Types Of Cryptocurrencies: What Are They And What Do You Need To Learn About Them?
While it is increasingly difficult to meet a person who has never heard of Cryptocurrencies, the recognition of other virtual assets remains relatively low.
The most important coins and types of cryptocurrencies can be exchanged mainly by those who follow this market on an ongoing basis.
If you are not one of them or if you want to better understand the different types of crypto, then this article is for you.
Many people call cryptocurrencies all instruments listed on cryptocurrency exchanges. This is not particularly surprising, because, in the strict investment sphere, there are no major differences between them.
The key is that individual digital assets are subject to the same trading rules and daily valuation.
Their prices, like the prices of shares or other financial instruments, are influenced by the play of supply and demand forces and can be analysed using indicators and technical analysis tools.
For the above reasons, a large part of investors no longer delve into the technical aspects of cryptocurrency. However, you should be aware that there are two main groups of digital assets: cryptocurrencies and tokens.
What’s more, within them, we additionally distinguish several subcategories of virtual instruments, which differ, among others, in terms of functionality or applications.
Let’s take a closer look at them and see what the most popular cryptocurrencies are right now.
The Main Types Of Cryptocurrencies, i.e. Bitcoin And Altcoins
The first decentralised payment projects appeared in the 1990s, but it is widely assumed that Bitcoin, created in 2009, gave rise to cryptocurrencies and the blockchain technology that revolutionised the way transaction information is stored and transmitted.
To this day, it remains the most popular and important digital currency, which is confirmed by its total market capitalization, which in recent years has been from approx. 40 to as much as 70% of the entire cryptocurrency market.
Because there are already several thousand virtual assets, this should be considered an impressive dominance.The emergence of Bitcoin and the publication of its source code paved the way for the emergence of other cryptocurrencies.
The former was assumed to be an alternative to it, which is why they began to be called alternative cryptocurrencies (altcoins). In most cases, they were also intended to be used mainly for payments, but at the same time to be faster, more efficient, and more useful.
There have been dozens of cryptocurrencies with such ambitions, but none of them came close to dethroning Bitcoin.Over time, virtual assets began to emerge that resembled Bitcoin only to a small extent and were not intended to compete with it.
Today, there are most of these types of assets on the market: some offer useful, revolutionary solutions, others do not bring anything new, and others are just a scam (fraud).
You can call them all cryptocurrencies and altcoins at the same time (because they were created after Bitcoin), but as you probably guessed, this is a big simplification.
Huge Variety Of The Cryptocurrency Market
From the technical point of view, not all types of cryptocurrencies meet the criteria that allow them to be considered cryptocurrencies. Not only that, in fact, “real” cryptocurrencies are a minority on the market.
So keep in mind that in practice we distinguish two basic types of digital assets: the aforementioned cryptocurrencies and tokens, which are much more.
Moreover, the tokens themselves are also not a homogeneous group and can be divided into several subcategories.
Cryptocurrencies And Tokens
To better understand the essence of the cryptocurrency market, you should know what the instruments on it are different from. For the sake of simplicity, let’s start with a difference that can be grasped without getting too technical.
Well, cryptocurrencies usually act as a kind of virtual money or digital currencies and perform (at least in theory) primarily a payment function.
By contrast, tokens do not have such obvious uses; they can be used to raise funds, be the equivalent of cash transferred to the blockchain, and even have properties similar to stock shares.
The second key difference is that bitcoin (BTC), Ethereum (ETH), ripple (XRP) litecoin (LTC), Stellar (XLM), eos, and every other cryptocurrency have their blockchain network, while tokens are created on a foreign chain block using the smart contracts, i.e. ready-made computer programs (protocols).
It is worth adding that some blockchains do not contain any tokens (e.g. in the Bitcoin network), while others have dozens or even hundreds of them (e.g. the Ethereum network, where ERC-20 tokens are created).
As you can easily guess, a token can be created in a much simpler way than a cryptocurrency. It does not require any advanced programming skills or specialist knowledge.
Just use the tips of available practitioners, for example, on YouTube. The procedure is simple thanks to smart contracts, which are additionally used for subsequent handling and monitoring of transactions.
Types Of Tokens And Their Specificity
Tokens have a much longer history than cryptocurrencies and blockchain technology. Already decades ago, various entities issued them as units of value, later they were also used in computer networks to protect access data, as well as in banking as session identifiers or one-time code generators.
In the world of cryptocurrencies, tokens perform different functions, but their diversity remains just as impressive.
Let’s start with the fact that all of them are a kind of virtual tokens, operate based on blockchain technology, and are created by the so-called. tokenization, i.e. “transforming” a value into a digital asset.
However, each of them has slightly different applications, which you need to remember when investing in the cryptocurrency market.Due to the differences in applications and construction, we can distinguish three basic types of cryptocurrency tokens.
- Utility tokens have value within their system. They are used to raise funds as part of ICO (Initial Coin Offering), which is why most entities enter cryptocurrency exchanges by issuing them. In addition, they somehow reflect the share in the capital of a given company, and may also enable participation in voting on important changes in projects.
- Security tokens are similar to company shares and are more heavily regulated than utility tokens. They can represent actual shares in an entity and provide investors with a high level of protection.
- Commodity tokens are partially or fully backed by standard goods such as gold, silver, or fiat currencies.
Currently, utility and commodity tokens play the largest role in the crypto world, with the latter being primarily about the so-called stablecoins. The latter is a kind of virtual cash (usually USD), which allows you to conveniently trade other tokens and cryptocurrencies.
According to the regulations of many countries, as long as you make transactions using tether (USDT), USD Binance (BUSD), or other stable coins, you do not have to settle them and pay taxes on them.
The tax obligation arises when crypto is exchanged for fiat currency, i.e. Polish zlotys.
It is worth noting that most cryptocurrency tokens are based on the Ethereum network blockchain and the ERC-20 standard.
Other popular standards include ERC-721, NEP-5, and BEP-2, which are used to create tokens in the Binance exchange system.
What Are The Most Popular Cryptocurrencies?
Now that you know the most important types of cryptocurrencies and tokens, let’s take a look at the most popular projects on the market. It is worth knowing them, if only because they are characterised by the largest capitalization and the highest liquidity of trade.
In their case, exchange rate fluctuations are usually relatively low (as for the cryptocurrency market), and at the same time, they are not subject to strong changes as a result of concluding a single high-value transaction.
Also, unlike less popular cryptos, you can trade them with leverage, through futures and CFDs.Importantly, recognizable cryptocurrencies are also associated with a relatively low risk of “forgetting”.
It is about the possibility of a situation in which a given coin loses the interest of investors and includes very strong drops, after which it will be difficult for it to ever come close to its price peaks. In this case, even if the market enters a bullish period, the forgotten crypto may remain stagnant or experience only a small increase in price.
Summary
If you are serious about investing in the crypto market, you should know the different types of cryptocurrencies and cryptocurrency tokens. The greater your knowledge and investment awareness, the easier it will be for you to make the right financial decisions.
The fact is, however, that at the moment the structural differences between individual cryptos are still of little importance. For the average investor, the current price of the cryptocurrency and the direction and with what strength it can go are crucial.