By Nathan Ferguson
Satoshi Nakamoto introduced the world to a new form of financial transactions in 2009 when he developed Bitcoin. It doesn’t get the hype at that time as the idea seemed to be crazy at that time. Decentralization was a new challenge, as all previous forms of digital payments were governed and under some 3rd party like financial banks.
Bitcoin was the first cryptocurrency but after that, hundreds of new cryptocurrencies were being added to the stream as Bitcoin started getting fame and acceptability. Blockchain is an open ledger, available for all developers to create their new coins and tokens. Do all kinds of cryptocurrencies are the same? or there is any difference? Let’s start with this guide article in which I will cover different types of cryptocurrencies.
Tokens Vs. Coins
First and foremost: Understand the distinction between a token and a coin. The phrases “coin” and “token” are frequently used while discussing cryptocurrencies. There is a distinction between the two terms, despite the fact that they may appear to be equivalent. It’s critical to keep them separate.
A coin is formed on its blockchain and functions similarly to traditional currencies. It can be used to hold value as well as a medium of exchange between the 2 people engaged in commerce. Bitcoin and Litecoin are two examples of digital coins.
Tokens can be used for a lot more than just electronic currency. Tokens are built based on top of the established blockchain and they can be integrated into software applications. They can be used to represent digital artwork for example NFTs. NFTs have also been used to deal with physical assets like real art and property investment. On the Ether network, Ethereum is an illustration of a token that is utilized to make transactions.
Coins
Coins are digital assets that operate on their own blockchains. Coins feature their own infrastructure that is self-contained. They can be mined and have many of the same characteristics as traditional currency.
Coins are commonly used for payment or investment. They’re also useful as accounting units.
Bitcoin (BTC), the initial cryptocurrency developed to replace conventional payment, is the pinnacle of currency. BTC is only employed as a form of transaction and a means of holding value.
Alternative cryptocurrency assets come in a broad variety of forms. Thousands of altcoins exist, each with its own set of goals, features, and functions.
Crypto coins can be classified into the following groups based on their individual characteristics:
- Stablecoins
- Privacy coins
- Meme coins
- Stablecoins
Stablecoins are cryptocurrencies that have a consistent value. Their worth is linked to other, somewhat stable assets. Conventional currencies, assets like diamonds, and even cryptocurrencies are commonly used.
On cryptocurrency exchanges, stable-value cryptos are very popular. Usually, they are used to replace fiat currencies such as dollars or euros.
Traders cannot directly convert cryptocurrencies to fiat money on cryptocurrency exchanges. Rather, they exchange cryptocurrencies for stablecoins, which are less volatile. In times of excessive volatility, traders can use stablecoins to remain on the exchanges rather than exiting the cryptocurrency market.
TUSDT, USDC, and Paxos Standard are some of the most well-known stablecoins (PAX). All of these, on the other hand, are based on current blockchains and are, in principle, tokens.
- Privacy Coins
Privacy coins are cryptocurrencies that place a high premium on confidentiality and security. These privacy coins’ blockchains have the ability to conceal transaction data. Wallet addresses, transmitter and recipient identities, and other payment information can all be kept completely private.
Other coins, such as BTC and Eth, provide just partial privacy. Although identities and contact information are not required for transactions, wallet addresses are available and can be linked to IP addresses.
Monero (XMR), amongst the most well-known privacy coins, creates one-time crypto addresses for each transaction on its network.
- Meme Coins
Meme Coins are cryptos that were developed purely as a joke or even as a result of popular internet memes.
One of the highest-risk types of cryptocurrency is funny meme coins. They’re usually made for amusement or speculative purposes, with no particular purpose in mind. As a result, they are exceedingly volatile and dangerous.
Dogecoin (DOGE) is the most popular meme coin right now. Shiba Inu (SHIB), despite being called a meme coin, is actually an ERC-20 meme coin.
Tokens
Tokens are cryptocurrencies based on existing blockchains with their own native cryptocurrency.
Ether, for example, is the Ether blockchain’s native coin. Hundreds of decentralized applications (dApps) are created on Ethereum’s blockchain, making it the most frequently utilized platform. Cryptocurrencies derived from these decentralized applications are ERC-20 standard tokens, not native ETH coins.
Additionally, tokens have a wider range of applications than currencies. Coins are primarily used to make payments or to make investments.
