The difference between coins and tokens; How to differentiate between Bitcoin (BTC), altcoins, and tokens; Stablecoins and their sub-categories; Notable examples of cryptocurrencies in each category, and much more.
What is Cryptocurrency?
The above is a more general definition that can be used to refer to all types of cryptocurrencies. As you will learn in this guide, some assets may fall into the fringes of this definition, but they are all cryptocurrencies in one form or the other. Currently, there isn’t a standard way of grouping digital assets. The cryptocurrency space is still nascent, with new developments and innovations emerging regularly. For that reason, you should take these classifications as mere guides to help you differentiate among the more common cryptocurrencies. However, before preceding it is important to understand the difference between Bitcoin and everything else.
How is Bitcoin different from other cryptocurrencies?
Bitcoin is the most popular and the largest cryptocurrency by market capitalization. It is considered the flagship crypto, having been launched in January 2009 by a pseudonymous individual called Satoshi Nakamoto. At the time of its launch, Bitcoin became the first successful implementation of the blockchain concept. Following its launch, other blockchain developers quickly noticed room for improvement or iteration to enable further functionality. As a result, some copied the original Bitcoin source code and made little adjustments in what is commonly referred to as ‘forking.’ Others started with a clean slate and made completely new creations, albeit based on the Bitcoin blockchain idea. Since the new networks were based on Bitcoin, they were referred to as alternative coins to Bitcoin or simply altcoins. And this gives birth to the first main classification of cryptocurrencies which is Bitcoin and the rest of the coins or altcoins. Tokens are another high-level classification category derived from altcoins. These are digital assets native to protocols that are hosted on other blockchain networks. For instance, Ethereum, the largest smart contract platform, can support the development and deployment of decentralized protocols. Ethereum has its own native altcoin called Ether or ETH. All other crypto protocols based on Ethereum have created native assets, and these are referred to as tokens. They typically adhere to the base protocol standards, such as ERC-20 on Ethereum. The majority of the crypto types identified below are based on altcoins and tokens.
Explained: Different Types Of Cryptocurrencies
In this section, we are looking at ten categories of cryptocurrencies. It is an amalgamation of how various investors and developers have grouped them. The following are the types of cryptocurrencies we will focus on in this guide: Let’s delve deeper into each of the cryptocurrency types:
1. Utility tokens
Utility tokens or utility coins are assets used to access services on a given blockchain protocol. Typically, a user will have to acquire the asset and hold it to gain the privileges other asset holders enjoy including governance, trading fee discounts, and start-up investment rounds (also called IDO or Initial DEX Offering). Utility or infrastructure assets are perhaps the most common types, and examples include the following:
Ether (ETH) – this is the native coin on the Ethereum blockchain, which serves as a gateway for smart contracts to access the Ethereum Virtual Machine (EVM); Binance Coin (BNB) – the native coin on the Binance ecosystem enables holders to access several privileges on the Binance platforms, including the launchpad, enjoy reduced trading fees and higher returns on some investment products; Basic Attention Token (BAT) – serves a critical role in properly incentivizing different players within the Brave browser ecosystem, including advertisers, content creators or publishers, and internet users.
Other notable utility and infrastructure assets include Golem (GNT), OmiseGo (OMG), and 0x (ZRX).
2. Payment Cryptocurrencies
Payment-type cryptocurrencies are, as the name alludes, crypto assets used to make payments for various goods and services. In essence, all assets can be used as a form of value transfer, but few can be used as money. To qualify as a payment coin or token, an asset needs to portray the following qualities of money:
Portability – means that the coin or token can easily be carried from one location to another. All coins and tokens achieve this feature; Divisibility – this quality refers to the extent to which a coin or token can be subdivided to be used for the exchange of minute or little-value items; Acceptability – refers to how well an asset can be accepted by users as a means of payment; Durability – physical forms of money need to pass the durability test where the material used to make them is proven to last a long time. This is less of a concern for digital assets, but to some extent, it is still important for investors to consider the longevity of a project to ensure it can last long enough to be accepted as money; Homogeneity – this quality refers to the sameness of value. For example, a one-dollar bill is exactly the same as the next one-dollar bill. Similar to two one-hundred dollar bills, which should ideally hold the same value. For a cryptocurrency to qualify to be used as money for payment, it needs to portray homogeneity.
Here are a few examples of cryptocurrencies that can be used for payment purposes:
Bitcoin (BTC) – the original cryptocurrency; Bitcoin Cash (BCH) – a fork of the Bitcoin blockchain; Dogecoin (DOGE) – a meme coin that was created as a joke; Litecoin (LTC) – one of the first blockchains to be forked from Bitcoin with minor improvements such as faster transaction processing speeds; Dash (DASH) – a privacy-focused payment network.
