Table of Contents
Checklist of criteria to consider when investing in alt coins
Before you splash out on alt-coins go through this checklist to see if the coin is a good investment:
1. Supply
The supply of coins has an effect on price - it's no accident that bitcoin's price started to rise once the coins per block halved to 25 at the start of 2013.
Here's some (useful I hope) info about the supply of alt coins.
Litecoin: Litecoin started with 50 coins per block which get halved every 4 years (or 840,000 blocks). At the time of this post they are at block 384,992. The bounty per block will halve circa Oct 2015.
Devcoin was founded in August 2011 and issues 50,000 coins per block, but there is no halving factor built in, the coins continue to be issued at the same rate.
PPCoin was founded in August 2012. It's more complicated than the other coins as it has a proof of stake function as well as a proof of work function. The proof of work blocks halve every four years, but the proof of stake function increases coins by 1% per annum
About 30 new coins were launched in 2013 alone - be careful as they won't see block reward halving till 2017 (at which time the miner or investor who has held the coins should see a return assuming the coin has survived.
2. Demand
If an alt-coin community has created ways to spend the coins, demand for them strengthens. It's the case that a coin with a strong e-commerce network will be more valuable than a coin with restricted supply but nothing to spend on, which means the miners are forced to regularly sell the coin for fiat.
Here is a list of alt-coins that have developed e-commerce networks
3. Publicity
The more a coin is in the news, the more likely that noob investors will pile into the exchanges and buy it “just in case it takes off”. An example of this is Feathercoin: despite being only a few months old, the lead developer has featured on talk shows like Let's talk Bitcoin as well as in articles of major newspapers like the Guardian, and as a result it's price is supported - of course it's easy to be enthusiastic in the first few months of a coin, but whether he can keep up[ that level of promotion for the next four years remains to be seen.
Another gauge of whether potential investors are investigating a coin is Google Trends which logs the number of people searching for a keyword over time. Most charts show that altcoins showed a spike in April 2013 when Bitcoin was in the news. If you do a comparison chart on Google trends, litecoin clearly leads, but feathercoin is getting more searches than more established coins like PPCoin.
4. Liquidity of Exchanges
The greater the volume being traded on an exchange, the greater the liquidity (i.e. the difference between the bid and ask prices is narrow). Alt-coins are mostly traded on three exchanges: Cryptsy, Vircurex and BTC-e, and they are mainly traded against bitcoin (though other pairs exist). I've seen some extremely illiquid pairs where the difference between bid and ask prices is as much as 20% - it's hard to near impossible to profit in markets like that as all gains can be simply wiped out by the spread.
You can check out liquidity on sites like Cryptocoin Charts which list volume, bid and ask prices and the orderbook for most pairs at the main exchanges.
5. Lack of Vulnerability to a 51% attack
Because alt-coins are in a fledgling state, they are vulnerable to 51% attacks killing them off. Once the coin is killed your investment is worthless. There have been literally dozens of alt-coins killed off by 51% attacks - for example Coiledcoin, and Geistcoin.
Feathercoin came under a 51% attack in mid June 2013 - they lost 80 blocks, but were saved when the automated scrypt-mining pools switched to mine feathercoin and diluted the attacker. BBQcoin was destroyed by a 51% attack, and Namecoin also came under a 51% attack and switched to merged mining to protect against it.
When investing in an alt-coin, look for a coin that is merged-mined with Bitcoin (and thus benefits from the large distribution of Bitcoin miners), or look for a coin like Litecoin which has a massive number of unrelated GPU miners. Devcoin, Namecoin and Freicoin are merged-mined.
Related page: Differences between different types of cryptocurrencies
