What Are the Different Types of Cryptocurrencies?

Today, cryptocurrencies have become quite a popular variety of virtual assets. They may differ in their characteristics and functions. And everyone who wants to become a full participant in this market must understand the various types of cryptocurrencies and their features. This blog post will discuss the different types of cryptocurrencies, including altcoins, tokens, stablecoins, and NFTs. Stay tuned!

What is cryptocurrency?

In simple terms, a cryptocurrency is a digital or virtual asset that uses cryptography to secure transactions. Cryptocurrencies are decentralized, i.e., not subject to government or financial institution control. We no longer need banks to process our transactions. Instead, cryptocurrency transactions are processed on the blockchain.

Blockchain is a virtual database where information about all transactions and how many coins are stored in each account is recorded. This technology provides the ability to transfer assets between users and, simultaneously, acts as an indisputable guarantee of ownership of these assets. Several thousand people worldwide share blockchain simultaneously; many different people and companies manage it, and not one organization, like banks.

Cryptocurrency wallets are used to store and transfer digital money between users. Their work’s principle is similar to how e-mail clients or instant messengers work.

Most cryptocurrencies are open source. This allows anyone to develop and improve the code or create new virtual assets on its basis.

The first and most famous cryptocurrency is Bitcoin. It was created in 2009 by a person or group under the pseudonym Satoshi Nakamoto. Since then, more than 6000 various cryptocurrencies have appeared. They are called altcoins (an alternative to Bitcoin).

Types of cryptocurrencies

Now that you have a basic understanding of cryptocurrency let’s explore the different types of digital assets. Cryptocurrencies often fall into one of two categories:

• Coins — include Bitcoin and alternative coins, or altcoins in short (cryptocurrencies alternative to Bitcoin);
• Tokens — programmable assets that exist on the blockchain of a given platform.

Though many people use the words crypto, coins, and tokens interchangeably, a basic understanding of cryptocurrency requires knowing how they differ from one another.

Altcoins

An altcoin is a term that originally stood for “alternative to Bitcoin,” and it has since grown to include any cryptocurrency that was created to improve upon Bitcoin in some way. Some examples of altcoins include Ethereum, Litecoin, and USD Coin.

The first altcoin was Namecoin. It was introduced in 2011 as a digital currency, but the original intention of its creator was to create decentralized domain names. Such a structure can be used not only in the field of cryptocurrency mining but also to create various online resources that are completely independent of national policies.

It is crucial to understand that not all altcoins are simply alternative versions of Bitcoin. Some of them were created for other purposes. The main difference between Bitcoin and altcoins is that altcoins are trying to improve upon or offer an alternative to the existing Bitcoin code.

Altcoin developers are primarily focused on improving the following problems of Bitcoin:

• Bitcoin transactions take a long time and have large commissions. For example, with small payments, the bitcoin fee can be 30–40% of the transaction amount. The most popular solution to this issue is Ripple.
• Lack of anonymity. Because all transactions on the bitcoin network are transparent and traceable, Bitcoin is not anonymous. The popular cryptocurrencies that solve this issue are Dash, Monero, and ZCash.
• Difficult and expensive mining. Approximately every four years, a halving occurs on the bitcoin network. The computing power of each individual miner is not enough to find the desired hash. For this reason, miners should join forces in pools. Pooling leads to the centralization of the network, which contradicts the main idea of ​​​​Bitcoin — to be a decentralized network.
• Insufficient functionality. Bitcoin’s main goal is to act as a currency for transactions. Since transactions are long and expensive, it becomes more like a regular bank and not like an advanced technology in the field of finance. The most popular solution that adds new functionality to cryptocurrencies is Ethereum, with smart contracts.

Tokens

The next type of cryptocurrency is tokens. A token is a unit of value issued by a project or company and can be used to purchase goods or services. Compared to other types of cryptocurrencies, they are unique because they do not have their own blockchain. Instead of mining, tokens are immediately issued in full emission.

Tokens are often issued on top of existing blockchain platforms such as Ethereum. As of March 24, 2022, around 508 thousand ERC-20 tokens exist on top of the Ethereum network. This allows companies to create their cryptocurrency without having to build a blockchain from scratch. Tokens can represent both direct monetary value and be pegged to the price of real assets. For example, a token may represent shares in a company or securities. This is called a tokenized asset. Such a purchase does not mean that you are buying the actual security itself, but rather that you are buying a token that represents its current market price.

The price of a token depends on the demand for it. Tokens always have a price they can be sold for, which is why some people buy them. Some buy tokens to sell later for a higher price instead of using them to purchase goods and services.

There are four types of tokens, including utility tokens, security tokens, tokenized assets, and non-fungible tokens (NFT). Let’s analyze each type in more detail.

• Utility tokens

Essentially, utility tokens are cryptocurrencies used in a system or application. They are paid out as rewards and can be used to purchase internal goods and services. They are similar to gold coins (or their equivalents) in an online game that can be bought with real money or earned by completing tasks.

