Understanding the Different Types of Cryptocurrencies
Cryptocurrencies have become extremely popular across the globe over the past few years. Multiple crypto exchanges have sprung up in India, making it easier for you and me to invest or trade in the tens of thousands of cryptocurrencies available today. However, it is vital that we understand the various categories of cryptos and their features before investing in them. In this article, we shall discuss different types of cryptocurrencies.
What is Bitcoin?
Bitcoin is a digital currency that provides secure global transactions quickly and without third-party manipulations. It was created to address the inefficiencies in global financial systems. Unlike normal currencies, Bitcoin is not issued by any government, and banks do not manage accounts or validate transactions. It is based on a cryptographic system that uses certain codes and numbers to keep information safe and secure.
Bitcoin is created, distributed, traded, and stored with the use of a decentralized ledger system known as a blockchain. It can be considered as records of transactions kept on a secure computer network. Moreover, Bitcoins are generally stored in digital wallets that allow users to manage and trade their coins. We recommend that you go through this detailed article to learn more about Bitcoin, blockchain technology, and how it works.
Bitcoins are currently accepted as a means of payment for products sold or services provided. It also offers lower transaction fees compared to traditional online payment mechanisms. However, the value of Bitcoin has been extremely volatile over the past few years.
What are Altcoins?
Altcoins or Alternative Coins is a term used to describe all cryptocurrencies other than Bitcoin. These coins also use blockchain technology that allows secure peer-to-peer transactions. Altcoins were built on the success of Bitcoin by slightly changing the rules to appeal to different types of users. They essentially solve the inefficiencies of Bitcoin. For example, an altcoin known as Litecoin was created to address issues related to scalability, higher transaction time & charges, and environmental concerns of Bitcoin.
Another example of an altcoin is Ether. Ethereum (the technology behind Ether) was created based on the idea that blockchain tech can be used to create applications that go beyond just enabling a digital currency.
There are more than 10,000 altcoins in existence today. New altcoins will keep emerging as a result of innovation and technological advancements.
Cryptocurrency as a Form of Currency
Cryptos that are used solely as a currency fall under this category. Examples include Bitcoin, Litecoin, Shiba Inu, and Dogecoin. Various companies and even countries around the world accept some of these digital currencies for conducting transactions. However, the high volatility of Bitcoin and other popular cryptocurrencies makes it unsuitable for everyday use by the public.
What are Stablecoins?
Stablecoins are a class of cryptocurrencies backed by reserve assets (cash or commodity). It attempts to offer price stability while ensuring all basic features or benefits of cryptocurrencies. Stablecoins also provides instant processing and security of payments. For example, each Tether (USDT) is pegged to (or backed by) 1 US Dollar. If you hold Tether, an equivalent amount of US Dollar is stored in a reserve. Since fiat currencies are pegged to an underlying asset such as gold or foreign exchange reserves, their valuations remain free from wild movements.
Another example of a stablecoin is PAX Gold, a digital token backed by physical gold. Currently, one PAXG is nearly 30 grams.
What are Utility Tokens?
While coins are built and run on their own blockchain and operate as currency, tokens are programmable assets that work on other cryptos’ blockchains. Utility tokens are those used for a specific purpose or use-case, generally for spending within a particular blockchain ecosystem. These tokens allow their holders to access a company’s product or service.
For example, Basic Attention Token (BAT) is a utility token of Brave, a free and open-source web browser developed by Brave Software, Inc. BAT was created to improve the security and efficiency of digital advertising through blockchain technology. It tracks the time and attention of media consumers on websites using the Brave browser. BAT aims to efficiently distribute advertising money between advertisers, publishers, and readers of online marketing content and ads.
Ether is another utility token used to facilitate transactions under Ethereum’s blockchain network.
What are Security/Equity Tokens?
Any company that works with blockchain technology or projects can raise funds via an Initial Coin Offering (ICO). It is similar to an initial public offering (IPO), wherein a firm raises funds by selling its shares to the public. A blockchain-based company can issue a whitepaper, outlining details of its projects, future plans, and issue size. Interested investors can apply to an ICO and receive a new cryptocurrency token issued by the company. This token may have some utility in using the product or service the company is offering. Or, it may simply represent a stake in the company or project.
What are Asset Tokens?
Asset tokens are a type of cryptocurrency backed by a real asset. Any asset, agreement, or contract between parties can be settled using crypto. An example of an asset token is Non-Fungible Tokens or NFTs. These are tokens that exist on a blockchain and cannot be replicated. NFTs can be used to represent ownership of unique items, including art, images, videos, collectibles, and even real estate. However, buying an NFT of an image or art does not mean the buyer gets the copyright of the underlying item. Unlike most digital items that can be endlessly reproduced, each NFT has a unique digital signature— meaning it is one of a kind.
New types of cryptocurrencies will continue to emerge as companies adapt and innovate upon the blockchain technology Bitcoin was built on to launch their own platforms and currencies. You can head over to CoinMarketCap to view a comprehensive list of the different types of cryptocurrencies.