Types of cryptocurrencies

What are cryptocurrencies? This question is no longer as common as it was a decade ago. We have witnessed the birth and development of a range of digital assets, each with unique features and purposes. The types of cryptocurrencies are many and varied: from the famous Bitcoin, which opened the door to the world of decentralisation, to modern altcoins and tokens that solve specific problems or power decentralised applications.

 

Understanding cryptocurrency networks, their functionality and capabilities is key to realising their role in the modern economic space. Cryptocurrency networks are not just technological platforms, but the basis for creating a global, decentralised economic system.

 

Familiarising yourself with this variety will not only help you understand how wide the crypto market is, but also help you decide on your investment priorities or how you can use cryptocurrencies in your everyday life.

 

Overview of types and features of cryptocurrencies

 

Type of cryptocurrency	Description	Intended purpose
Bitcoin (BTC)	The first and most famous cryptocurrency powered by blockchain technology.	Used as a medium of exchange and store of value.
Altcoin	Any cryptocurrency created after Bitcoin, often with improvements or new features.	A variety of features, from fast transactions to enhanced anonymity.
Stablecoin	A cryptocurrency whose value is linked to the value of fiat currency or other assets.	Reducing volatility and ensuring value stability.
Token	A digital asset created on an existing blockchain platform, most commonly Ethereum.	Representing the value or right to use a particular product/service.
Exchange tokens	Tokens issued by cryptocurrency exchanges offering privileges to exchange users.	Discounts on commissions, listing voting and other bonuses for exchange users.
Central bank digital currencies (CBDCs)	Digital currencies issued by central banks that are a digital form of fiat currency.	Simplifying payment systems and strengthening monetary policy.
Wrapped tokens	Tokens whose value is tied to the value of another cryptocurrency, but they run on a different blockchain platform.	Utilisation of assets from one blockchain network in another network.
Security tokens	Tokens that represent an investment contract and are asset-backed.	Giving investors a share in profits, assets or voting power.
Non-Futurable Tokens (NFT)	Unique tokens that cannot be interchanged and are often linked to digital assets.	Confirmation of authorship and ownership of digital goods and art.
Meme coins	Cryptocurrencies that originated from internet memes or jokes are often highly volatile.	Trading and participating in the community around internet culture.
GameFi (game finance)	Cryptocurrencies linked to blockchain games that allow you to earn while you play.	Generating income through participation in games and game economies.
Privacy Coins	Cryptocurrencies that provide improved privacy and anonymity of transactions.	Increase anonymity and privacy of transactions.

 

This table represents just the tip of the iceberg in the world of cryptocurrencies, each type has its own subcategories and features that require more in-depth study to fully understand their potential and risks.

 

Bitcoin

(BTC) Bitcoin is the first cryptocurrency that emerged in 2009, and it is still the best known and most valuable. Based on blockchain technology, it offered the world the concept of decentralised digital money circulation that does not require the intermediation of banks or governments. Bitcoin is often referred to as "digital gold" as it also serves as a tool for preserving value and hedging inflation.

Altcoin

Altcoins are a broad category that includes all cryptocurrencies that were created after Bitcoin and offer alternative characteristics or new features. Ethereum, Ripple, and Litecoin are all examples of altcoins. They may offer faster transactions, improved privacy, more scalable networks, or other technological innovations.

Stablecoin

Stablecoins are cryptocurrencies whose value is pegged to stable assets, usually currencies like the US dollar, to minimise price volatility. Examples of stablecoins include Tether (USDT), USD Coin (USDC), and Binance USD (BUSD). They allow traders and investors to avoid short-term market fluctuations by keeping the value of their assets digital.

Token

Tokens are a type of cryptocurrency asset that are created on existing blockchain platforms, most commonly on Ethereum, using token standards such as ERC-20. Examples of tokens include Chainlink (LINK) and Uniswap (UNI). They can represent anything from an ownership stake in a project to the right to use a particular service.

Exchange tokens

Exchange tokens, such as Binance Coin (BNB) and KuCoin Shares (KCS), are issued by cryptocurrency exchanges and often offer users privileges such as reduced trading fees, voting opportunities to add new tokens to the exchange and participation in special programmes.

Central bank digital currencies (CBDCs)

CBVCs are digital currencies that are issued by the government and have the status of official means of payment. They are designed to simplify payment systems and improve the efficiency of monetary policy. For example, the Chinese digital yuan (DCEP) is being actively developed and tested by the National Bank of China.