3. Stablecoins
Stablecoins are cryptocurrencies that aim to maintain a constant value regardless of market conditions using various techniques. As a result of the use of different methods, there are four different kinds of stablecoins. These are:
Fiat-Collateralized Stablecoins – these are the most common stablecoins with the largest market share compared to their counterparts. The value of these cryptocurrencies is tied to that of a traditional currency such as the US Dollar or a basket of currencies. Leading stablecoins Tether (USDT), USD Coin (USDC), TrueUSD (TUSD), and Binance USD (BUSD) are all pegged to the US Dollar currency; Crypto-Collateralized Stablecoins – these cryptocurrencies derived their value from other more established cryptocurrencies such as Bitcoin. They could be backed on a 1:1 ratio against one or a basket of other digital assets. One such crypto-collateralized stablecoin is DAI, whose value is pegged to the US Dollar, but its collateral is comprised of Bitcoins; Algorithmic Stablecoins – this is a more recent type of stablecoin whereby developers use a system of incentives and smart contracts to maintain a stablecoin’s peg to another asset. It is worth noting that these assets do not have collateral associated with them. The idea behind such assets is that market participants will be incentivized enough to participate in the price stabilization of an asset. If the stablecoin loses its peg, the system is designed to deploy countermeasures that adjust the supply of tokens. However, this stablecoin model is prone to significant risks that could lead to de-pegging. Such an incident happened to Terra-Luna in 2022 when the asset lost its USD-based peg, and its value fell close to 100%. Other notable algorithmic-based stablecoins are FRAX, FEI, and RAI. Commodity-Backed Stablecoins – as the name alludes, these stablecoins are collateralized using commodities, and the most common assets used to back them include Gold (XAU), Oil, and real estate. Some examples of such stablecoins are Tether Gold (XAUT) and PAX Gold (PAXG), both of which track the price of the US Dollar while being backed by Gold reserves.
4. Exchange Tokens
Exchange tokens are cryptocurrencies associated with or issued by cryptocurrency exchanges. Could be centralized (CEX) or decentralized exchanges (DEX), but both could create native tokens that are used to power their ecosystems. Most of the leading crypto exchanges issue tokens that serve as
Governance tokens; Trading fee discount claim tokens; Staking tokens; Launchpad investment access tokens.
Some leading platforms with exchange tokens include:
Binance exchange – Binance Coin (BNB); Crypto.com exchange – Cronos.org chain (CRO) token; Huobi exchange – Huobi (HT) token; KuCoin exchange – KuCoin Shares (KCS); Uniswap DEX – UNI tokens.
5. Meme Coins
Meme coins are cryptocurrencies that are created to take advantage of the social media meme phenomenon. Despite the cause of their origin, some meme coins have gone on to become notable cryptocurrencies in terms of how large they’ve grown in market value. The first and currently the largest meme coin by market cap is Dogecoin (DOGE) was created for entertainment by software engineers Billy Markus and Jackson Palmer back in 2013. The coin was created based on the Shiba Inu dog breed, which incidentally led to the use of the dog’s image as the coin’s logo. The coin’s market value has grown over the years, propelling it to be among the ten most valuable blockchain networks. At the back of its success have been several other cryptocurrencies looking to replicate DOGE’s success. Notable among them is the closely dog-themed Shiba Inu (SHIB) project that also experienced explosive growth following its launch in August 2020.
6. GameFi Crypto
GameFi is a recent blockchain use case that involves the economics of designing an engaging and immersive experience. The term is a truncation of the words gaming finance, and it combines ideas from both decentralized finance (DeFi) and non-fungible tokens (NFTs). This group of GameFi crypto includes all tokens that serve critical roles in metaverse games, including projects such as Axie Infinity (AXS/SLP), Splinterlands (SPS/DEC), Alien Worlds (TLM), Decentraland (MANA/LAND) and The Sandbox (SAND). Most of these GamiFi tokens are used as utility tokens for rewarding players in play-to-earn games, but some games offer chances of earning even more by enabling staking features. Rewards from staking are often in another native token with expanded capabilities, such as being used for governance reasons.
7. Central Bank Digital Currencies (CBDC)
Central Bank-issued Digital Currencies (CBDCs) are a type of cryptocurrency designed and issued by a central government as alternatives to fiat currencies. The aim of creating a cryptocurrency is to replicate some of the desirable features witnessed in digital assets, such as sound security, low transaction costs, and fast execution times, while still controlling supply and demand. There are very few governments already using or developing CBDCs for various reasons. So far, about three countries have launched their digital currencies, while others are in the pilot stages. Yet still, a few others are researching, but a majority are still stuck in the wait-and-see phase. Here are a few of the notable countries involved in the deployment of CBDCs so far as at the time of publication: Launched In
The Bahamas – Sand Dollar Jamaica – JAM-DEX Nigeria – eNaira Eastern Caribbean Union comprising Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts, and Nevis, Saint Lucia, and St. Vincent and the Grenadines – DCash
In the Pilot Phase Australia, Ghana, South Africa, United Arab Emirates, Russia, Ukraine, Sweden, China, Hong Kong, South Korea, Iran, Saudi Arabia, Thailand, India, Singapore, and Malaysia. Actively Researching So far, more than seventy countries are in the research and development phase for launching a CBDC. This includes the United States, Canada, Japan, the United Kingdom, Brazil, Venezuela, the Philipines, and Norway, among others.
