and one bitcoin would buy you two XYC Coins.

In this case, you could use $1 to buy an XYZ Coin. You could then trade that XYZ Coin for 0.5 Bitcoin. Then, lastly, you would trade your 0.5 Bitcoin for $28,511. This would effectively make each XYZ Coin worth $28,511. Since that can’t happen (the price of an XYZ Coin to the U.S. dollar is fixed), instead the market would shift until an XYZ Coin was priced at about $1 worth of Bitcoins. This process is called arbitrage. While it rarely plays out to such extremes, even very small price fluctuations are usually smoothed out quickly by high-volume traders.

While critical to any kind of frequent cryptocurrency investment, at the same time many stablecoins have proven unreliable. Given the largely unregulated nature of cryptocurrency, stablecoin companies have drawn increasing scrutiny. Market watchers have accused them of not actually having the financial assets necessary to guarantee the pegged value that their currency promises, instead coasting by in an unregulated environment where nobody looks too closely at their books.

This is potentially disastrous for investors who move their money in and out of stablecoins on a regular basis. Like real currency, a cryptocurrency that cannot back its guaranteed price will almost certainly collapse in value. For a utility currency built to make the system work, that’s a serious potential problem.

The Bottom Line

Glowing bitcoinAltcoins are a catchall term that means any cryptocurrency that is not either Bitcoin or Ethereum. They make up almost the entire cryptocurrency market by numbers, although not by value or volume. Most altcoins are speculative investment assets that give you the chance to invest in a cryptocurrency without the high price tag of Bitcoin. Stablecoins, on the other hand, are utility assets that investors use to move their money in and out of crypto.

Tips on Investing

  • Cryptocurrency is volatile, but that doesn’t mean it’s bad. Volatile assets can go up just as fast as they go down. Still, before you dive into this mercurial marketplace, you should consult with a financial advisor. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Do you know how much you’ll need to have saved for retirement? SmartAsset’s Retirement Calculator can help you estimate how large of a nest egg you’ll need to fund your retirement lifestyle.
  • Altcoins are one way to get new exposure to the cryptocurrency marketplace. They’re not the only way, however. Introducing the Bitcoin ETF, the first of its kind in the United States… and maybe a more stable way to start investing in this history-making asset.

Photo credit: Â©iStock.com/asbe, ©iStock.com/Arnon Thiankheaw,  ©iStock.com/onurdongel

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