Key Takeaways
Altcoins are speculative digital assets offering diverse investment opportunities beyond Bitcoin.
Research tokenomics, utility, market narratives, and other key items before adding any altcoin to your portfolio.
Risk-averse investors may prefer crypto ETFs or staking for more stable exposure to the asset class.
Altcoins are a dynamic and often speculative segment of the crypto market, offering a wide range of investment opportunities. Their value can fluctuate significantly based on factors such as perceived utility, technological innovation, market sentiment, or pure speculation. While some altcoins support innovative blockchain applications, many—including meme coins—lack fundamental value and trade primarily on hype, making them especially volatile.
With over 18,000 altcoins available, investors must conduct thorough due diligence before investing in any project.1 This includes researching the technology, development team, use case, and tokenomics of each coin. For risk averse investors, alternatives such as crypto-focused exchange-traded funds (ETFs) or regulated staking services.
What Are Altcoins and Why Are Investors Interested?
Altcoins, short for "alternative coins," are any cryptocurrency other than Bitcoin (and sometimes Ethereum). The first altcoins, Namecoin and Litecoin, were created in 2011 as developers sought to improve upon Bitcoin's limitations. Now, these tokens can serve a variety of purposes such as governance rights, smart contracts, decentralised finance (DeFi), and native network transactions, which gives them their value. Many altcoins are directly tied to innovations within their ecosystems, meaning increased adoption and utility can drive corresponding increases in token value.
For investors, altcoins with strong fundamentals from reputable projects can be a good portfolio diversification option. They’re also a good initial way to get your first exposure to cryptocurrency markets, especially if you have limited capital.
However, the speculative nature of altcoins creates significant variation in profitability, with smaller-capitalization or lesser-known projects sometimes outperforming larger, potentially better known altcoins, rewarding risk-tolerant investors who were willing to hold positions long-term.
What to Look Out for Before Investing in Any Altcoin
Coins with real-world utility: When investing in altcoins, it's best to focus on projects with strong blockchain scaling solutions that have demonstrated resilience across multiple crypto cycles. Proven narratives like Layer 1 blockchain platforms, Layer 2 scaling solutions, and Real World Assets (RWA) tokenization can be good starting points as they address fundamental infrastructure needs in the cryptocurrency ecosystem. (“RWA” refers to instances of traditional assets like gold, real estate, and bonds that are represented by digital tokens.) You should prioritize altcoins that are actively solving real problems or contributing meaningful innovation to existing ecosystems. Projects with authentic utility tend to perform better over the long term.
Market capitalization and liquidity: While investors might find higher-cap altcoins like Ethereum harder to purchase and burdened by limited growth potential, lower-cap coins offer easier entry points but entail much more risk and volatility. To manage risk and avoid overexposure to altcoins, investors should consider limiting exposure to a maximum of two lower-cap altcoins while also employing dollar-cost averaging (DCA).
Track record and reputation: Before investing in any altcoin, thoroughly research the team behind it, its social media presence, and weigh public sentiment about their reputation in the cryptocurrency community. Some teams carry negative reputations from previous failed projects, making them poor investment choices regardless of their current project's promises. When conducting research, be aware of “neutral experts” that sometimes turn out to be experts only in the particular product they are pushing.2 Check the project’s community, too: Is it highly engaged or just full of noise? Does the project have a tangible long-term vision? These will help you determine if an altcoin is worth investing in.
Tokenomics and supply structure: While many investors find that white papers (which are akin to prelaunch business plans) have become less useful as good investment indicators, you should nonetheless check out elements that white papers traditionally highlight, like transparent tokenomics, supply structure, and token mechanics.3 For example, projects that incorporate a burn mechanism (a process for removing a coin from circulation), such as Shiba Inu and Binance Coin (BNB), can create upward price pressure when combined with increased demand. Another thing to look for is token distribution: if a large percentage of the cryptocurrency is allocated to the team and/or investors, that is a red flag.
Exchange listings and regulatory status: A good rule of thumb is to stick with altcoins that are only available on reputable, well-established exchanges rather than purchasing tokens from project websites or specialised decentralised platforms. You can start with our list of best crypto exchanges. However, even coins listed on major exchanges carry delisting risk, so stay informed about potential removals. Recovering funds from delisted tokens can be extremely difficult or impossible.
Related Stories
Risks to Watch Out for When Investing in Altcoin
Relatively high volatility
Altcoins can be extremely volatile, particularly during periods of Bitcoin volatility, due to a phenomenon called Bitcoin dominance. When Bitcoin dominance is high, altcoins typically experience slower growth as investors prefer to allocate capital to Bitcoin, but when Bitcoin fever subsides, investors often rotate their funds into alternative cryptocurrencies, creating opportunities for altcoins to grow.4
Regulatory Risks
Regulatory risk represents one of the most serious threats to altcoin investments, as demonstrated by events surrounding the SEC v. Ripple case. The Securities and Exchange Commission (SEC) charged Ripple with selling XRP as an unregistered security. As the case ground on, investor confidence eroded. XRP fell from a March 2021 price peak of about 1.59 to a range between 0.33 and 0.69 from May 2022 to September 2024.
