Types of cryptocurrency coins

Bitcoin has been synonymous with the term ‘cryptocurrency’ since long, and is undoubtedly the most famous cryptocurrency out there. However, there are over fifteen thousand cryptocurrencies out there in market circulation, apart from Bitcoin. In fact, there are more cryptocurrencies in the world today than fiat currencies (i.e. government-issued currencies).

Focus of this article will be to introduce you to the various major cryptocurrencies in the market that are gaining traction, and so are worth exploring as a means of investment or mining.

Table of Contents

• Types of Cryptocurrencies
• Major Cryptocurrencies

Warning

Cryptocurrencies is a very volatile market. Fluctuations are rather huge, leading to windfall gains and drastic losses. So, be very vigilant while dealing cryptocurrencies and rely on your own deep research.

Over and above that, in India the government and RBI have not been displaying a very supporting attitude for crypto market, evident in 30% tax imposition on profits made, 1% TDS on transactions, and also virtually delinking the regular banking system and digital wallets from crypto exchanges.

Types of Cryptocurrencies

Cryptocurrencies can be broadly classified into three categories, based on their usage.

• Cryptocurrencies used as Currencies
• Cryptocurrencies used as Tokens
• Cryptocurrencies used as Jokes

Cryptocurrencies used as Currencies

These are the most well-known type of cryptocurrencies, and the main reason why cryptocurrencies became so popular at the first place – “Cryptocurrencies as a substitute of Fiat currencies”.

So, they provided an alternate and safe method to people to make their payments. With time, some of them have demonstrated that they can even hold on to their value, and so can be an interesting investment option, e.g. Bitcoin, Ether, Litecoin, etc.

Note

We all know that Bitcoin was the first cryptocurrency. That’s why all other cryptocurrencies that came after it are also called Altcoins.

Cryptocurrencies used as Tokens

Some cryptocurrencies are also used as tokens. These cryptocurrencies are used for a specific project or purpose.

Basically, there are four types of crypto tokens:

• Utility Token
• Asset Token
• Security Token
• Decentralised Financing Token

Let’s understand them one by one.

Utility Token

We all use a lot of online services and apps, e.g. Facebook, Twitter, Amazon, etc. Most of these are centralized, i.e. some company or person owns and controls them. However, using blockchain technology we can also make decentralized online applications.

Many products, services and applications have been made using the decentralized blockchain technology. These products, services and applications use their own blockchain platforms and such platforms have their own cryptocurrencies, that users can use to buy/sell products and services on that platform.

For example:

• Ethereum is a blockchain platform that uses a cryptocurrency called Ether. So, to do any transaction on Ethereum platform or store any data on it, we need Ether.
• Siacoin (SIA) for Sia (a decentralized cloud storage platform).
• MANA for Decentraland (where users can buy virtual land)
• Brave Browser is based on blockchain technology (while others like Google, Bing, etc. are traditional centralized browsers). To do any transaction on it, we need Basic Attention Token. In fact, they reward you these tokens every time you browse on their platform.
• Civic token to identify a user’s identity.
• Golem Token

Asset Token

They are based on some asset, i.e. they drive their value on the basis of some real-life asset. This backend asset can be anything of value, e.g. real-estate, paintings, etc. So, these are the “Cryptocurrencies representing Assets”.

Say, you own a house. Traditionally, we are given some papers by government registry office and development authorities as a proof of our ownership. But in decentralized blockchain platforms we are given asset tokens. Whoever is in possession of a particular asset token, will be considered the owner of the real-life asset represented by that token.

Though they may be as varied as there are assets in real-life, there are two major types of Asset Tokens:

• Stablecoins
• NFTs

Let’s understand each one of them in more detail.

Stablecoins

Some cryptocurrencies are based on some reserved external assets (fiat currencies, commodities, or cryptocurrencies) and drive their value from them. For example:

• Tether (also known as USDT), Gemini Dollar, USD Coin (USDC), and DAI derive their value from the US dollar.
• Gold GLC, Pax Gold, and DIGIX derive their value from the value of gold.

As these cryptocurrencies are backed by some reserved external assets, they are considered less volatile than other cryptocurrencies in general.

So, basically Stablecoins combine the positives of fiat currency (stability and assurance) with the positives of blockchain technology (decentralized, transparent, secure).

Some of these types of cryptocurrencies may also be backed by other kinds of cryptocurrencies, oil, etc.

Warning

Kindly keep in mind that just because a company claims that its cryptocurrency is backed by some asset, does not really mean that it’s true. Afterall, there’s no one to verify that claim. It was evident in the tanking of Terra LUNA in May, 2022.