Wrapped tokens

Wrapped tokens, such as Wrapped Bitcoin (WBTC), allow the assets of one blockchain platform to be represented on another. This creates bridges between different networks, allowing, for example, bitcoin on the Ethereum network to be used to participate in decentralised financial applications (DeFi).

Security tokens

Security tokens are cryptocurrencies that represent investment contracts and are subject to securities regulation. They typically entitle the holder to a share of profits, dividends or other financial benefits, similar to shares. Examples include tokens issued on the Polymath platform.

Non-Futurable Tokens (NFT)

NFTs are unique digital assets that can prove ownership of a specific item or copyright in digital art, music, video content and more. They are created on the blockchain and cannot be interchanged or shared. Examples include digital art traded on platforms like OpenSea.

Meme coins

Meme coins such as Dogecoin (DOGE) and Shiba Inu (SHIB) often originate from internet jokes or memes and do not always have a clearly defined practical value or use. However, some of them have managed to build large communities and even be used for trading and payments.

GameFi

GameFi combines cryptocurrencies and blockchain games where players can earn digital assets as they play. Examples include Axie Infinity and Decentraland, where players can earn tokens by participating in game economies and interacting with other users.

Privacy Coins

Cryptocurrencies such as Monero (XMR) and Zcash (ZEC) offer enhanced privacy and transaction anonymity. They use sophisticated cryptographic techniques to ensure that transactions are difficult to trace, making them popular with users who value privacy.

The main types of cryptocurrencies and their pros and cons

Bitcoin

Pros:

• Recognisability: The most well-known and widely used cryptocurrency.

• Liquidity: High level of liquidity compared to other cryptocurrencies.

• Security: A powerful network with a high level of security thanks to a solidly established blockchain.

Minuses:

• Transaction speed: Comparatively slow transactions due to the limitations of the blockchain.

• Cost of transactions: High fees for high volume of transactions on the network.

• Scalability: Limitations in network scalability without significant technology upgrades.

Altcoins

Pros:

• Innovation: Many altcoins are innovating and offering improved features over Bitcoin.

• Specialisation: Some altcoins are created for specific purposes and niches, offering unique opportunities for investors and users.

• Affordability: Often have a lower purchase price at the outset.

Minuses:

• Risk: Greater volatility and risk associated with less established and recognised currencies.

• Liquidity: Less liquidity compared to Bitcoin can make it difficult to sell large quantities of coins quickly.

• Market Split: A large number of altcoins can cause confusion and dilution of investments.

Tokens

Pros:

• Functionality: Tokens are usually assets or utilities and can be used within specific projects.

• Capabilities: Provide access to functions such as participation in DAOs (decentralised autonomous organisations) or use in defi (decentralised finance).

• Technology integration: Often built on existing blockchain platforms, making them easier to develop and integrate.

Minuses:

• Dependency: Their cost and functionality may depend on the success of the platform on which they are built.

• Regulation: May face legal and regulatory challenges depending on their treatment as securities.

• Complexity: Tokens can be difficult to understand for those new to investing and cryptocurrencies.

These pros and cons represent the big picture for each type of cryptocurrency, but it's worth remembering that each specific currency or token has its own unique characteristics and risks.

 

By looking at the different types of cryptocurrencies it becomes clear that each type offers its own unique opportunities and risks for investors and users. Bitcoin remains the gold standard in the cryptocurrency world, offering high recognisability and security, but it also suffers from limitations in terms of speed and transaction value. Altcoins and tokens, on the other hand, provide innovation and specialised solutions, although they come with greater volatility and risks.

By recognising these differences, you can approach investing in cryptocurrencies in a more considered way:

• Diversification: The key is to spread your investments across different types of cryptocurrencies to reduce risk.

• Research: It is important to thoroughly research each cryptocurrency before investing, including the technology, development team and market potential.

• Newsflash: The cryptocurrency market is constantly evolving, and new technology and regulatory changes should be closely followed.

• Consideration of regulatory risks: Potential regulatory changes that may affect the value and legality of cryptocurrencies should be considered.

In conclusion, cryptocurrency is not just an investment instrument, it is also an innovative technology that can radically change the financial system. Therefore, it is important to approach investments in cryptocurrencies not only with a desire to make a profit, but also with an understanding of their role in the future of the digital economy.