Understanding The Different Types of Cryptocurrency

Introduction

The decentralised cryptocurrency Bitcoin and its groundbreaking blockchain technology were launched in 2008 by someone who went by the alias Satoshi Nakamoto. Since then, Bitcoin and many other cryptocurrencies have entered the mainstream with a bang. They have attracted a great deal of interest from both retail and institutional investors, based on the key promise that cryptocurrency technology can offer decentralised systems that avoid trust and dependence on centralised authorities.

In a story of remarkable growth, the number of different cryptocurrencies exceeded 50 by the end of 2013. And by the end of 2014, this number had increased by about 10 times to more than 500. As of April 2023, there are over 22,904 different cryptocurrencies in circulation with a total market value of more than $1 trillion and a trading volume per 24 hours currently arount $90 billion. More than 300 million people around the world use cryptocurrencies. And about 18,000 businesses now accept some form of crypto as payment.

What is “Cryptocurrency” and How Does It Differ from Other Currencies?

Cryptocurrency is a form of value and payment that differs from fiat currency (e.g., U.S. dollars and foreign currencies). It does not have a physical form, but exists as unchangeable distributed ledgers on public blockchains.

Cryptocurrency is not the same as electronic cash (e.g., an online bank account with a consumer banking institution), which is linked to physical currency. Rather, cryptocurrency refers to a mode of exchange that is digital only and not connected to any physical currency.

Depending on the situation, cryptocurrencies may be classified as securities by the Securities and Exchange Commission (SEC) and commodities by the Commodities Futures Trading Commission, as defined by those institutions. For tax and other regulatory purposes, cryptocurrency can be treated and taxed as a property, prepaid good or service, or equity in the United States.

Other terms, such as “digital currency,” “virtual currency,” “tokens,” or “coins,” may be used to describe cryptocurrency. However, it is important to distinguish between different cryptocurrency and tokens.

Cryptocurrency, Coins, Altcoins and Tokens: What’s the Difference?

The words “coins” and “tokens” are often used as synonyms in the crypto world, but they actually mean different things. They are both types of cryptocurrency, which is a digital asset that uses blockchain technology, but they have distinct features.

- Cryptocurrencies - or coins - are digital assets that have their own blockchain network and can be used as a medium of exchange, a store of value, or a unit of account. Examples of cryptocurrencies are Bitcoin, Ethereum, Cardano and Litecoin. Cryptocurrencies are issued by the blockchain protocol itself and are secured by cryptography.

- Tokens are digital assets built on top of an existing blockchain network using smart contracts, which are mostly ERC-20 tokens, and can represent various things - such as a share of ownership in a DAO, a digital product or NFT, or even a physical object or collectible - and have different functionalities and purposes depending on the project. Examples of tokens are Uniswap, Chainlink, Filecoin and CryptoKitties. Unlike cryptocurrencies, tokens are not mined: they are created and distributed by the project developer on an existing blockchain network using smart contracts. Tokens can be traded, sold, and bought like coins, but they are not used as a medium of exchange. Tokens can be classified as:

• value tokens, which represent an object of value such as a digital asset;
• utility tokens, which provide a service and allow users to perform actions on a blockchain network or decentralized application;
• security tokens, which represent ownership of an asset and differ from value tokens and NFTs in that they are fungible.

- Altcoins are any cryptocurrencies that are not Bitcoin, and they are based on modifying Bitcoin's original code and protocol to create new coins with different features. However, as the cryptocurrency market has grown, many altcoins have developed other use cases besides being a medium of exchange and are not necessarily rivals to Bitcoin. A way to distinguish altcoins and tokens is by looking at their architecture: altcoins have their own independent blockchain that supports their own currency, while tokens use an existing blockchain that enables the development of decentralized applications. Ethereum is the most prominent altcoin, followed by others such as Solana and Cardano. Altcoins can have different functions, such as Ethereum's ability to run decentralized applications and host smart contracts. There are several main types of altcoins, depending on how they were created, how they work, and what they offer:

• Stablecoins - These are cryptocurrencies that are pegged to other assets that have less volatility, such as fiat currency, gold, etc.
• Meme coins - These are digital assets that are inspired by popular Internet memes. The biggest meme coin is Dogecoin (DOGE), which is among the top 10 cryptocurrencies by market capitalization.
• Private cryptocurrencies - These altcoins aim to provide more anonymity and privacy for transactions. Examples include Monero (XMR), Zcash (ZEC), and Dash (DASH).

A Classification of Cryptocurrencies

Classifying cryptocurrencies can be challenging as there is no universally accepted system. One way to categorize different categories of crypto is based on their purpose and function. According to this approach, there are four main types of cryptocurrencies:

• Payment cryptocurrency – Cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) are designed to serve as a form of currency, a means of payment, a store of value, an investment asset or a speculative instrument. They exist on a blockchain that is solely dedicated to recording and executing transactions, without any additional functionality that could affect their value as a medium of exchange. Once acquired, these coins can be kept in digital wallets that are secured with passwords.
• Utility Tokens – These are digital assets that represents access to a specific product or service within a blockchain ecosystem. They are not primarily designed to function as a currency or a method of payment like payment cryptocurrencies such as Bitcoin or Litecoin. Instead, utility tokens are used to access a particular application or service within a blockchain platform. For example, the Ether (ETH) token is used to pay for transaction fees and computational services on the Ethereum network. While utility tokens can be bought and sold on cryptocurrency exchanges and may have value as an investment asset, their primary purpose is to provide access to a specific product or service within a blockchain ecosystem.
• Stablecoins – These are a type of cryptocurrency that is designed to maintain a stable value relative to an underlying asset that can be a national currency, such as the US dollar in the case of Tether (USDT) and the Gemini Dollar (GUSD), or a commodity like gold. Stablecoins can also be backed by other cryptocurrencies, as in the case of DAI, which is collateralized by other digital assets. Some stablecoins are algorithmic or non-collateralized, meaning that they use smart contracts to buy and sell the underlying asset in order to maintain price stability. The main purpose of stablecoins is to provide a stable store of value within the volatile cryptocurrency market.
• Central Bank Digital Currencies (CBDCs) – These are digital currencies issued by a central bank, designed to provide a digital alternative to physical cash and used as a method of payment. Unlike cryptocurrencies, which are decentralized and operate independently of a central authority, CBDCs are centralized and their value is fixed by the central bank and equivalent to the country’s fiat currency. Several central banks around the world are currently exploring the development of CBDCs, with Australia, Brazil, Canada, China, India, Japan, Russia, South Korea and Thailand that have made significant progress. The European Central Bank is also likely to start a pilot next year.

Apart from the four primary categories of cryptocurrencies, there are also other subcategories and classifications based on various features and applications – such as consensus type, underlying technology, application sector, and economic model – that go beyond the conventional uses of well-known cryptocurrencies such as Bitcoin and Ethereum.

References

• Different Types of Cryptocurrencies – Forbes Advisor
• https://www2.deloitte.com/us/en/pages/audit/articles/fra-classification-of-cryptocurrency-holdings
• How Many Cryptocurrencies are There In 2023? (explodingtopics.com)
• Types of Cryptocurrency - Overview, Examples (corporatefinanceinstitute.com)
• 4 Categories Of Cryptocurrency You Should Know | Cryptoverze
• Altcoins: What Are They, and Why Do We Need Them? | CoinsPaid Media