Bitcoin might be the first cryptocurrency ever launched on the market, but it’s not the only type of digital currency. There are several other variations you can choose from when you want to diversify your portfolio. Crypto specialists identify at least four main types of digital currencies, depending on their use case, application, code design, and other factors.
The term cryptocurrency is used to define a broad category of digital currencies, and it’s usually interchanged with coins. They are all commonly called so, even if many of them don’t serve as a store of value, unit of account, or medium of exchange, as Bitcoin does.
It’s essential to differentiate coins from altcoins, as the term altcoins refers to all digital currencies apart from Bitcoin, which were designed as an alternative to Bitcoin. However, Bitcoin price impacts all other cryptocurrencies’ value, and the fluctuations can be easily noticed in Ethereum price which was $1,519.36 at the moment when this article was written.
Coins differ from altcoins because they function on a blockchain where they act as native tokens (similar to fuel or gas payment tokens). The most well-known examples are ETH on the Ethereum blockchain and Bitcoin on the Bitcoin blockchain. When it comes to creating a cryptocurrency, it’s usually constructed or comes into existence along with a blockchain.
Altcoins can be regarded as coins and have been created as alternatives to Bitcoin (the first digital currency launched in the sector). While some altcoins were forked from Bitcoin, many have their blockchains, like Ethereum, Omni, Ripple, and NEO.
You’ll also find on the market the mention of the term token, which is a digital representation of a utility or asset. Tokens can also be named altcoins, but they’re unique in the sector because they reside on top of another blockchain and aren’t native to the network they reside. Tokens are designed to enable the creation of smart contracts on networks like Ethereum, and users can transfer them from one blockchain to another. They’re embedded in self-executing codes or programs and can function without a third-party platform.
Crypto users think utility tokens are similar to vouchers or coupons, but they are digital units representing a value on a blockchain. Therefore, they offer access to a service or product operated or run by the developers. Users gain access to digital services or assets by buying the utility token and redeeming it as an access value to the service or product.
Utility token holders have the right to the service or product equivalent to the token they own. For example, they can benefit from discounted prices or free access for the period they hold the tokens. Depending on the jurisdiction, utility tokens can be cryptocurrencies under no financial regulation.
It’s crucial to note that they’re unsuitable investment products because they can lose value if the holder decides so.
Some popular utility tokens are Golem, Funfair, Timicoin, Basic Attention Token, Sirin Labs Token, and Brickblock.
Security cryptocurrencies’ value is pegged to an external asset which can be traded as security under financial regulation. People use them for securitized tokenization of property, bonds, properties, real estate, and even traditional currencies. Considering the nature of the transactions they facilitate, their issuance, exchange, tokenization, dealings, trading, and value can be governed and controlled only by financial regulators. Regulations are created to protect investors, guarantee funds, and hold developers accountable. Security cryptocurrencies are developed through Security Token Offering and can be used to settle transactions, increase management transparency, or divide assets.
Security tokens are split into two categories:
– Equity tokens that function similarly to traditional stocks, except that their transference and ownership happen online.
– Asset-backed tokens baked by real-world assets, commodities, real estate, carbon credits, art, etc.
The most well-known security tokens are Science Blockchain, Sia Funds, and Bcap.
Their name suggests their purpose; they were designed to buy and sell services and goods online without the need for an intermediary (as required in traditional finance). The majority of digital currencies fall into this category, regardless of they’re utility or security coins. However, it’s essential to mention that not all utility tokens can be used to complete payments.
Payment cryptocurrencies are hybrids of other coins and cannot be added to investment portfolios as securities. They fall under no financial regulation, and they may or may not guarantee the user’s access to products.
Some examples of payment coins are Bitcoin, Ethereum, and Dogecoin.
Crypto specialists have different definitions for exchange tokens, but they all agree that they’re developed to be used in digital asset exchanges. Even if they can also be used outside their native blockchains, their main utility is to facilitate the exchange between digital assets. Exchange tokens are issued by centralized exchanges or blockchains and can be used for gaining access to particular crypto exchange services, voting rights, getting free discounts, boosting liquidity, or governing blockchains. Exchanges usually use them to attract users into participating in projects.
Some popular exchange tokens in the market are: Binance Coin or BNB Token, Uni token, and KuCoin tokens.
Non-fungible tokens are digital certificates of ownership to non-replaceable or unique items users cannot trade for another. They’re created with the same technology behind digital tokens, but they’re used to represent digital content, works of art, virtual worlds, videos, photos, audio, memes, real estate, GIFs, and other similar digital content.
The first NFT was created on the Ethereum blockchain in 2015. NFTs have a digital signature that prevents users from exchanging them. The holder owns an original item in the network and can bring it to NFT marketplaces and sell it. NFTs allow collectors, creators, artists, and digital content developers to sell their items.
Some examples of NFTs are crypto kitties, Logan Paul’s video clips, and Everydays: The first 5000 Days drawings by Mike Winklemann.
Stablecoins have a stable value, and their prices are predictable because they remain the same almost all the time. Usually, they’re backed by value-stable assets like fiat money, so you can buy euro or dollar-backed stable cryptocurrencies. They have the purpose of helping the crypto sector get rid of volatility.
Popular stablecoins are Tether, Gemi Dollar, USD Coin, Kitco Gold, and Ampleforth.