Types Of Cryptocurrencies: Introduction
Since the creation of Bitcoin over a decade ago, we have seen the types of cryptocurrency available in the crypto industry expand at such a massive pace. Right now, there are approximately 22,932 different cryptocurrencies in circulation, with a total market capitalization of $1.1 trillion.
These cryptocurrencies come with different names, different functionalities, communities, and use cases. From stablecoins to meme coins to non-fungible tokens (NFTs), crypto investors now have a wide variety of crypto options to trade, invest in and diversify their crypto portfolio with.
In this detailed guide, we will be classifying all these 22,932 different crypto coins into the 5 types of cryptocurrencies we have and also help you understand their utilities. This way, you have a better understanding of the type of cryptocurrencies you are investing in and how they might work well with your crypto portfolio.
What Is Cryptocurrency?
Cryptocurrency is the future! As humanity continues to integrate the internet and the fast speed connections it gives us into our daily lives, there is now a major need to improve the way we see money and use it. Cryptocurrency does just that.
Designed specifically to be used via the internet, cryptocurrencies brings speed, security, and international ease of use to the forefront. They are created utilizing cryptography to secure and validate transactions using algorithms built on the blockchain technology.
Cryptocurrency’s regulations are decentralized in managing transactions. Each transaction in blockchain has a unique tag called block and are executed via peer-to-peer interaction (meaning anyone can send or receive money without the intervention of a third party like banks for verification or validation).
Bitcoin was the first cryptocurrency founded in 2009, it was created using blockchain technology- using the mathematical power of computer to generate coin in form of hash power.
Success recorded through Bitcoin’s invention paved way for other cryptocurrencies to be created through the blockchain technology.
Check out this article: Fiat vs. Crypto: How Crypto Will Change The Way We Use Money!
Cryptocurrencies Classified By Type: Coin vs Token
Cryptocurrency simply involves value transfer from one user to another in the transaction chain. Two main carrier of the values are identified as “Coin” and “Token”.
These two words are used interchangeably in the crypto space. Hence, there is confusion about the technical difference between the two crypto resources. Let’s have a brief description of these two components.
1) Coin:
A coin is a digital asset with its own blockchain network and powered by the same blockchain. In most blockchain, coins are issued through mining process. Coin is designed as a means of payment. It can be used to purchase goods and services like any other currency.
An example of a coin is Bitcoin which is powered by its own blockchain. Bitcoin is used as a transaction fee on the bitcoin network. Being a prime coin, all other coins are regarded as alternative coins by possessing their independent network.
The following are major coins in the crypto space:
Bitcoin, Ethereum, BNB, Cardano, Solana, Polkado, Dogecoin, TRON etc.
2) Token:
A token is a digital asset that is built on top of another blockchain. Transactions involving this assets are powered by the native network on which the token is built. For example, transaction that involve tokens built on Ethereum network will require Ethereum coin as transaction fee.
Tokens are usually minted in the process of transaction. Tokens can be used for several purposes like fund raising for a particular crypto project, and gain access to certain services and applications.
An example of fund raising for a particular crypto project is the Initial Coin Offering (ICO). The term ICO is used to define a method for generating funds by selling tokens to crypto startups and early adopters. These tokens are then held until the crypto project is officially launched to the wider public.
Examples of token in crypto markets are:
Tether, USD Coin, Binance USD, Wrapped Bitcoin, LEO Token, Shiba Inu, Lido, Staked Ether, (Defunct) FTX Token, Chainlink, ERC-20 Tokens etc.
Types Of Cryptocurrencies: Coins vs Altcoins
The Blockchain technology has provided an avenue for developers to easily modify existing codes on the blockchain network to create new and improved crypto coins focused on unique characteristics they might find useful.
Following this rule, Bitcoin was the base code used for creating every other cryptocurrency we have right now. So the term “Altcoin” is used to refer to any coin other than Bitcoin.
For instance, a developer may take advantage of a code on the Ethereum network to create another digital coin with a unique characteristic and function on the blockchain network. This new coin may differ in the scalability, security and scope of functions they might offer their users.
Here are some popular types of cryptocurrencies to help you understand this better:
1) Bitcoin:
Bitcoin is the prime decentralized cryptocurrency that utilizes blockchain technology to initiate and facilitate digital transactions. Regulation of transaction does not require a third party for these transactions to occur, instead the Bitcoin blockchain acts as an intermediary between the two parties in each transaction.
A decentralized currency like Bitcoin can be transferred between two parties in different countries and at a reduced cost while protecting the authenticity of the transaction.
2) Ether (Ethereum):
Ethereum is the most popular cryptocurrency after Bitcoin. The Ethereum coin is used to facilitate transactions on the Ethereum network.
Ethereum coins are measured in units called Ether. The Ethereum blockchain is also popularly used as the go to blockchain technology for other decentralized applications, coins, and DeFi software’s coming into the crypto market.
3) Tether:
Tether exist as a stablecoin, or a currency with a value attached to a fiat currency like the U.S Dollar. The nature of this coin is that it combines the stability provided by the U.S dollar and the benefits of a cryptocurrency (in that no financial intermediaries is needed in the transaction process).
