The beginner’s guide to trading and investing in altcoins

Terry ScottTerry Scott ·

Cryptocurrencies are going nuts, and you’ve got everyone talking about bitcoin, ethereum and litecoin. However, there are thousands of alternative coins (altcoins) that people should be keeping an eye on. Altcoins are simply coins that serve as alternatives to bitcoin. The cryptocurrency market needs altcoins due to the hard cap of bitcoins and other altcoins. If the hard cap is reached, prices could be more volatile, if demand changes. That said, we need to start looking at other ways to trade the cryptocurrencies, and altcoins could be your best bet.

Although many early bitcoin adopters find altcoins unnecessary, and they think altcoins won’t succeed and can’t compete with bitcoin’s infrastructure. However, that’s not the case with all altcoins. Some offer faster transaction times and a decentralized payment system.  Since altcoins provide decentralization, there is competition in the market, and in turn, this spurs innovation and improvements.

Before you start taking money out and placing bets on a lot of altcoins, using the “spray and pray” method, you should conduct your due diligence.

Avoiding scamcoins

When you’re looking for altcoins to trade, you’ll need to avoid scams. That means, you’ll need to research the company offering altcoins and its goals. Scamcoins are those in which the creators are solely looking to profit, for themselves. Companies offering scamcoins don’t care whether investors make money.

Some ways to spot a scamcoin:

  • See whether users on cryptocurrency forums are talking about these altcoins with little to no warnings. If they’re not properly letting potential traders and investors know the risks, chances are it’s a scamcoin.
  • If the altcoin is pre-mined by the creators, it means they’re sitting on some of these coins already. That means they’re looking for ways to pump the stock in order for their own self benefit.
  • If altcoin creators try to gain users’ support by encouraging mining, it would encourage trading and attract more traders and investors. Consequently, this would drive up the value, and the creators could dump their coins. That’s just a traditional pump and dump.
  • Trading volume of altcoins are typically low. That said, someone with a substantial amount of bitcoin, ethereum or litecoin could drive the price of smaller altcoins. Consequently, this creates hype around the altcoin and small investors get in and bid up the prices. Thereafter these large altcoin holders are selling as the prices are pumped.

Finding “legit” altcoins to trade

There are multiple ways to find altcoins that aren’t scams. Generally, you would want to look for altcoins that have solid teams. In other words, you want to see the creators of the team with a great track record in the community. You generally do not want to get into altcoins in which the creators have very little experience in the cryptocurrency game. That’s just a recipe for disaster.

You also want to see whether there’s a large number of supporters for the altcoin. Even if the idea seems silly, as long as there is demand and a community of users, the altcoin could rise.

Take CryptoKitties for example. It’s an Ethereum-based digital kitten game and its processed over $10M in sales, on its decentralized marketplace. Each digital kitten represents a different crypto asset, and the ownership can’t be altered. Some of these digital kittens are going for over $100K. It might sound silly at first, but people are actually buying these digital kittens. Again, just as long as there is broad support for the token, it could rise significantly.You’ll need to figure out what’s a scamcoin and a “real” altcoin.

If you do your due diligence, you’ll realize CryptoKitties isn’t a “scam,” even though it’s silly. The creators aren’t sitting on a bunch of tokens and trying to pump and dump their digital kittens. Rather, they’re using a sustainable revenue model, in which they receive a small percentage of each transaction.

In general you want to look for altcoins with:

  • At least $100M in market capitalization
  • Over $1M traded daily. If there’s a low dollar volume, it means there’s little to no demand and the community isn’t all that interested in the coin.
  • Strong management team and experience.

Again, you’ll want to read up on the company offering the coin and see whether you could trust them. Additionally, you could go on Reddit and other cryptocurrency forums to see what the community is saying about them. Moreover, you’ll want to avoid coins that have multiple articles saying it’s going to rise X times within X number of days or months. That could just be someone trying to pump their position. Don’t get fooled by this.

For the most part, when you’re looking for altcoins, you can use CoinMarketCap to find the “top” altcoins. You’re able to filter by market capitalization or volume.

Source: CoinMarketCap

If you’re tech savvy, you could build something like my tool that filters for altcoins to trade:

Practice Diversification

Similar to your traditional investment portfolio, you want to diversify your holdings. The more diversified your portfolio, the better. In other words, you don’t want to put all of your eggs in one basket. Don’t invest a large portion of savings into cryptocurrencies. Since cryptocurrencies are relatively new, there are multiple risks, and you could lose a large portion of your investment. You only want to invest what you’re comfortable with losing.

For example, if you’re willing to lose $1,000, you could look for multiple altcoins with immense support and liquidity, and you could split up your capital accordingly. If you find 5 altcoins, you could create an equal-weight portfolio by investing $200 into each of those coins.

How to get started trading altcoins

If you’re just getting into cryptocurrencies, there are a couple of things you need to learn. First, you’ll need to choose a cryptocurrency to buy. If you trade or invest in altcoins alone, this could be one of the hardest steps.

Once you’ve found some altcoins to trade, you’ll need a wallet to store your cryptocurrencies. To make things easier, we’re going to focus on soft wallets.

First, check to see if you have access to your keys.

When you’re buying altcoins, you should see if you have access to the private keys. If you don’t, do not use that wallet provider. Technically, if you don’t have your private keys, you don’t have control over your altcoins. Consequently, whoever has access to those keys could use your altcoins. You need to check to see whether you have access to your private keys at all times, ensuring you have control over your coins. In other words, guard your private keys like your life depended on it. Once you lose your private keys, you could say goodbye to your cash.

The next thing you want to see is whether the wallet provider is fully transparent with their operations. Although this might seem confusing at first, you want to see whether the wallet provider’s code is open source. If it isn’t open source, you pretty much have no idea how the provider is securing your coins (if at all). Cryptocurrencies are all about decentralization, and when providers have open source code, it means they’re transparent, and altcoin users could review and check to see whether there’s vulnerabilities.

Thereafter, you need to make sure the wallet provider is reputable, and whether users have had bad experiences with it. The best way you could do this is search for the wallet provider on forums, such as the Bitcoin Forum or Reddit, to see what users are saying about it. If there aren’t any threads about the wallet provider, you should create a thread, and other users might comment and tell you about their experience.

There are a few mobile and desktop wallets out there that you could compare, including Mycelium, Bread Wallet, Jaxx and Armory. There are also exchanges that offer web wallets, like Binance, Changelly, Bittrex, Poloniex and Bitfinex. If you choose to, you could store your coins online with the exchange, but you could run the risk of losing your coins. I would advise getting another mobile or desktop wallet, to properly secure your coins. With a mobile wallet, you store your coins on your device, while a desktop wallet stores your coins on your computer. Most importantly, you should set up multi-factor authentication. That means you’ll need to verify your login using either your mobile device, email or answering security questions.

Final Thoughts

Once you understand and set up your wallet, while properly secure your funds, you’re on your way to start trading altcoins! You’re going to need to do some due diligence before buying any old altcoin. That means reading up on the company offering the altcoin, seeing whether it’s likely to be a scam and then looking at technical analysis tools to signal when you might want to buy and sell.

#-#-#

Terry Scott runs Crypto Trader Pro. He has been trading stocks for nearly two decades and cryptocurrencies for two years. He primarily trades altcoins using proprietary trade tech and is constantly in search of the next big move.

Be a Better Stock Trader, Starting Today

Get the expert insights, tips and strategies you need to optimize your trading skills and profiles
START NOW