With Bitcoin exploding in popularity, along came a large variety of alternative cryptocurrencies. On many occasions, these so-called altcoins have shown enormous profit-making potential, surpassing their predecessor by a large margin.
Today, some telltale signs might be indicating an altcoin bull run in the upcoming year. For this reason, we decided to create this handy guide on how to trade altcoins and help you make the most of this opportunity.
In this article, we’ll be explaining the difference between various altcoin types, how to buy and store them, and the benefits of trading them.
Additionally, you will learn what cryptocurrency trading platforms are and how to use them. We will explore some essential trading mechanisms such as different order types that are crucial to maximizing the profit potential of your trades.
Finally, we will list some crucial strategies on how to trade altcoins that should help you remain profitable in your crypto trading venture.
What are altcoins?
Altcoins are all cryptocurrencies apart from Bitcoin. Most of them were created as an attempt to improve upon Bitcoin’s bottlenecks or implement novel blockchain technology concepts.
Faster transactions, greater anonymity, lower energy requirements, improved consensus methods - every altcoin tries to outclass its competitors and grab part of the market share. A lot of them succeed in their mission, although none have been able to surpass Bitcoin.
Many successful altcoins, such as Litecoin, were created based on the Bitcoin protocol, inheriting some of its properties while modifying or adding others.
That being said, most of these altcoins were largely unknown to the general public until the 2017 astronomical bull run. In this short period, they catapulted into mainstream media and their extreme profit potential became common knowledge. Today, there are more than 7500 altcoins on the market, accounting for approximately 40% of the entirety of the market cap, with Bitcoin holding the remaining 60%.
Different types of altcoins
When browsing the cryptocurrency market, you might get overwhelmed by the number of different coins available. If you want to learn how to trade altcoins, your first step will be to differentiate altcoins by type.
To make things easier, they can be classified into the following distinct subcategories:
Stablecoins - are cryptocurrencies pegged at a 1:1 ratio to FIAT currencies such as the US dollar. Stablecoins are often used to facilitate trading and provide investors with a safe harbor, reducing volatility within the cryptocurrency ecosystem. Popular stablecoins are Tether, Paxos, and Dai.
Utility tokens - these have a specific use on their native blockchain. For instance, they can be used to pay for transaction fees or used to access the unique functionalities of the network. Notable examples are Ethereum and Chainlink.
Additionally, altcoins can also be categorized by their consensus mechanism. This defines how their transactions are verified and how new coins are issued. The two most popular are:
Proof of Work (PoW) - where consensus is reached through a process called mining, requiring pure computational power.
Proof of Stake (PoS) - where validators lock (stake) their holdings in order to verify transactions.
Many additional, albeit less popular, consensus mechanisms exist, each with its own benefits and drawbacks.
Why trade altcoins over Bitcoin?
While altcoins might not have the same level of reputation as Bitcoin, they provide some obvious benefits if you are looking to make some profits while trading.
Altcoins are diverse - they allow you to diversify your portfolio and limit your exposure to the risks of a single asset.
Altcoins are more volatile - instability in the markets isn’t always a bad thing. Altcoin’s high volatility is a great opportunity to make high returns in short amounts of time.
Altcoins are cheaper - due to the low prices of some altcoins, smaller price swings can lead to a big increase in your portfolio, percentage-wise.
Altcoins can outperform Bitcoin - in periods commonly referred to as “altseasons” by the crypto community, altcoins allow you to make considerable profits.
An altseason is a (short) period of time during which Bitcoin’s price consolidates or stagnates, while altcoins’ prices keep increasing.
In the above chart, we’ve highlighted the periods where altcoins were clearly outpacing Bitcoin in terms of performance. These are excellent opportunities to stack up on Bitcoin through altcoin trading.
Some analysts believe that Ethereum’s update to a PoS consensus in 2021 could be a catalyst for such an event in the near future. For this reason, learning how to trade altcoins is imperative.
Now that you have a good grasp on the basics of altcoins and why you should consider trading them, let’s have a look at your options to store them.
How to store altcoins
Cryptocurrency exchanges are sometimes the only place to obtain some coins. However, we do not recommend keeping your assets there for two main reasons:
exchanges are often the target of hackers and your funds may be stolen or lost.
you are entrusting ownership of your coins to a third party that might arbitrarily revoke access to your funds.
Instead, you can create your personal cryptocurrency wallet. These come in various types such as:
Mobile wallets - smartphone apps that allow you to carry your coins with you. We recommend Exodus Wallet.
Desktop wallets - software solutions that turn your PC into a cryptocurrency safe. We recommend Atomic Wallet.
While exchange wallets are convenient, it’s much better to get a personal wallet to store your crypto when you aren’t actively trading.
How to trade altcoins
With the basics of storing altcoins out of the way, it’s time to teach you how to trade altcoins. Your two major options are:
Purchase altcoins from a non-custodial exchange such as Safecurrency, which is the best answer when trying to learn how to buy altcoins with USD or any other local currency. This option is pretty straight-forward (and limited for advanced traders) so there is no need to delve deeper.
Trade them on cryptocurrency trading platforms - which is the option we will be focusing on in the following chapters.
What are cryptocurrency exchanges?
Simply put, cryptocurrency exchanges allow investors to trade, buy, or sell cryptocurrencies instantly. They play a vital role in the cryptocurrency ecosphere, as they are the only place where you can obtain most altcoins. There are two types of cryptocurrency exchanges:
Centralized exchanges (CEX) require you to deposit your crypto on a third party wallet before you can trade on their platform. They act as a middleman between traders, matching their buy and sell orders, and charging a commission for successful trades.
Centralized exchanges are by far the most used type of exchange and include popular choices such as Binance, and FTX.
Decentralized exchanges (DEX) allow for direct peer-to-peer trading, without the need for an intermediary. Users link their crypto wallet to the exchange and trading is managed directly on the blockchain with the help of smart contracts. The only fees are those of the blockchain transaction.
Popular options of DEX are Uniswap, Serum and Binance DEX.
All in all, CEXs provide higher liquidity, regulation compliance, whereas DEXs offer increased anonymity, security, and low fees.
How to choose your cryptocurrency exchange
There are five fundamental features you should be looking for when choosing your cryptocurrency exchange:
Geographical location and restrictions - the exchange should be accessible from your country and above all, regulatory compliant.
Transaction fees - make sure fees are reasonable compared to the competition.
Market pairs - ensure that the coins you want to trade are supported by the platform and if it provides a fiat-to-crypto option. When looking at how to trade altcoins, the amount of market pairs is possibly the most important factor.
High volume and liquidity - which guarantees you can easily find a buyer or seller for your trade.
Security - history of hacks and how they were handled in the past.
How to use cryptocurrency exchanges
There are 3 main steps you’ll need to go through before you begin your trading journey:
Create an account - to comply with regulations and avoid money laundering, centralized exchanges require a verified account before you can begin trading.
This involves a know-your-customer procedure (KYC), where you will be prompted to share a piece of ID, ensuring you are the real owner of the account.
Buy or deposit funds
Fiat-to-crypto exchanges usually offer the possibility to buy cryptocurrencies with a credit or debit card and deposit them directly into their exchange wallet.
Crypto-to-crypto exchanges require you to deposit one of the supported cryptocurrencies (usually BTC or USDT) into your exchange wallet.
Set orders - once your exchange wallet has been funded, you can begin trading by setting buy and sell orders on the exchange.
Check out the image below for an overview of a common cryptocurrency exchange dashboard and the information usually displayed on it.