Tether coin exist on different cryptocurrency network like, Binance Smart Chain, Tron and others.
4) Binance Coin (BNB):
Binance Coin is created on the Binance smart chain network. Binance Coin can be used as a type of currency, it is also used as a token to execute transaction on the Binance decentralized exchange platform.
Payment for services and assets on Binance network uses BNB as gas fee.
5) USD Coin:
USD Coin is also a stablecoin tied to U.S Dollar like Tether. USD Coin is hosted on the Ethereum blockchain with a technological framework of creating virtual dollar coin that has the stable nature of U.S dollar combined with decentralized functions provided by blockchain.
And just like Tether, there is no need for a bank to get involved before a holder can use the currency. This coin can be exchanged with native fiat currency without a third party.
Types of Cryptocurrencies: Classified By Their Utilities
A Cryptocurrency’s value can be evaluated on the following basis:
- Access to decentralized network
- Transaction cost
- Security and privacy
- Incentive provided
- Programmable transactions
Each of the community behind a coin focus on optimizing their cryptocurrency on one or two of the above bases.
For example, a crypto community creating a coin that is specifically focused on solving payment and transaction issues will want to ensure they optimize their crypto coin on things like Transaction costs.
In the view of the above points, cryptocurrencies can be grouped based on usage
1) Utility Coins:
Utility coins are assets that enable holders to gain access to services on a given blockchain protocol. Holders enjoy certain values that may include trading fee discounts, and start-up investment rounds (Initial DEX Offering).
For instance, holders of Ether (ETH) basically have access to contracts hosted on the Ethereum Virtual Machine (EVM).
Binance Coin (BNB) also enables holders to gain access to several packages on the Binance platforms, offers like reduced trading fees as well as higher returns on some investment packages.
2) Payment Cryptocurrencies:
Payment cryptocurrencies are coins or tokens used to make payments for various services. Value of the asset is transferred in exchange for service provided.
Examples of payment cryptocurrencies are Bitcoin, Dogecoin, Litecoin etc. Many websites enables users to make payment via the use of cryptocurrencies. These types of cryptocurrencies focus on providing users fast transactions with the lowest fees possible.
3) Stablecoins:
Stablecoins are cryptocurrencies that are created to maintain a constant value of a fiat currency in combination with the fluctuating market price of the other cryptocurrencies.
The most common of this type of currency is fiat-collateralized stablecoins. The value of these cryptocurrencies is tied to that of a native currency mostly US Dollar. Examples are Tether (USDT), USD Coin (USDC), and Binance USD (BUSD).
4) Exchange Tokens:
These cryptocurrencies are issued by cryptocurrency exchanges. Centralized exchange like Binance issued BNB coin that is used as transaction fee by users on their platform.
Other examples of exchange token are Huobi exchange – Huobi (HT) token, Uniswap DEX – UNI tokens etc.
5) Wrapped Tokens:
Wrapped tokens are other versions of any cryptocurrency. The idea behind this system is to enable interoperability of the cryptocurrency among different blockchain.
An example of wrapped token is Wrapped Bitcoin (WBTC). This token match at a 1:1 ratio with BTC value. Other wrapped tokens are Wrapped Ether (WETH), renDOGE (RENDOGE) etc.
How To Purchase or Own These Types Of Cryptocurrencies?
Trading and holding of crypto assets can earn holders a return. Cryptocurrency exchanges also provide their users with a platform to stake some of these coins or tokens in order to power the ecosystem and earn an passive interest on their coins from it. But how do you get your hands on these coins?
There are multiple ways to purchase or own a cryptocurrency, one popular way is crypto mining. Airdrops is also popular for early investors looking to get into a new token for a crypto project about to lunch.
Crypto mining involves the use of internet and computer to solve sophisticated and complex mathematical problems which eventually yield “power”. The mining power is valued to be coin generated in the mining process.
Once this crypto coin has been mined, you can then move them to a crypto exchange where you can sell it or exchange it to other Altcoins available.
If you do not want to go through the process of mining or Airdrops, you can simply purchase the cryptocurrency of your choice using fiat money from any crypto exchange, brokers, peer-peer sales and other means available to you depending on your country.
Types Of Cryptocurrencies: Summary
Cryptocurrency is a digital asset created via blockchain technology that allow transfer of assets from one party to another without the need of a third party like a bank.
Coins and tokens are forms of cryptocurrencies that are used for several purposes like payment, holding of funds, and gaining access to services depending on the scope and functionality of the blockchain network on which the cryptocurrencies are built.
These scope and functionalities can be classified into 5 major types of cryptocurrencies and can have a major effect on the perceived value of the crypto asset, causing massive volatility and fluctuation in price when adoption is on the rise.
So when you want to invest in a crypto asset, it is important to watch out for the coin utility, the Blockchain network the cryptocurrency is on, and the current demand for solution to the type of problem it is looking to solve.
Check out this article: Crypto 101: What Drives the Crypto Market Price?
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