What are the types of cryptocurrencies? Overview and differences
There are now over 3,000 different cryptocurrencies around the world. Almost each of them has something to offer that the others don’t, and their number is constantly growing. How to get caught up in this abundance? Based on what criteria are the currencies grouped into separate categories? Below we will point out all the currently available types of cryptocurrencies and explain the differences between them.
Cryptocurrencies and the digitization of money
Cryptocurrencies are a relatively recent invention. Bitcoin, the world’s first and most famous cryptocurrency, entered the market about a decade ago. So it’s hardly surprising that a large part of the public still knows nothing about cryptocurrencies. Recently, however, a promising trend can be observed: the media are increasingly covering the topic of cryptocurrencies, perhaps in response to the growing interest in alternative financial systems that exclude money’s physical existence. Undoubtedly, the coronavirus pandemic has played a part in this.
But an even more significant role has been played by the gradual digitization of money that we have seen since payment cards and electronic banking came into widespread use. What once seemed unthinkable – online transactions, account management through apps, Cashless payments – are all now part of our everyday lives. According to many experts, cryptocurrencies are the next and inevitable step in the global financial system’s evolution.
Admittedly, they are still placed on the margin. Still, given their Economic potential and initiatives taken by large and significant institutions – cryptocurrencies have a chance to become a common means of payment in the future. The entire industry’s dynamic development confirms this: currently, there are already several thousand cryptocurrencies. Investors have a tough nut to crack when looking for projects in this maze that represent real value and have a chance to conquer the market.
The purpose of this article is to bring order to this chaos, to show what types of cryptocurrencies there are, to distinguish the most general categories in which it is possible to place each digital currency without exception. Such a division will be a great help for all those who would like to gain knowledge about the currently available cryptocurrencies.
Types of cryptocurrencies: distinctiveness based on the underlying technology
Cryptocurrencies can be divided into different types only when based on some criterion. First of all, the general division considers the technology used by the network. All cryptocurrencies that deserve this designation use blockchain technology, which we have already covered in other articles on our website. Different algorithms can be used within this technology. The most well-known cryptocurrencies, such as Bitcoin (BTC) or Ethereum (ETH), work based on the Proof of Work (POW) algorithm.
This is a sort of “certificate” confirming that a miner has done the work, i.e., a person who makes sure that the transactions made by Internet users are credited to the blocks. We described more about the details of this process in other articles, which are worth reading to learn the ins and outs of blockchain technology. Here, we will limit ourselves to pointing out that some cryptocurrencies do not have their protocol and are based on a different platform. This goes for a whole range of new cryptocurrencies that use the Ethereum platform.
Such currencies do not have their own registry. They resort to data taken from another network – unlike currencies that use their own protocol. The latter are Autonomous. These include cryptocurrencies such as Ripple and Stellar (Ripple was created for banks and financial institutions).
Projects based on the solutions of other networks are not at all less profitable, as statistics confirm. In assessing a given cryptocurrency’s investment potential, the underlying technology has nothing to do with it. A high risk of losing the invested money, e.g., in the case of the so-called financial leverage, applies to virtually every project. Nevertheless, it is worth paying close attention to the content included in the statute of the company that works on it.
Cryptocurrency types: coins and tokens
It is important to distinguish between so-called coins and tokens. Many people confuse these two terms, assuming that each means the same thing. This is not true. Coin exists on the market in a different way than a token. First of all, it has its own blockchain. Tokens do not have one. Cryptocurrencies like Bitcoin (BTC), Ether (ETH), and Ripple (XRP) are coins. The standard laws of peer-to-peer networks govern them, and records of transactions are kept in digital ledgers, which are sets of data covering every transaction without exception. This allows them to serve as a medium of exchange.
This is not the case with tokens. They are issued as part of an ICO (Initial Coin Offering), a method of raising funds through cryptocurrencies. ICOs are popular among start-ups that are just beginning to working on their platform or service. Such companies release Their own token into circulation, and investors interested in the project buy them using cryptocurrencies (usually Bitcoin and Ether) or FIAT currencies (i.e. traditional money). With the hope that when the project develops, the token will gain value and can be sold at a high profit. Tokens provide access to selected services or products. They also confirm users’ shares in the cryptocurrency company.
Tokens are divided into two primary groups: utility and capital (also called security tokens). The first includes means of providing access to the functionality of information systems, applications, and services. Capital tokens (security tokens) are instruments analogous to stocks and bonds; they inform about users’ state of ownership. In the cryptocurrency market, they serve as securities.
Security tokens confirm the owner’s identity during logging in and all subsequent operations. Unlike utility tokens, they are based entirely on a blockchain system and were created to secure Retail investor accounts. Security tokens are often confused with utility tokens, whereas they have a different function in financial markets.
Cryptocurrency types: stablecoins
Cryptocurrencies can also be divided based on market stability. The first group consists of the So-called stablecoins, i.e. currencies with very low-price fluctuation. The second group consists of other cryptocurrencies whose price is subject to frequent and rapid fluctuations depending on a variety of factors (on our website, you will find detailed information on the most important variables affecting the value of cryptocurrencies).
Stablecoins are based on a traditional asset, such as the USD or EUR. The theoretical exchange rate of a stablecoin pegged to USD is equal to the value of 1 USD. This type of cryptocurrency is designed to maintain a stable rate against another asset. It does not have to be a FIAT currency; it can also be gold. Stablecoins use blockchain technology to provide transparency and security for user transactions.
At the same time, they are backed by some traditional assets, which makes them largely independent of the influence of cryptocurrency exchange rate factors. Stablecoins are thus a kind of a bridge between traditional electronic banking and Modern cryptocurrency networks.
Cryptocurrency exchanges use stablecoins as substitutes for traditional means of payment. Why? Because of the legal difficulties associated with the possible introduction of regular money. With stablecoins, you can Bypass unfavorable regulations in certain countries.
Thus, stablecoin is not fully a cryptocurrency if, by cryptocurrency, we mean a Virtual asset independent of macroeconomic factors. It is also not a traditional currency, such as USD or EUR. It works similarly to tokens, although not exactly the same. Stablecoins are worth investing in if there are sharp price fluctuations in the cryptocurrency market. It is also an option for those for whom the high risk of losing funds is unacceptable.
Don’t just invest in Bitcoin!
So, as you can see, Bitcoin is not the only cryptocurrency available. You can invest in currencies such as Litecoin, Binance Coin, Ethereum, or Ripple, which are some of the most well-known examples. There is an increasing number of new projects popping up worldwide looking to make a name for themselves. If you are looking for a profitable investment, be sure to follow the latest news on industry websites, so you don’t miss out on any opportunities. Of course, keep in mind that a new currency may not be accepted on the market. To avoid exposing yourself to severe losses – whether due to leverage or unfavorable circumstances – do not risk more than 1/3 of your capital. Even when you are dealing with CFDs.
Above, we have described all the available types of cryptocurrencies. Any cryptocurrency system can be included in one of the categories described here. A cryptocurrency is both a token and a coin. Coins run on their own platform, some of which may have different functionalities and have their own database. For example, Ethereum, unlike Bitcoin, is an excellent platform for decentralized applications. You can trade CFDs on it (although you won’t avoid transaction fees). A token differs from a coin in its dependence on an external network; it does not have its own platform.
The market is full of both tokens and coins – traders have a really extensive choice. However, we would like to warn beginner traders about CFDs. If you already enter into a CFD contract, pay attention to all the contents of such a document to know exactly what you agree to. A large proportion of Retail investor accounts have experienced losses due to trading CFDs, so we do not encourage you to undertake such investments.