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Types of Cryptocurrency: What Everybody Should Know

There are thousands of cryptocurrencies. They all serve different purposes and come with different characteristics. Moreover, each of them has very different growth potential.

Consequently, users still become lost between terms and confuse types of cryptocurrency.

In this article, we’ll explain exactly how digital currencies are differentiated, starting with the two biggest categories that define key differences of cryptos: coins and tokens.

Coins

Coins are cryptocurrencies that run on their native blockchains. They have their own independent infrastructure. Coins can be mined and typically have the same features as traditional money.

Most often coins are used as payments or investments. They can also be used as units of accounts.

The ultimate example of coin is Bitcoin (BTC); the first cryptocurrency that was created to replace traditional money. Bitcoin is only used as a means of payment and a store of value.

Any other coin that is not Bitcoin, is called an altcoin. The name derived from the words “alternative” and “coin” and became so generic, that it now means every crypto alternative to Bitcoin, be it a coin or a token.

Types of Altcoins

The range of alternative crypto assets is wide. Thousands of altcoins exist with different purposes, features, and functionalities.

According to individual characteristics, digital coins can be grouped into the following categories:

  • Stablecoins
  • Privacy coins
  • Meme coins

Stablecoins

Stablecoins are digital currencies with a stable price. Their value is tied to other assets that are more or less stable. Usually, these are traditional currencies, commodities like gold, or even other cryptocurrencies.

Cryptocurrencies with a stable value are highly popular on crypto exchanges. Typically they act as a substitute for fiat currencies like the dollar or euro.

Traders can’t trade cryptos to fiat currencies directly on crypto exchanges. Instead, they trade cryptocurrencies to stablecoins that are resistant to volatility. Stablecoins help traders stay on the exchanges and not exit crypto markets in times of high volatility.

Some of the best-known stablecoins are Tether (USDT), USD Coin (USDC), and Paxos Standard (PAX). All of them, however, are built on existing blockchains and, theoretically, are tokens.

Privacy Coins

Privacy coins are cryptos that come with privacy and anonymity features as a top priority. Blockchains of these privacy coins have the capabilities to hide transfer data. Wallet addresses, identities of sender and the receiver, other transaction details can be totally anonymous.

Other coins like Bitcoin and Ethereum, meanwhile, come only with partial anonymity. Although transactions do not require names and contact details, the wallet addresses are visible and can be traced to the IPs.

One of the most iconic privacy coins is Monero (XMR), whose blockchain generates one-time wallet addresses for every single transaction.

Meme Coins

Meme coins are cryptocurrencies, created entirely as a joke or as an outcome of viral internet memes.

Humorous meme coins are considered to be one of the riskiest forms of crypto. They are created mostly for fun or speculative reasons and typically have no other use case. Because of that, they are extremely volatile and risky.

Dogecoin (DOGE) is currently the dominant meme coin. Its competitor, Shiba Inu (SHIB), although named a meme coin, is really an ERC-20 meme token.

Tokens

Tokens are cryptocurrencies built on blockchains that already exist and have their own native currencies.

For instance, Ether is the native coin of the Ethereum blockchain. Ethereum is the most widely used platform for thousands of decentralized apps (dApps) that are built on its infrastructure. Cryptos that derive from these dApps, are not native ETH coins; they are ERC-20 standard tokens.

Furthermore, tokens always have more use cases than coins. Coins are mostly used as payments or investments.

Tokens, meanwhile, can have additional roles like access to services, decision making, staking, validating transactions, or simply proving the authorship and ownership of something.

Based on their characteristics, tokens fall under the following categories:

  • Utility tokens
  • Security tokens
  • Governance tokens
  • Non-fungible tokens (NFTs)

Utility Tokens

As the name suggests, utility tokens are digital assets that provide some kind of utility. In other words, they give the ability to use certain functions, products, or services of the project.

Utility tokens are one of the most common types of tokens and also the type with the highest demand.

It’s logical, given their wide functionality, that utility tokens can provide value in different ways. Utility tokens are not only used for transactions. They can also be used to raise funds, redeem special services or pay network fees.

There are hundreds and thousands of utility tokens. Filecoin (FIL), for instance, enables decentralized data storage networks.

Security Tokens

Security tokens represent ownership in various financial assets that are traded on a blockchain. These assets might be any financial instrument, for example, a real estate, commodity, or any type of equity that is tokenized.

Security tokens serve a similar purpose as stocks or bonds. They are comparable with a company’s shares, which give ownership rights and the possibility to earn dividends from the profit.

Contrary to other types of tokens, security tokens are considerably more regulated and thus much less common in the crypto space.

To become security, tokens must pass the Howey Test, which is created by the United States Supreme Court and determines whether the arrangements within parties involve an investment contract.

The security token market is far smaller when compared to the general cryptocurrency market. At the time of writing, the total market cap of security tokens is over $1B, while the general crypto market cap sits over $2.76T.

Governance Tokens

Governance tokens give the voting right and ability to influence the future of certain crypto projects. They allow the distribution of power within the holders and thus enable decentralized decision-making similar to the rights stakeholders get in corporate governance. Holding governance tokens give investors the ability to propose how crypto projects should evolve further. Holders can also vote for or against technical changes.

A single governance token represents a single vote. So, the more tokens the holder has, the higher is his or her influence over the protocol changes.

Maker (MKR) is the best-known example of a governance token and can be used for voting, which is the only way to execute protocol changes.

Non-fungible Tokens (NFTs)

NFTs are non-fungible tokens that might represent anything digital. They are one of a kind and can’t be exchanged for any other token without losing value.

Blockchain-based NFTs record every single transaction into the immutable digital ledger. These records can’t be changed, duplicated nor deleted. This is how each NFT provides proof of authorship and also the ownership.

NFTs may eliminate third parties and thus change the way how creators earn money. Currently, they are mostly used as collectibles, in-game assets, and speculative means of investment.

Coins or Tokens: Which Is the Better Investment?

There are no simple answers regarding which type of crypto is a better investment, coin or token.

What truly matters are the tokenomics, key metrics and the team behind a particular project. Coins and tokens might both have excellent, or alarming foundations.

Tokens may have considerably more specific use cases than coins, whereas coins have their underlying blockchains.

Bearing in mind that blockchains are much more difficult and challenging to build than a dApp, we may only presume that coins could have stronger fundamentals and thus more solid long-term price growth perspectives.

Why You Should Care?

You have to know the basics of crypto if you want to play this space.

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    This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed to be financial legal or tax advice. Trading Forex, cryptocurrencies, and CFDs poses a considerable risk of loss

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    Author

    Simona is a fintech journalist and content editor at DailyCoin Academy, which focuses on educating new crypto investors. She entered the crypto space in early 2018, got burned, but discovered a passion for trading, and now it’s her hobby. Simona covers crypto and blockchain-related topics and takes a deeper look at what lies behind the latest industry trends.