Cryptocurrencies have taken the financial world by storm, providing a digital, decentralized solution to traditional fiscal practices and serving as the vanguard of a new era of economic innovation. Emerging from the cryptographic brilliance of Bitcoin, these digital assets have since proliferated into a vast array of types, each with unique features, functions, and intended uses.
From privacy-focused coins to programmable smart contracts, the cryptoverse’s diversity is as intriguing as it is complex. This article aims to explore these varied types of cryptocurrencies, offering a clear guide to the unique qualities that differentiate them and the potential each one holds in this evolving digital economy.
How many types of cryptocurrencies are there?
According to CoinMarketCap, there are around 22,932 cryptocurrencies, and their total market capitalization is $1.1 trillion. This is a large number of cryptocurrencies considering that Bitcoin was introduced in 2009. Altcoins, which are alternatives to Bitcoin, were introduced in 2011 with coins like Litecoin (LTC) and Namecoin (NMC).
Altcoins gained popularity after the launch of Ethereum (ETH). Bitcoin and similar cryptocurrencies are commonly used for investment purposes and are seen as a way to preserve value. Ethereum, on the other hand, is often used for transactions. It offers developers the opportunity to create a variety of transactional tools, services, and communities using its blockchain.
Crypto Coins vs. Crypto Tokens
Cryptocurrencies can be classified into two categories: coins and tokens. Coins are digital currencies like Bitcoin and Ethereum, which exist on their own blockchain. When we think about cryptocurrencies, we usually think of coins like Bitcoin.
Tokens are digital assets that are stored on blockchain databases. They are generated on existing blockchains and usually signify an asset or allow the holder to access a specific service or application. Essentially, tokens represent digital assets or utilities, and there are numerous tokens operating on the Ethereum network, among others.
Types of Crypto Tokens
- Value tokens: Value tokens refer to digital assets like art or music in the form of an NFT that holds significant value.
- Utility tokens: Utility tokens enable users to access and utilize services on a blockchain network or decentralized application by granting them the right to perform certain actions.
- Security tokens: A security token is a financial asset that indicates ownership of an asset. If a company wants to raise capital, it can sell equity tokens as security tokens. Since they are regulated by the Securities and Exchange Commission (SEC), they represent ownership of financial security. It’s important to note that they are not the same as NFTs or value tokens because they are fungible.
What Are ERC-20 Tokens?
ERC-20 tokens, named after the Ethereum Request for Comment 20, operate on the Ethereum network. Some well-known examples of ERC-20 tokens are the meme coin Shiba Inu (SHIB) and the stablecoin DAI (DAI).
To create fungible tokens on the Ethereum blockchain, developers must follow the technical standard called ERC-20. This standard outlines the rules for tokens to function properly on the Ethereum platform. If you want to know more about the creation of cryptocurrencies, please refer to our guide on new cryptocurrencies.
Altcoins
The meaning of altcoin has changed over time in the world of cryptocurrency. Initially, during the early days when there were only a few cryptocurrencies, altcoin referred to any digital asset other than Bitcoin.
Today, the world of cryptocurrency has expanded to include several coins and tokens that have uses beyond just serving as a means of exchange. It’s worth noting that many of these cryptocurrencies are not necessarily competing with Bitcoin.
Ethereum is currently the top altcoin with a market cap of $150 billion, while Bitcoin’s market cap stands at $325 billion. Also, Solana (SOL) and Cardano (ADA) are also major altcoins in competition with Ethereum.
Beyond serving as a digital currency, altcoins can have various purposes. While Bitcoin is designed to function as a decentralized currency, Ethereum operates as a computing network that allows users to execute decentralized applications on the blockchain and facilitate smart contracts.
Stablecoins
A stablecoin is a type of cryptocurrency that is linked to the value of another asset. For example, a stablecoin that is linked to the U.S. dollar should always have a value of $1, assuming that it is working properly.
There are two types of stablecoins. One is backed by collateral held by a financial entity for each stablecoin unit, while the other uses derivative strategies to maintain the value of the crypto asset equivalent to the underlying government currency.
Stablecoins which are collateralized, have a reserve of assets that help to secure the value of the coin. These coins reduce their reserve by the same amount whenever tokens are sold. Tether (USDT), which maintains a peg to the U.S. dollar, is the most well-known of these stablecoins, although there are doubts about the dependability of its reserves.
Algorithmic stablecoins utilize algorithms to regulate their supply and ensure that their price remains steady. TerraUSD (UST) is an instance of such stablecoins. Initially, it was fixed at $1 by producing and eliminating a counterpart coin known as Luna. Upon every purchase or sale of TerraUSD, an equivalent amount of its sister token, Luna, was generated or erased.
This strategy worked great until it didn’t. When panic caused people to cash in their TerraUSD in a mass exodus, TerraUSD de-pegged from its $1 price and slid to near zero, along with Luna. In TerraUSD’s defense, the same panic caused Tether to slip from $1 per coin to $0.94 per coin.
Meme Coins
Coins that use memes and social media to gain popularity are referred to as meme coins, often in a joking or humorous manner.
Dogecoin (DOGE) was the first meme coin that was launched, and it was based on the popular “doge” Shiba Inu dog meme. It was initially supposed to be a joke, but it quickly gained a massive following among users, eventually becoming a legitimate cult asset. This success inspired the creation of more meme coins.
Since the launch of Dogecoin, over 200 meme coins have been created. Although imagining these coins can be enjoyable, they can fluctuate in value very quickly. Currently, DOGE is only worth one-tenth of its highest value from a year ago. It’s an essential lesson for all cryptocurrency investors to bear in mind.
Conclusion
Cryptocurrencies, in their myriad forms, represent more than just a new form of money. They encapsulate a technological revolution, a challenge to conventional financial systems, and an opportunity for greater financial inclusion and independence. While the vast array of types can seem daunting, understanding the basic distinctions equips us to navigate this digital landscape effectively. As the world of Bitcoin, altcoins, tokens, and stablecoins continues to evolve, one thing is clear: cryptocurrencies, in all their diverse forms, are here to stay. The challenge and opportunity lie in understanding and harnessing their potential.
