What Are Altcoins and Should You Invest In Them? | Investing 101

Altcoins are any cryptocurrency that aren’t Bitcoin.

These coins were created after Bitcoin and often present themselves as better alternatives to the premier cryptocurrency. Altcoins make up nearly 40% of the total cryptocurrency market, according to CoinMarketCap.

“With more than 5,000 altcoins out there, it is safe to say that most of them will never be able to materialize into anything useful or provide substantial returns in the long term,” says Ben Weiss, chief operating officer of CoinFlip. “Of course, there are many promising altcoins out there that help facilitate new and exciting advances in blockchain technology like Ether and Chainlink, both of which strive to bridge the gap between blockchain tech and real-world applications.”

That said, altcoins are incredibly risky investments. You may be more likely to lose than win on an investment if you don’t do adequate research. Before you consider putting your hard-earned savings at risk by investing in altcoins, make sure you understand the risks and know just what you’re getting into.

Should You Invest In Altcoins?

Cryptocurrencies have a certain allure as investments.

“Altcoins offer an opportunity in that they have a much higher upside in terms of percentage gain,” Weiss says. “On the other hand, they also have a much higher risk.”

He points to Dogecoin as an example. The cryptocurrency took off in value in late January 2021 seemingly for no reason other than people started buying it, causing the altcoin to go viral. Such investments can fall out of favor as quickly as they fall into it.

“There is a saying that time in the market beats timing the market, meaning timing trades is difficult,” he says. It’s better to invest in something you believe in for the long run than hop along for the ride on something experiencing sudden popularity because you risk losing a lot when a pullback inevitably happens.

“If you are investing in altcoins for the long haul, you must truly believe in what you choose as a good investment,” Weiss says. “Otherwise, you’re just gambling.”

So how can you tell if an altcoin is a good investment? The simple answer, according to Ryan George, is you can’t. The chief marketing officer at Docupace, which helps digitize operations in the financial advice and investment industry, says to be wary of anyone who tries to give you a definitive answer.

“But the same goes for nearly all securities investments,” George adds. “The key difference with altcoins is what protections are in place.”

When you invest in a security offered on a regulated exchange like the NYSE and Nasdaq, you have dozens of protections that have been built over 100-plus years of trading at your back, such as SIPC insurance. While some initial coin offerings are securities that fall under the U.S. Securities and Exchange Commission’s jurisdiction, many are not. What’s more, even those that do fall under SEC regulation can still pose significant risk of fraud.

“There are many, many players in the altcoin space, and (it’s) nearly impossible to understand what is true (and) what’s the risk,” he says. “‘Unregulated’ is just another way to say not for the typical retail investor.”

In many cases, you may not even know where exactly your money is going when you invest in an altcoin or who is on the other side of the exchange. You need only do a quick Google search for “SEC and cryptocurrency” to see the continual stream of accusations of fraud or Ponzi schemes being filed.

“Your invested funds may quickly travel overseas without your knowledge,” SEC Chairman Jay Clayton wrote in a 2017 statement on cryptocurrencies and initial coin offerings. “As a result, risks can be amplified, including the risk that market regulators, such as the SEC, may not be able to effectively pursue bad actors or recover funds.”

These risks cannot be ignored by any investor. The fact is no one can really be an expert at investing in altcoins, as the cryptos are too new and different versions constantly emerge.

You should only invest in an altcoin that you understand and believe in through and through, Weiss says. “Any investor looking to buy altcoins should definitely be doing their due diligence and researching who is behind the coin and its value proposition.”

With proper research and due diligence, Weiss does believe it’s possible to find an altcoin that could be a worthwhile investment.

“A worthwhile altcoin to invest in should provide a service that you believe is unique to that particular token,” he says. “If you’re looking for a safer investment but want to get involved with altcoins, start with the top five or 10 coins by market capitalization, like Ethereum or Litecoin.”

Be careful with coins that have smaller capitalizations, he says. While some coins are finding new ways to use blockchain technology, their small capitalization makes many of them vulnerable to market manipulation and hacks.

Questions to Ask Before Investing In Altcoins

Clayton has shared several questions on the sec.gov website that investors should ask before investing in altcoins. For instance:

  • Who is issuing and sponsoring the altcoin? What is their background, and how are they making money on the transaction?
  • Where is your money going and what will it be used for?
  • How and when can you sell your investment? What will it cost to sell it?
  • What specific rights are you entitled to with this investment?
  • Are there financial statements available? And are they being audited? If so, by whom?
  • What legal protections may be available in the event of fraud, a hack or malware?
  • Who is responsible for refunding your money if something goes wrong? Will there be adequate funds to repay you if your rights are violated?

If you do invest in altcoins, make sure to only invest money you can afford to lose. Nothing is guaranteed in investing, least of all with unregulated and new investments like cryptocurrencies.

“Investing in various altcoins is almost like casting a vote for which technologies you want to see advance,” Weiss says.

George agrees that investing in altcoins is akin to putting your money where your beliefs about the future lie. “And the hard truth about beliefs is that they are just that: beliefs,” he says. “Thousands of years of currency fluctuations should tell us all we have no idea how this will shake out.”