• Security tokens

This is a type of token that a company issues as its own securities. They may represent a share of ownership of the company and the right to vote during important decisions. At the same time, it is important to distinguish them from tokenized assets, which will be discussed below — token shares are initially issued by companies independently. In contrast, tokenized shares do not mean ownership of a real stake in the company.

• Tokenized Assets

Tokenized assets are tokens whose value is tied to the current price of real assets, such as company stocks, commodities, or indices. At the same time, as mentioned above, owning a tokenized asset does not give you any rights that traditional instruments provide — for example, you cannot receive dividends from them.

• NFT tokens

NFTs are non-fungible tokens, which means they cannot be interchanged with other tokens of the same type. NFTs represent a unique asset, such as a piece of digital art or a virtual world property. They were created to transfer ownership of unique assets to the blockchain, such as works of art, 3-D models, antiques, and more. Each token is unique and cannot be replaced by another. NFTs have special popularity in the collector community.

NFTs have a wide range of applications. They can be used to create digital collectibles, represent real-world assets, or even be used in video games. The most well-known NFTs are CryptoKitties and Decentraland.

Examples of cryptocurrencies

To better understand the diversity of assets in the crypto market, it makes sense to consider specific cryptocurrencies, tokens, and stablecoins.

Bitcoin (BTC)

The first and most well-known cryptocurrency. It was created in 2009 by Satoshi Nakamoto. Bitcoin is a decentralized currency that can be used for peer-to-peer payments. Bitcoin is traded on many exchanges and is the main object of crypto investments. The peculiarity of this coin is that its rate directly affects the cost of many other digital currencies.

Among the advantages of Bitcoin are:

• Decentralization. No one can interfere with Bitcoin transactions or change the system’s rules.
• Anonymity. When making a transaction, you do not need to provide personal data.
• Security. The cryptocurrency is well protected from fraudsters thanks to blockchain technology.
• Transaction speed. A BTC transaction takes an average of ten minutes.
• Low commissions. When transferring Bitcoin, you do not need to pay a commission to banks or other financial institutions.

Disadvantages of Bitcoin:

• High volatility. The first cryptocurrency’s rate often changes, making it difficult to predict its future value.
• Government regulators. Governments of different countries do not like the anonymity and decentralization of bitcoin. Therefore, they are trying to control it in various ways.
• A limited number of bitcoins. There will only ever be 21 million BTC in existence.
• Complexity. Bitcoin is not easy to understand for beginners.

Ethereum (ETH)

The second-largest cryptocurrency by market capitalization. It was launched in 2015 by Vitalik Buterin. Ethereum is a decentralized platform that runs smart contracts. These applications run exactly as programmed without any possibility of fraud or third-party interference. Ethereum is also used to create and trade tokens. The native currency of the Ethereum blockchain is called Ether (ETH).

Ethereum has many advantages:

• The possibility of creating decentralized applications.
• A large number of developers. Ethereum is the most popular platform for blockchain projects.
• Flexibility. The Ethereum network can be easily changed and improved.
• An active community. Many developers contribute to the development of Ethereum.

Disadvantages of Ethereum:

• Scalability problems. The Ethereum network can process about 15 transactions per second. This is not enough for large-scale applications.
• The complexity of smart contracts. Smart contracts are difficult to understand and use for non-technical users.
• Security vulnerabilities. There have been several hacks on the Ethereum network.

Tether (USDT)

A digital token pegged to the US dollar. Tether was one of the first stablecoins. It was launched in 2014 by Brock Pierce and Reeve Collins. The USDT token is backed by reserves of US dollars held in a bank account. This ensures that each USDT token always has the same value as one US dollar.

Tether has the following advantages:

• Stability. The USDT token is stable and does not fluctuate in value like other cryptocurrencies.
• Transparency. Tether publishes regular reports on the status of its reserves.
• Low volatility. USDT is less volatile than other cryptocurrencies, making it a good choice for trading and investments.

Disadvantages of Tether:

• Centralization. Tether is centralized and controlled by a single company.
• Lack of trust. Some people do not trust Tether because governments or financial institutions do not regulate it.

Ripple (XRP)

A digital token created by Ripple Labs. Ripple is a decentralized platform that enables fast, cheap, and secure global financial transactions. The native currency of the Ripple network is called XRP.

Ripple has the following advantages:

• Instant transactions. Transactions on the Ripple network are processed instantly.
• Low costs. Transactions on the Ripple network are very cheap.
• Decentralization. Ripple is decentralized and not controlled by any single entity.

Disadvantages of Ripple:

• Scalability problems. The Ripple network can only process about 1000 transactions per second.
• Lack of adoption. Ripple is not as widely used as other cryptocurrencies.
• Centralization. Although Ripple is decentralized, it is still controlled by a single company.

Final Thoughts

There are a vast number of cryptocurrencies on the market, and each has its characteristics, advantages, and disadvantages. It is essential to choose the right cryptocurrency for your needs. Different cryptocurrencies are suitable for various purposes. For example, if you need a stable and secure currency for trading, then Tether or Ripple would be a good choice. If you want to invest in a new project with the potential for high returns, then Ethereum would be a better choice. In any case, you should carefully research each type of cryptocurrency before investing in it.