What are the differences between stablecoins and Altcoins? The popularity of cryptocurrencies is ever-growing and there is a large variety of crypto coins that you can invest in, apart from the most common and popular one, Bitcoin.
There are lots of Altcoins and stablecoins that you can choose from in order to invest but for that you will first need to know the differences between them.
Going through this article will help you to understand the differences and also choose the right investment option both.
In the world of cryptocurrencies today, there are several options available to an individual to invest and grow their funds.
Some of these options are safe while a few are risky. Two of such productive options are stablecoins and Altcoins. Check out Differences Between Crypto Holding and Staking.
The Altcoins and stablecoins are designed to deal with the volatility of crypto coins. This is done by tying the value of the coins to an underlying commodity, index, or security.
The stablecoins can be asset-backed or not asset-backed which are not very famous but use the Seigniorage Shares System which is why these coins are also called the Seigniorage-style stablecoins or non-collateralized stablecoins.
These specific types of coins have their value regulated by their supply and do not need any collateral. As for the Altcoins, anything apart from Bitcoin falls under this category.
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7 Differences Between Stablecoins and Altcoins
It is quite natural that most of the crypto users, especially the beginners in this field, wonder which among the stablecoins and Altcoins they should invest in.
If you are one of them, please be informed that it is important that you make your choice according to your specific needs.
However, if you do not know the difference between the two you will not know which of these two will be able to meet all your needs.
Knowing this and by making a wise decision you can maximize your profits. Here are a few significant differences for your knowledge.
1. Definition and Characteristics
As said earlier, the price of those crypto coins that are tied to another type of crypto coin and are called cryptocurrency-backed stablecoins, or fiat money that are called fiat-backed stablecoins or even any other commodity for trading such as valuable metals that are called asset-backed stablecoins. All these have different characteristics and are quite significant and important in the crypto market.
On the other hand, all other types of crypto coins other than Bitcoin are called Altcoins or Alternate Coins. The main types of Altcoins are stablecoins, security tokens, utility tokens, and more.
A few examples of Altcoins are Dogecoin, Litecoin, Ethereum, Namecoin, Peercoin, Monero, Cardano, and others. However, the characteristic features of the Altcoins somewhat resemble that of the Bitcoin.
In spite of that, there are also a few other specific features of the Altcoins that are poles apart from Bitcoins. For example, these Altcoins have additional capabilities like using smart contracts which makes them significantly different from Bitcoin.
2. Types and Significance
There are thousands of different types of Altcoins available in the market and every day more and more Altcoins are being developed and introduced. However, all of these coins fall under these specific categories which differ in value as well as in functionality.
There are the mining-based Altcoins that you can earn by mining which is actually using your computing power to solve a complex mathematical problem and earn coins in return for successful unlocking and creation of a new block on the chain. A few mining-based Altcoins are ETH and LTC.
There are security tokens that are tied to a specific business and are typically released through an ICO or Initial Coin Offering where the investors put in their money to fund the venture and are promised some coins in return for it. Two of the most popular security tokens are Monero and Dash.
The utility tokens found in the market are very niche and are typically used to fund the network in exchange. It guarantees the investors of the power to use the products and services of the particular network.
However, these tokens will not guarantee any dividends like the security tokens in the future. Instead, the value of these tokens goes up when the demand for them is more than its supply. A few of the utility tokens include Timicoin or TMC and FunFair or FUN.
In comparison, the stablecoins can be grouped into three major types according to their design.
The fiat-collateralized is the simplest stablecoin version where every stablecoin is created in that currency. The issuer of the coin carries out both liquidation as well as production of the coin.
In this type of coin there is an equal amount of fiat held as a reserve in the central banks safely. The price remains constant because you can exchange the coin for fiat for an equal amount or vice versa with the issuer.
However, the only problem with these coins is that everything depends on the issuing party that needs to be regulated properly and should honor deposits and withdrawals made just as it is expected.
A few well-known fiat-collateralized stablecoins are Tether or USDT, TrustToken or TUSD, Paxos or PAX, Gemini or GUSD, and Circle or USDC.
The non-collateralized stablecoins are typically not backed by any collateral and therefore are very different in design in comparison to the traditional stablecoins.
The operating procedure of these specific types of stable coins is just like the fiat currencies. This means that it is governed and regulated by a sovereign body such as the central bank of the country.
The unique thing about these specific types of stablecoins is that these can be minted more when the prices tend to cross the $1 mark and bought back when it falls below it. Two of the most well-known non-collateralized stablecoins are Basis and Carbon.
There are also the crypto-collateralized stablecoins that are tied with other crypto coins such as Ether, just as the name suggests. This acts as collateral for the coins.
However, these specific types of stablecoins need to use a specific set of protocols since the values of the crypto are themselves not stable. The set of protocols ensure that the price of the stablecoin issued is constant at $1. A well-known crypto-collateralized stablecoin is MakerDAO.
3. Volatility Factor
One significant difference between stablecoins and Altcoins is that the stablecoins are more stable and therefore do not experience any rise in their values. The stability in their value comes from the fact that these coins are externally restrained by a budget of funds.
On the other hand, in comparison, the Altcoins can experience rises in their value due to their volatile nature. However, there is one thing that you should keep in mind at this point which is that the stablecoins are also a type of Altcoin.
4. Advantages
There are several advantages of stable coins that may make you feel that these are more useful. These are lower fees, faster financial process, borderless system, easily programmable, a lot of transparency, and offering the ability to the users to make new changes in accordance with the changing requirements.
Apart from low fees and secure transactions, using stablecoins will also allow you to stay somewhat, if not completely anonymous. These asset-backed coins also help in adoption because these are more acceptable and easier to bridge from fiat to crypto use.
