Altcoin Risks You Should Know About - Ofir Beigel

Alternative currencies (also known as altcoins) have become immensely popular over the past few years. Ever since bitcoin stormed onto the market and proved that non-government, peer-to-peer currencies can work, people have been trying to create alternative currencies, or “alt currencies” for short.

Some alt currencies have emerged as serious players, and while none have yet challenged bitcoin as far as leadership goes, they are worth keeping an eye on. Other alt currencies could actually be a scam or simply a wasted investment. With so many alt currencies flowing into the market you need to make sure you do your homework.

Bitcoin's total market cap now weighs in at about $10 billion dollars, making it by far the largest all digital currency. Still, bitcoin isn't the only member of the billion dollar club, with ethereum already having topped the one billion dollar mark. Meanwhile, ripple has reached about $300 million and litecoin is worth about $300 million.

There are tons of other alt currencies, however, that don't even break a million dollars in market cap. SaluS, BitBay, obits, and jinn are just a few of these lesser known alt currencies with market caps under a million dollars. These currencies are much higher risk as few people are actually using them.

Why Alt Currencies Are Becoming So Popular

Bitcoin does have its flaws. Many people are concerned that the 21 million cap limit on total bitcoins could eventually cause problems. Others have noted that bitcoin isn't exactly the most secure with numerous market exchanges and other organizations having been breached and scammed. Fears over mining costs and other risks also have people rightfully worried.

alt currencies can offer some advantages over bitcoin. Better technology, different supply mechanisms, different mining methods, there are many reasons to create alt currencies. For investors, alt currencies can also be attractive because they are cheaper. Everyone wishes they could go back to the time when bitcoins cost only a few cents. It's fair to wonder then if the next emerging alt currency will be the next bitcoin. If so and if you cash in at the right time, you could make a lot of money.

When looking at or purchasing Alts, however, you need to make sure that you do your due diligence. The people building alt currencies have a lot of incentive to push their coin as the next greatest thing. If their digital currency blows up, the owners will likely be able to cash in a lot of money. This means that the promoters will be pushing very hard to sell their Alts regardless of whether or not they are actually good investments.

Altcoins Can be Pump & Dump Coins

Perhaps the most serious risk of alt currencies is that they can be pump and dump scams. With a pump and dump scam, an investor will essentially try to drive the price of a certain asset up, then this investor will dump the assets themselves. So with alt currencies, somebody could create and promote the alternative currency. Then once prices get high, they can sell off all or part of their own holdings. Often, this results in a collapse of the asset that was being pumped up, but the person behind the pump and dump gets to cash in before prices collapse.

With lesser known and not widely used currencies, there is a serious risk that the creators of the currency are looking to create a pump and dump, or another type of scam. Of course, this doesn't mean that all alt currencies are scams, but you do need to exercise caution. Further, pump and dumps aren't the only type of scam.

Take OneCoin for example. The currency has been accused of being a multi-level marketing scam. The Bulgarian based alt currency does seem to have many flaws. Several of the project's leaders have been linked to other scams in the past. Further, technical details and transparency in general has remained largely elusive. Often, people and companies looking to create new alt coins will launch an ICO, or initial coin offering. This offering might include free coins, steeply discounted coins, and other incentives. They do this to strum up interest in their coins. In many cases, the ICO will be sponsored by a legitimate company with good intentions.

In some cases, however, it's little more than a scam. People will try to drum up interest in the coins, watch prices rise, and then sell off their own holdings of coins. This is a classic pump and dump scam, and can occur in many types of investment fields.

Usage Should be Your Ultimate Metric

If you're trying to determine whether or not an Altcoin has potential, the best metric is usage. How many people are using the alt coin in question? How many are companies are accepting it as payment? How big are trade volumes and other essential statistics?

Usage is the most reliable metric because it helps you determine whether or not the larger community accepts the currency. Bitcoin, for example, is currently the most widely used non-government currency. It is accepted by a pretty sizable number of companies, such as and even Microsoft. In fact, bitcoin's roughly $10 billion market cap is actually greater than the next 20 alt coins combined. No other digital currency is so widely accepted.

A few other alt currencies are enjoying a growing usage base, especially in regards to trading. Litecoin, steem, and ethereum are among the most widely accepted alt currencies. Ethereum is becoming especially popular, and has a market cap of over a billion dollars. This makes it the second most popular digital currency. Others, such as Boolberry, are used, accepted, and traded by almost nobody. Even if these alt currencies aren't scams, low levels of liquidity will make it difficult for you to free up cash, and risks are extremely high. As such, you need to be very careful when investing in alt currencies, and especially ones that aren't widely used.

Written by Ofir Beigel on October 9, 2016.