Before investing in any altcoin, you should check if the project faces current or foreseeable regulatory challenges, as legal battles can severely impact token prices regardless of the project's underlying fundamentals.
High Probability of Scams and Rug Pulls
Like every other asset class, altcoins can be subject to scams and “rug pulls,” where developers abandon projects after collecting investor funds. While no approach is completely fail-safe, it's advisable to stick with altcoins listed on popular, regulated exchanges. These exchanges also provide additional security measures and regulatory oversight that can help protect investors from market manipulation, though you should still conduct your own research.
No Track Record and Technical Vulnerabilities
When buying altcoins, be wary of new projects with no price history or proven performance track record. It's generally better to invest in tokens that are at least one to two years old and have demonstrated consistent value, one study says, especially in comparison to new projects promising instant returns within incredibly short timeframes.5 Also, technical vulnerabilities can significantly impact altcoin prices.
For example, Solana has experienced multiple technical vulnerabilities, including core protocol outages, that created fear, uncertainty, and doubt (FUD) among investors, causing the price to fall sharply at those times Sudden moves like that can immediately lead to huge unrealized losses.6
Over-Allocation
Altcoins can be exciting investments, and you might be tempted to allocate a large percentage of your portfolio to them, especially during bullish markets when prices are rising rapidly. But it's more prudent beforehand to determine how many tokens you want to purchase based on how much money you are willing to risk, and stick to those limits regardless of market momentum. Remember that cryptocurrencies are a highly volatile asset class, and if you become overweight in altcoins, even small changes in the market could significantly tilt your portfolio, affecting its overall performance.
Alternatives to Spot-Buying Altcoins
Staking
Staking offers a lower-risk alternative to trading altcoins. It’s a process that—in short—pays you crypto for locking up coins with normal volatility, like Cardano, and even stable coins like USDC for a specific period. Basically, you lend your crypto to others, who pay interest. This approach carries less risk and is as easy as putting money into a savings account.
DeFi Yield Farming
DeFi yield farming provides higher returns than staking but with more complexity and risk. In yield farming, you provide liquidity to decentralized protocols in exchange for interest and rewards, though this strategy demands deep technical knowledge and exposes you to smart contract risks, impermanent loss, and potential protocol failures.
Crypto ETFs, Trusts, and Tokenized Index Funds
Crypto ETFs, trusts, and tokenized index funds offer the most regulated and diversified approach to outright altcoin exposure. These vehicles give you diversified exposure to multiple altcoins through traditional brokerage accounts. Meanwhile, you benefit from professional management and regulatory oversight, which are far less available to individuals trading directly in altcoin.
Tips for Safer Altcoin Investing
Start Small and Diversify Across Different Altcoin Sectors
Altcoins, especially lower-cap ones, allow you to invest with as little as $10 in some cases, providing an excellent opportunity to test the waters and see what fits your portfolio without significant capital commitment. When investing, avoid concentrating on just one narrative since the cryptocurrency market spans diverse sectors such as gaming, media, NFTs, and AI. Instead, choose altcoins from at least two to three different narratives. This diversified approach helps reduce concentration risk while allowing you to benefit from different growth cycles.
Use Secure Wallets and Reputable Exchanges
When buying altcoins, only buy those that can be stored on reputable and secure wallets or bought through well-recognised exchanges. These steps will help you avoid hassles over accessibility, security, and liquidity. This approach also ensures you maintain control over your assets.
Stay Updated on Regulations and Emerging Risks
Always monitor general news and changing regulations, as these can quickly impact your altcoin holdings. Also, follow the projects you've invested in on X (formerly Twitter) to receive timely updates that might lead you to adjust your investment strategy to suit changing market conditions and new developments.
Establish a Stop-Loss and Profit-Taking Strategy
If you are directly buying altcoins through spot trading, have a solid exit and profit-taking strategy in place before making any investment. You should predetermine when to exit if prices fall to a specific level below your entry point, as well as how to take profits at predetermined levels above your entry price. This disciplined approach will minimize your losses and prevent you from losing much or all of your capital in the event something goes catastrophically wrong and the altcoin goes to zero, as happened with Terraform Lab’s LUNA and TerraUSD.7
The Bottom Line
Altcoins offer a low barrier to entry for investors looking to diversify their portfolio through cryptocurrency. However, before you begin researching these alternative assets, remember they are subject to high volatility, even more than Bitcoin.8 Thoroughly research any project you are interested in, checking for vital signs like utility, tokenomics, and regulatory status.
While some altcoins come with risks like rug pulls and unverifiable track records, there are still many altcoins that can pass these checks and make a good fit for your portfolio. If you’re willing to invest in them indirectly, you can explore ETFs, staking, DeFi yield farming, and tokenised index funds. In all, do not yield to Fear Of Missing Out (FOMO) when investing in altcoins. Have an entry point, an exit strategy, and a budget to ensure you protect your portfolio.
