Over the past several years, the digital asset ecosystem has seen a substantial rise in both the supply and demand of altcoins—common estimates place the total between 9,000 and 20,000— all varying in utility, value, and overall adoption.1 While each altcoin seeks to offer something unique to its users, it is helpful for investors to review how the category itself compares to bitcoin when considering either as an investment opportunity.
Defining an Altcoin
“Altcoin” is a combination of two words: “alternative” and “coin.” The category generally encompasses all digital assets that are not bitcoin—including the popular currency ETH (ether). Each altcoin can be grouped into one of several subcategories based on its function: payment tokens, stablecoins, meme coins, privacy coins, utility tokens, play-to-earn tokens, and governance tokens.
Many altcoins are created specifically to address the perceived limitations of existing digital assets. For example, ether—one of the best-known altcoins and the native token of the Ethereum blockchain—was first conceived in 2013 to help provide developers the means to build decentralized apps using smart contracts. However, there are also altcoins that are not derived from Bitcoin or Ethereum and instead utilize their own blockchain and consensus mechanisms built for a specific use case or community.
Understanding the Rising Popularity of Altcoins
With thousands of altcoins in circulation, the term serves as an umbrella for a diverse array of digital assets, each with its own purpose and underlying technology. With that said, many altcoins share some key similarities that have potentially contributed to the class’s growing popularity, including:
- Innovation and experimentation: Developers can explore new ideas including consensus mechanisms and governance models, expanding the boundaries of what is possible for decentralized finance.
- Accessibility: Given the volume of altcoins, some retail investors consider them to be a way to experiment with or gain exposure to digital assets despite the potential volatility.
- Diverse use cases: Altcoins offer a wide variety of use cases, ranging from stablecoins—which peg their value to an underlying asset and are backed by reserves such as fiat currencies—to play-to-earn coins that serve as in-game currencies.
Although each altcoin varies in its utility and overall adoption rate, these assets could continue playing a prominent role in the digital asset ecosystem.
Identifying Key Differences between Bitcoin vs. Altcoins
Like bitcoin, altcoins leverage blockchain technology to establish an incorruptible, distributed public ledger. However, regardless of which type of altcoin bitcoin is compared to, the latter has several irreplicable differentiators:
- Longevity: Bitcoin was the first digital asset, originally introduced by its pseudonymous creator in 2009. Now, 15 years later, it is the most widely known digital asset.
- Value: Bitcoin is the largest digital asset by market cap, at approximately $1.3 trillion and comprises over 50% of the entire digital asset market cap.2
- Volatility: Bitcoin exhibits lower volatility compared to other digital assets due to its prominence and greater market liquidity. Altcoins are often more volatile, experiencing sharp price fluctuations influenced by news, technological advancements, and shifts in investor sentiment.
Overall, bitcoin enjoys a unique position as the first-ever digital asset. While many prominent altcoins have cultivated growing followings, there is the possibility that newer, less popular coins will fail, whereas bitcoin’s 15-year track record leads many to believe its success could continue.
Positioning Bitcoin as an Aspirational Store of Value
Many altcoins were created for a specific purpose or in response to an existing need. Comparatively, as Bitcoin’s ecosystem matures, it may simultaneously serve many functions—either foundationally or through incremental layers—as its utility is not predicated on serving a single purpose. Instead, bitcoin has the potential to be used as a store of value with the ability for the ecosystem to innovate as the network continues to mature.
Bitcoin’s programmed characteristics make it fundamentally different from any existing altcoin. Given these inherent differences, some members of the digital asset community believe no other digital asset is likely to soon improve upon bitcoin strictly as a monetary good because bitcoin is currently the most—relative to existing alternatives—secure, decentralized, and sound digital money.
Adding Digital Assets to a Portfolio: Where to Begin
Due to bitcoin’s inherent differences from all other coins, investors should leverage two distinctly separate frameworks when considering an investment in the digital asset ecosystem. This includes one framework examining the inclusion of bitcoin as an emerging monetary good, and a second considering the addition of other digital assets such as altcoins.
For a deeper look into why investors should consider bitcoin separately from other digital assets—and how to potentially leverage the above frameworks to do so—read our earlier report, “Bitcoin First Revisited.”
1https://www.coingecko.com/en/all-cryptocurrencies
2https://coinmarketcap.com/currencies/bitcoin/
The information herein was prepared by Fidelity Digital Asset Services, LLC (“FDAS LLC”) and Fidelity Digital Assets, Ltd (“FDA LTD”). It is for informational purposes only and is not intended to constitute a recommendation, investment advice of any kind, or an offer to buy or sell any asset. Perform your own research and consult a qualified advisor to see if digital assets are an appropriate investment option.
Digital assets are speculative and highly volatile, can become illiquid at any time, and are for investors with a high-risk tolerance. Investors in digital assets could lose the entire value of their investment.
Custody and trading of digital assets are provided by Fidelity Digital Asset Services, LLC, which is chartered as a limited purpose trust company by the New York State Department of Financial Services to engage in virtual currency business (NMLS ID 1773897). FDA LTD relies on FDAS LLC for these services. FDA LTD is registered with the Financial Conduct Authority under the U.K.’s Money Laundering Regulations. The Financial Ombudsman Service and the Financial Services Compensation Scheme do not apply to the cryptoasset activities carried on by FDA LTD.
To the extent this communication constitutes a financial promotion in the U.K., it is issued only to, or directed only at, persons who are: (i) investment professionals within the meaning of Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the "FPO"); (ii) high net worth companies and certain other entities falling within Article 49 of the FPO; and (iii) any other persons to whom it may lawfully be communicated.
This information is not intended for distribution to, or use by, anyone in any jurisdiction where such distribution would be contrary to local law or regulation. Persons accessing this information are required to inform themselves about and observe such restrictions.
FDAS LLC and FDA LTD do not provide tax, legal, investment, or accounting advice. This material is not intended to provide, and should not be relied on, for tax, legal, or accounting advice. Tax laws and regulations are complex and subject to change. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Digital Assets or its affiliates. Fidelity Digital Assets does not assume any duty to update any of the information.
Fidelity Digital Assets and the Fidelity Digital Assets logo are service marks of FMR LLC.
© 2024 FMR LLC. All rights reserved.
1148116.1.0