Tokens, on the other hand, can serve a variety of functions, including providing access to services, making decisions, staking, verifying transactions, or just confirming the ownership and possession of something.
Tokens are classified into the following groups based on their characteristics:
- Security tokens
- Utility tokens
- Non-fungible tokens (NFTs)
- Governance tokens
- Utility Tokens
Utility tokens, as the name indicates, are crypto assets that have some type of utility. In simple words, they grant access to specific project functions, assets, or services.
Utility tokens are among the most widely used forms of tokens, as well as the most in-demand.
Utility tokens can deliver value in a variety of ways, which makes sense given their broad functionality. Utility tokens are utilized for more than just payments. They could also be used to generate money, redeem special offers, and pay network fees.
Hundreds of thousands of tokens exist. For example, Filecoin (FIL) enables decentralized digital storage networks.
- Security Tokens
Security tokens are digital tokens that reflect ownership in a variety of economic assets that are exchanged on a blockchain. These assets could be any financial tool, such as real estate, commodities, or any sort of tokenized equities.
Security tokens are used in the same way that stocks and bonds are used. They are similar to a firm’s shares, which provide rights of ownership as well as the opportunity to receive dividends from profits.
Security tokens, in contrast to other forms of tokens, are significantly more governed and thus far less widespread in the cryptocurrency market.
To be classified as a security, tokens should meet the Howey Test, which was developed by the US Supreme Court and examines if the arrangements between parties constitute an investments contract.
When opposed to the overall crypto market, the security token industry is much smaller. The total current valuation of these tokens is over 1 billion USD right now, while the whole cryptocurrency market cap is over $2.76 billion.
- Governance Tokens
Governance tokens grant the opportunity to vote on and affect the development of specific cryptocurrency projects. They permit the distribution of power among holders, allowing for decentralized decision-making comparable to the privileges given to shareholders in governance. Investing in governance tokens allows users to suggest how cryptocurrency projects should go. Owners can also vote on whether or not to make technical adjustments.
A single vote is represented by a single governance token. As a result, the more the holder’s influence over protocol updates, the more tokens he or she owns.
Maker (MKR) is a very well governance token, and it may be used to vote on protocol modifications, which is the sole means to implement them.
- NFTs
NFTs or non-fungible tokens can be used to symbolize any digital asset. They’re one-of-a-kind and can’t be traded for anything else without dropping in value. NFTs users multiplied 10 times since the beginning of 2022.
Every transaction is recorded in an irreversible digital ledger via blockchain-based NFTs. These records are not editable, duplicatable, or deletable. This is the method by which each NFT proves authorship as well as ownership. NFTs may reduce the need for third parties, so altering how artists make money. They’re largely employed as collectibles and risky investments for now.
Why Is It That There Are So Many Different Varieties Of Cryptocurrency?
Because blockchain is open source, any computer programmer can utilize the software to develop something new. That is exactly what developers have done. As of now, there are moreover 10,000 different decentralized cryptocurrencies in circulation, and the number continues to grow. Only 4 years ago, the number of cryptocurrencies had surpassed 1,000.
The relative simplicity with which new cryptos can be developed is one of the reasons for the growth. One’s source code can be utilized to create another. The Ethereum blockchain, for example, might be used to produce your own digital currency. There are “forks” in computer software that change laws for how a cryptocurrency is regulated, which can result in the formation of a new cryptocurrency. In 2017, a Bitcoin fork allowed for more operations to be recorded in a given block of the blockchain, resulting in Bitcoin Cash.
The rise in cryptocurrency values has prompted many coders to try to get a piece of the action. Furthermore, blockchain technology has applications beyond digital money. While some cryptocurrencies may be a bubble economy that will ultimately burst, the decentralised nature of technology and the huge range of applications it may make in the software industry are 2 factors why there are many.
The Most Common Cryptocurrencies
Bitcoin is regarded as the initial cryptocurrency, and additional cryptocurrencies are referred to as “altcoins” (a combination word originating from “alternative coin”). It’s tough to tell which cryptocurrencies are the best, but Bitcoin and other of the most popular altcoins are top-tier possibilities due to their scalability, anonymity, and range of usefulness.
There is no “best” currency because each has its own set of characteristics based on the needs of the creator. Here’s a summary of a few of the most widely used crypto assets and how they’re used.
