This article was contributed by Yu See Chu, Institutional Account Manager at Bitstamp.
It is the stuff of every investor’s wet dream: invest a sum of money into an asset at a dirt-cheap price, wait for the price of said asset to jump 100x overnight and walk away with a windfall. While we’ve all heard about someone’s friend’s friend who struck gold putting money into a relatively unknown altcoin, such stories — even if they’re true — are far and few between. They certainly do not hold up as exemplary ways to invest one’s hard-earned money.
What Is An Altcoin?
An altcoin refers to any cryptocurrency other than Bitcoin.
By market capitalisation, Ethereum is the largest altcoin. Apart from the actual utility enabled by certain altcoins, people invest in these assets for various reasons.
One, they are looking to diversify their crypto portfolios. Two, they are attracted by the potential for higher returns; some altcoins may give investors higher returns compared to more established cryptocurrencies like Bitcoin. Three, some investors believe they are backing the innovative and unique features offered by a certain altcoin and see their investment as a way of learning about and experimenting with blockchain technology.
Finally, some investors are driven by FOMO (fear of missing out) — all this, coupled with the fact that liquidity on such altcoins is often low, can result in sudden price spikes and wild price swings making it highly speculative and risky.
While Bitcoin is currently priced in the region of US$24,000* (at the time of writing this article), the prices of altcoins vary. But just because you can buy an altcoin for less than a dollar, does it mean you should?
A Coin By Any Other Name Would Still Be As Useful?
There are as many as, if not more than, 1,000 altcoins in the market today, each created for a different purpose.
In an ideal world, the team behind an altcoin is focused on building the project and proving its utility. Supporting an altcoin goes beyond just price and investors who only see that are, in essence, speculating; they are looking to make a quick profit.
Not all altcoins are created to support a sound project. A shitcoin is a term used on a coin whose primary purpose is to scam people out of their money. Memecoins — also a subset of altcoins — are coins that have gained prominence and perceived value in their identity as part of a joke.
By owning these memecoins, members may also become part of a larger community in which they are able to find other like-minded individuals. Members might know there is little practical function to certain memecoins but might simply enjoy being part of the joke.
Is Listing A Stamp Of Approval?
While investors can find a myriad of altcoins on crypto exchanges, you should know that listing is not a guarantee of profits. Red flags are hard to catch. Also, while a coin’s price is an indication of interest, it is not necessarily indicative of the quality of the team behind it.
So, why would an exchange list a coin that may or may not be useful to investors or the ecosystem?
Some exchanges charge listing fees so the more coins they list, the more money they earn. At Bitstamp, we remove this conflict of interest by not charging or accepting listing fees.
In addition, Bitstamp has an internal process to assess if a token should be listed or not. This follows a firmly established Digital Currency Asset Listing Framework and it is used to assess and review the background of the digital asset and its creators.
This process is a comprehensive assessment that covers compliance, legal, business, financial, operational, technology, reputational and general risk factors before a token is approved for listing on Bitstamp’s exchange. It is worth noting that overarching importance is placed on the legal and compliance sets of criteria to help determine if the asset is in compliance with Singapore Law and does not contravene AML / TF measures.
While it means not every token gets listed, our partners and customers can be assured that we don’t take any shortcuts when it comes to protecting them.
Ultimately it continues to be important for you to DYOR (do your own research) before putting money into certain altcoins.
Should You Choose To Proceed, Know This
If you’re still interested in including some altcoins in your portfolio, there are several things you should keep an eye out for:
1. Reputation of the founders – Unless you know the founders of the project personally or consider yourself a sort of “industry insider”, it is difficult to ascertain if the founders are credible or not. Media coverage and appearances at conventions don’t equate to credibility as seen in the OneCoin scam involving “cryptoqueen” Ruja Ignatova.
2. Market access – If an altcoin can only be purchased via some obscure decentralized app or suspicious website, rather than a major regulated exchange, it is possible that the project is a complete work of fiction, and you might just have become an unknowing member of a rug scheme.
3. The tech – The engineering team and the quality of code behind the coin. How a coin is built can potentially leave it susceptible to bad actors. It is also prudent to make sure that a third party has audited and reviewed the altcoin you’re interested in buying to uncover issues in a coin’s development, its network or its funds.
One thing’s for sure: altcoin investing is not for anyone. There are all sorts of altcoins and their uses run the whole gamut. Buying an altcoin purely from a price angle is speculation and exposes you to many risks. If you have neither the time nor the inclination to do your own research or learn more about a project, my advice is to steer clear of such volatile investments and invest only as much as you can afford to lose.
* Many have the impression that you must buy a whole Bitcoin to get started in crypto investing. That’s incorrect — you can buy a fraction of the asset.