The fiat-related regulatory measures also make these coins much more reliable and it is a safer investment option since these are normally linked to a larger source. These are also quite consistent in nature and performance.
On the other hand, the advantages offered by the Altcoins are quite different, though not all, and it includes exclusive functionality, lower transaction fees, better solutions provided and more.
The Altcoins will also offer a lot of room to grow your crypto portfolio. Apart from that, the Altcoins act as a backup when Bitcoin fails and when you use distinctive functions such as Ethereum it will also act as a developer platform.
5. Disadvantages
The disadvantages of stablecoins include less return on investment provided, the need for a third party and external audits, and more. Apart from that, the stablecoins will never experience a massive spike and will be locked to an external source.
In comparison, the disadvantages of Altcoins are its limited usage and less exposure, volatile values, and others. The Altcoins also have less name value which makes these coins an alternative choice to Bitcoin.
6. Purpose
The primary purpose of creating Altcoins is to remove the limitations that are associated with Bitcoin. One of the specific limitations is the consensus method which is typically time and energy consuming.
On the other hand, the main intention of creating the stablecoins is to offer the users a more stable solution to invest in.
7. Few Other Notable Differences
There are a few other differences between stablecoins and Altcoins that you should not be unaware of as well.
Though the first stablecoin Tether was created in late 2014, most of the stablecoins that were designed after that were introduced in early 2015. On the other hand, according to the available records, the Altcoins were introduced in April 2015 and the first Altcoins that was introduced in the market was Namecoin.
The Altcoins are a specific type of cryptocurrency and are an independent entity whereas the stablecoins are a specific type of Altcoin.
Stable coins are typically considered to be an investment and not as a currency like the Altcoins due to the fact that these coins are typically locked with an external asset.
Which is More Useful – Stablecoins and Altcoins?
When you want to make an investment decision and choose between Altcoins and stablecoins, it should ideally depend on the current market conditions.
However, it should also depend on the payment you make, the terms you wish to choose as well as your personal preferences.
When you consider the Altcoins, these can prove to be useful because the DeFi ecosystem created brings the entire financial system of the world together.
With the acceptance of such coins gradually increasing with each passing day, you can not only use them to take loans but they will also spread across several different institutions such as real estate, the health sector, and many others.
However, you must keep in mind that Altcoins are more prone to price fluctuations. This will make it quite difficult to store and use these coins as a means for a transaction.
In addition to that, it can also be said that the Altcoins are a bit overshadowed by Bitcoin and therefore these coins typically happen to be the second preference.
Nevertheless, these are old perceptions now because today these perceptions are not as relevant as they were before due to the fact that Altcoins like Ethereum are growing in value at a rapid pace and are being adopted all over the world at an equally fast pace.
Stablecoins, on the other hand, if considered will provide you with all the benefits that are usually associated with fiat currencies and cryptocurrencies.
This means these coins will offer you the security and privacy features of the digital currencies as well as the stability in price just like the fiat currencies.
This typically means that the stablecoins are good to use by the traders for making a transaction since they will not have to worry about any price fluctuations.
At this point, however, it is important to note that the stablecoins are typically linked with an external asset.
This is why these are good for investments and not as currencies to be used for transactions, as said earlier.
This is also one of the significant reasons why Tether is often considered to be a resource to store fiat currencies in cryptocurrencies.
Therefore, most of the traders find it easy and reasonable to store their money in stablecoins till the time they need to convert these coins into fiat currencies or any other type of crypto coins such as Ethereum.
The primary reason behind this is that the stable nature of these coins protects against price volatility and inflation which cryptocurrencies and fiat currencies are bound to experience.
This means that you can use the stablecoins as a store of value for their efficient functionality.
On the other hand, if you want to trade, you will want to do so with coins that are volatile in nature because these can produce profitable results due to the price fluctuations.
In such situations, your choice should typically depend on your specific needs and expectations.
Altcoins that function on similar core principles as Bitcoin differ from it in the process of mining.
It uses the Proof of Stake consensus in which the investor has the mining power which is directly proportional to the number of coins in possession.
Working on the blockchain technology, the process not only reduces the time required to create new blocks or to validate new transactions but also makes the records of the same immutable.
Another useful feature of the Altcoins is that these coins can be mined from any given computer.
This makes the mining process even more convenient and affordable for all users since they do not need to invest in an expensive mining machine as they may need in order to mine Bitcoin.
This is one of the most significant benefits of Altcoins which has attracted a lot of investors and made the crypto market much more competitive and bustling.
As for the stablecoins, the price stability comes from its link with Dollars and other types of fiat currencies as well as precious metals.
This makes trading stablecoins much more profitable because these are not volatile.
This is a primary requirement to make a profit through crypto trading. Altcoins and Bitcoin may be a good choice to make bigger profits because they are highly volatile but it is the same trait that makes them a lot riskier than stablecoins as well.
Most of the market experts think that the stablecoins are the safest to invest because they act more like a staking pool that provides a high rate of interest of more than 10% annually.
Also, the circulation of some of the stablecoins is regulated precisely by using proper and innovative algorithms that help in managing the supply and demand of the coins so that it matches with the amount held in reserve.
This means that stablecoins are not only a good investment option but can also be used as a good hedge for the investment.
However, just like any other investment, you will need to do proper research and your due diligence before making a move. This will significantly enhance your chances to earn higher returns on your investment.
Conclusion
Altcoins or stablecoin are quite evolving and fruitful options for investment. However, to make it lucrative you must be knowledgeable and cautious when you make an investment. Knowing their differences is one good step to start with.
I have special interest in crypto and intend to help common people to gain knowledge about the digital asset as well as its potential. Follow Me at Linkedin.