- Bitcoin
Bitcoin is the first decentralized cryptocurrency that makes use of blockchain technology to allow decentralized payments and transactions. Rather than relying on a central bank or 3rd parties to validate transactions (such as your bank branch, credit card issuer, and trader’s bank), Bitcoin’s blockchain behaves like a public ledger for all the transactions made on this blockchain.
The ledger can assist avoid scams and other unauthorized manipulation of the currency by allowing a party to show they own the Btc they’re attempting to use. Peer-to-peer funds transfers (such as those between persons in two separate states) can be made faster and cheaper with a decentralized currency than with standard currency exchanges through a 3rd-party entity.
- Ether
The Ethereum network’s token, Eth, is utilized to conduct transactions. Ethereum is a platform that leverages blockchain technology to allow the construction of smart contracts and other dApps (meaning the software doesn’t need to be distributed on app stores like Apple’s Google Play Store, where they may have to give the technology firms a 30% cut of any profit).
- Binance Coin
Binance Coin, among other crypto coins accessible for trading, can be found on the Binance crypto exchange platform. Binance Coin is used as a kind of cryptocurrency, but also permits the creation of tokens which can be used to cover Binance exchange fees and run Binance’s DEX for application development.
- USD Coin
USD Coin, like Tether, is a stable coin that is tied to the US dollar. USD Coin, like Tether, is based on the Ethereum network. USD Coin was created with the goal of creating a “totally digital” dollar that has the same stability as US fiat money but does not need a bank account and the holder to reside in a specific nation. USD Coin is intended as an everyday currency that can be used with traders on the internet, rather than just as an investment.
- Solana
SOL is the native token of the Solana blockchain, which, like Bitcoin and Ethereum, is based on blockchain technology. Solana’s network can handle 50,000 transactions in a second, making it particularly appealing to traders who want to trade fast.
- Ripple
Because it’s tailored to fulfill the demands of the economic services sector, XRP, which operates on the Ripple protocol, has been dubbed a “cryptocurrency for banks.” XRP was created to help with international payments by acting as a bridge between the 2 different currencies, allowing for cheaper and faster global transfers.
- Cardano
The Cardano blockchain’s native currency is ADA. Cardano, called a “third-generation” currency, separates its blockchain into 2 layers to allow faster transactions and introduces native tokens to give ADA users a better experience.
LUNA is the Terra native coin, and it backs the network’s multiple stablecoins. Terra’s algorithm stablecoins are supported by LUNA and are priced using a centralized pool of tokens governed by smart contracts. Token holders can bet LUNA in order to get compensated for absorbing volatility. LUNA can be used to cover network costs and gives owners a say in how the network is run.
Different Types Of Crypto Trading
Investing in cryptocurrency is not the same as investing in a firm’s stock. Stock claims a firm’s profits as well as possession of the firm. Purchasing crypto coins, on the other hand, is a speculation bet on the virtual currency’s value movement, which can be highly unstable and is susceptible to the principle of supply and demand because digital currency is not a static asset. Using a wallet on trading software, cryptocurrency can be swapped for other cryptocurrencies or fiat currencies such as USD, Euro, or Pound.
But, aside from trading, there are many other ways to gain profit. To gain incentives, some currencies can be “staked.” After purchasing a cryptocurrency, an investor can keep it in their account and use it to validate transactions on the public blockchain. Proof of stake is a way of operating a blockchain network in which the holder of the cryptocurrency can receive a payout by staking their assets, which is typically paid in extra coins or tokens.
CME Group, a renowned derivatives exchange, offers futures contracts on BTC and ETH in addition to exchanging digital currencies. Futures contracts are derivatives that are used to protect against price volatility in the underlying value.
Thousands of cryptocurrencies exist. They’re all used for different things and have different properties. Furthermore, every one of them has distinct growth potential. As a result, users continue to be perplexed by terminologies and types of cryptocurrencies.
In this post, we’ll break down how cryptocurrencies are classified, commencing with the two most important categories that characterize crypto’s key differences: coins and tokens.
Conclusion
Which is a better investment: coins or tokens? There are no straightforward solutions to the question of whether a token or a coin is a good option. The tokenomics, important metrics, and people behind a venture are what really matter. The foundations of tokens and coins might be good or frightening.
Tokens may have far more particular use cases than currencies, which are supported by their own blockchains.
Given that blockchains are far more complex and time-consuming to develop than dApps, we can only assume that currencies will have superior fundamentals and, as a result, more stable long-term market growth prospects.