Alt coins (for alternative coins) are crypto tokens with smaller market capitalization. They are alternatives to the major coins like Bitcoin and Ether.

Alt coins offer greater returns along with greater risks. In this way, they are like small cap stocks. Blue chip stocks are larger and more stable, but small cap stocks offer the opportunity to invest in new ideas with greater upside potential.

Alt coins also come with significant risks. The price volatility is the most obvious risk. Along with greater upside potential comes greater downside risk. A small cap crypto token can lose value very quickly due to the smaller number of tokens being traded. This is especially true in the crypto market due to the connection between valuation and network effects. If a community of investors supports a token and provides ongoing buying pressure, this will cause the price of the alt coin to rise. But if that community wavers in its commitment and decides to shift its allegiance to a different token, then the network effects disappear very quickly and valuations can plummet.

Alt coins also bring greater risk of fraud and manipulation. Due to the limited amount of information disclosure for some coins, investors are sometimes investing in coins that are not what they seem. This is why the SEC is increasing its regulation of tokens that function like investment securities. Alt coins are also susceptible to price manipulation. A pump and dump is when some investors promote a coin and generate a period of concentrated buying activity only to then turn around and sell the coin at its peak. With the growing role of social media in retail investing, this is a particularly dangerous form of herd behavior in the crypto market.

If you are considering investing in alt coins, you should limit your exposure and do your homework. Never invest money that you aren’t willing to lose. These are risky ventures and should be treated as the “high risk, high return” part of your portfolio. Just as in stock investing, it is a good idea to have core investments that track the overall market. The smaller cap tokens are opportunities to place bets on new ideas that have the potential to beat the market. Investors in this space should also be extra careful to avoid the pitfalls of being led astray. Investors in alt coins should place a high premium on transparency, because it demonstrates that this new venture is serious about doing things the right way. Investing in this way can lead to very profitable outcomes.