These coins were created after bitcoin and often present themselves as better alternatives to the first crypto-currency. Altcoins account for almost 40% of the total crypto-currency market, according to CoinMarketCap.
“With over 5,000 altcoins in circulation, it’s safe to say that most of them will never be able to materialize into anything useful or provide substantial returns over the long term,” says Ben Weiss, COO of CoinFlip. “Of course, there are many promising altcoins that are helping to facilitate new and exciting advances in blockchain technology, such as Ether and Chainlink, both of which are striving to bridge the gap between blockchain technology and real-world applications.”
That said, altcoins are incredibly risky investments. You’re more likely to lose than gain on an investment if you don’t do proper research. Before you consider putting your hard-earned savings at risk by investing in altcoins, make sure you understand the risks and know exactly what you’re getting into.
Should you invest in altcoins?
Crypto-currencies have a certain appeal as investments.
He takes the example of Dogecoin. The crypto-currency rose in value at the end of January 2021, seemingly for no reason other than the fact that people started buying it, which made altcoin go viral. Such investments can fall from grace as quickly as they entered it.
It’s better to invest in something you believe in for the long term rather than go with the flow of a product that experiences sudden popularity, as you stand to lose a lot when a downturn inevitably occurs.
“If you’re investing in altcoins for the long term, you have to really believe in what you choose as a good investment,” says Weiss. “Otherwise, you’re just gambling.”
How do you know if an altcoin is a good investment?
The simple answer, according to Ryan George, is that you can’t. The marketing director of Docupace, which helps digitize operations in the financial advisory and investment sector, says to be wary of anyone who tries to give you a definitive answer.
When you invest in a security offered on a regulated market like the NYSE and Nasdaq, you have dozens of protections that have been built over 100 years of trading on your back, like SIPC insurance. While some initial coin offerings are securities under the jurisdiction of the U.S. Securities and Exchange Commission, many are not. What’s more, even those that fall under SEC regulation can still present a significant fraud risk.
“There are many, many players in the altcoin space, and (it’s) almost impossible to understand what’s true (and) what the risk is,” he says. “‘Unregulated’ is just another way of saying it’s not for the typical retail investor.”
In many cases, you may not even know where exactly your money is going when you invest in altcoin or who’s on the other side of the exchange. Just do a quick Google search on “SEC and crypto-currencies” to see the steady stream of accusations of fraud or Ponzi pyramids being made.
“An altcoin worth investing in must 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 in altcoins, start with the top five or ten coins by market capitalization, such as Ethereum or Litecoin.”
Be careful with coins that have a small market capitalization, he says. While some coins are finding new ways to use blockchain technology, their low capitalization makes many of them vulnerable to market manipulation and hacking.
Questions to ask before investing in altcoins
Clayton shared several questions on sec.gov that investors should ask before investing in altcoins. For example:
Who is issuing and sponsoring the altcoin? What’s their track record, 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? How much will it cost to sell it?
What specific rights does this investment give you?
Are financial statements available? Are they audited? If so, by whom?
What legal protection is available in the event of fraud, piracy or malware?
Who is responsible for refunding your money if something goes wrong? Will there be sufficient funds to reimburse you if your rights are violated?
If you invest in altcoins, make sure you only invest money you can afford to lose. Nothing is guaranteed when it comes to investing, and even less so with new, unregulated investments like crypto-currencies.