8. Security Tokens
Security tokens are digital equivalents of traditional securities existing on a blockchain. Think of any regulated conventional financial security such as equity shares, or property rights. These can be represented on the blockchain, and their performance can be tracked from anywhere in the world. These security tokens are more commonly deployed on the Ethereum blockchain adhering to the ERC-1400 standard. Issuance of these tokens is referred to as a Secure Token Offering (STO), and these events are conducted in accordance with financial regulations determined by agencies such as the Securities and Exchange Commission (SEC) in the US or the Swiss Financial Market Supervision Authority (FINMA). Examples of blockchain security tokens are Blockchain Capital’s BCap, SPiCE VC, Sia Funds, and Science Ventures.
9. Wrapped Tokens
Wrapped tokens are alternate versions of a given cryptocurrency enabling its value to be ported over to another blockchain. The concept was introduced as a solution for the blockchain interoperability challenge. As an example, the most popular wrapped token so far is Wrapped Bitcoin (WBTC), which is a token that tracks the value of Bitcoin and is backed on a 1:1 ratio. Ideally, the price of 1 WBTC should always equal 1 BTC. Bitcoin is an independent protocol not interoperable with, say, Ethereum. However, with WBTC, BTC holders can use ‘their’ Bitcoins on the Ethereum network. The same also applies to the Tron network, whose community has created a WBTC version based on the TRC-20 token standard. Wrapped tokens are created through a process of ‘minting’ and ‘burning.’ To create 1 WBTC, the creator will lock 1 BTC in a smart contract, and in reverse, whenever they want to redeem their 1 BTC, they’ll burn the WBTC by sending it back to the smart contract and receiving an equal amount of Bitcoin back. Other notable wrapped tokens are Wrapped NXM (WNXM), renBTC (RENBTC), renDOGE (RENDOGE), and Wrapped Ether (WETH).
10. Privacy Coins
There is a common misconception that cryptocurrencies offer private transactions. This is not true of most digital currencies, including Bitcoin, Litecoin, Bitcoin Cash, and Ethereum. What they do offer are pseudo-private or pseudonymous transactions where some information is kept hidden, and the rest is available to the public. For instance, the Bitcoin network will typically share the addresses of the sender and the receiver, the amount transacted, and the fee paid. Additionally, a wallet’s entire transaction history is available on the internet. However, some coins are designed to hide this information from the public, and these are referred to as private or privacy-focused coins. The most popular is Monero (XMR), whose transactions are so private that only the counterparties are privy to the transaction amount. Also, only the wallet owner knows their wallet balances. Other notable examples of privacy-focused coins are Zcash (ZEC), and Dash (DASH). PIVX (PIVX), Decred (DCR), and Horizen (ZEN).
11. Bonus: Non-fungible Tokens (NFTs)
Non-fungible tokens are not cryptocurrencies. However, we have included them in this guide as a bonus type because it is important to identify and differentiate them from digital currencies. The major difference between the two is that NFTs adhere to different token creation standards than those used to create currency tokens. It is important for beginners to understand and differentiate between these assets as well. NFTs are unique digital certificates proving ownership and provenance of an item. Unlike currency tokens that portray money features, NFTs are not money, and cannot function properly if used for value transfer. This is because each NFT is unique; even those created by the same smart contract within the same series have unique features held within their metadata. Therefore, two NFTs will rarely have the same value. Popular NFTs include the Bored Ape Yacht Club (BAYC), EVERYDAYS: The First 5000 Days by digital artist Beeple and CryptoPunks.
Final thoughts
In this guide, we have discussed some of the more common types of cryptocurrencies. This is by no means a conclusive list, but it is a solid introduction for anyone starting their journey and looking for a way to balance their digital asset portfolio. If you’re an experienced investor, hopefully, you have identified a couple of extra categories you can use to better classify your investments. However, it is worth noting that the cryptocurrency space is highly dynamic, and there are constant innovations and improvements to current projects that create new digital assets. Therefore, aim to stay updated with the crypto trends and avoid making investments based on old information. Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.
Utility cryptocurrencies; Stablecoins; Payment cryptocurrencies; Exchange-based tokens.