Coin or Token

Several Stablecoins are not coins, but rather tokens. For example, Tether and USD Coin. So, they are technically Stabletokens. But in general parlance, we call all of them Stablecoins only.

Example of true Stablecoins, i.e. cryptocurrencies that are actually coins and not tokens, are TerraUSD (UST) and Steem Dollars (SBD).

NFTs

A prime example of asset token is Non-Fungible Tokens (NFTs), which are digital assets with unique data, that are secured and backed by blockchain technology. NFTs are verifiable and cannot be duplicated. For example:

• Flow
• ALGO (related to Algorand, a proof-of-stake blockchain cryptocurrency protocol)
• CryptoKItties

NFTs have gained a lot of popularity recently and are considered good for safeguarding copyrights. For example, for arts, comics, stamps or baseball cards, as in case of all these assets originality matters, and crooks often try to make cheap duplicate copies of them and then pass them as original. To avoid that scenario in digital world (where copy-paste is even much easier), the idea of NFTs was put forward. For example, if an online gaming asset won by a player in an online gaming contest is secured by blockchain technology, then it would be difficult for others to duplicate or steal that digital asset.

Security Token

Security Tokens are also known as Equity Tokens. These are basically like shares of a company that people can buy. However, unlike shares that are issued via a centralized stock exchange, these crypto tokens do not need any such institution.

For example:

• tZERO
• Polymath
• The Elephant Private Equity Coin
• Recovery Right Token (RRT)

Note

In finance terms, ‘security’ is a tradable financial asset. So, Bitcoin is not a security token, as money invested in it is not utilized in a common enterprise. You do not get some share or partial ownership of a company by buying Bitcoins.

Decentralised Financing Tokens

These cryptocurrencies are used in Decentralised Finance (DeFi), which is an alternative to traditional finance sector. For example:

• Chainlink for decentralized Oracle’s network.
• Aave for decentralized lending.
• Uniswap for exchanging Ethereum based tokens.
• LUNA for e-commerce payment. It aims to make decentralised finance (DeFi) accessible to everyone.

Note

You may say that that crypto coins or utility tokens are basically assets on their own blockchains, e.g. Bitcoin on Bitcoin blockchain and Ether on Ethereum blockchain. While, stablecoins, asset tokens, security tokens, or DeFi tokens represent assets foreign to the blockchain they live on.

Cryptocurrencies used as Jokes

Now, there are some cryptocurrencies that are more in the nature of a joke or a meme, and so are not very trustworthy investment or mining options. They serve no purpose as such, and some of them may even just be scams. Needless to say, they are very volatile too. For example:

• Dogecoin (ELON) for inter-planetary money transactions.
• Shiba Inu

However, some of them may make a transition to serious cryptocurrencies in the future. For example, though Dogecoin started as a joke, it is fast becoming a serious cryptocurrency. Tesla CEO Elon Musk tweets sure seem to suggest so. Its developers seem to be serious in making it a challenger to the leading cryptocurrencies in the market, viz. Bitcoin, and Ethereum. But they still have a long way to go before that even starts looking like a possibility.

Proof-of-Stake Vs. Proof-of-Work

Cryptocurrencies also differ in the way they allot coins to miners. Some use proof-of-work mechanism, while others use proof-of-stake mechanism. For example:

• Bitcoin uses proof-of-work mechanism, and probably will keep on using it till its code changes (which will need at least 51% of the bitcoin holders to accept that change).
• Ether for decentralized applications. It uses proof-of-work, but has already started migrating to proof-of-stake in 2022.
• Cardano for research purposes. It uses proof-of-stake.
• Solana for blockchain applications. It uses proof-of-stake.

We will deliberate on the differences between these two mechanisms/protocols in much more detail in a separate article.

Major Cryptocurrencies

Now, let’s have a look at the various leading cryptocurrencies that you can put on your watchlist and may think about investing or mining them.

Bitcoin

Bitcoin is the leader of cryptocurrencies, and considered relatively safe to invest. However, even its prices have fluctuated a lot recently.

Moreover, as most of the bitcoins have already been mined, its mining difficulty level has increased tremendously. So, now it’s not as lucrative for miners as it used to be, especially for those with small-scale rigs.

Ether

It’s probably the second big name in cryptocurrencies universe after Bitcoin. It gained a lot of traction after 2017, reflected in its soaring prices (and that of GPUs!).

Though there’s still some juice left in Ether, it is also becoming more difficult to mine. However, as it moves from proof-of-work mechanism to proof-of-stake mechanism, it will become easier to mine but only for those who have bought its stake. Either way, as the trend suggests, it may become less appealing option for general crypto miners after 2022-23.

That’s why miners with long-term futuristic mindset are already setting their eyes on the other kids on the cryptocurrency block. Let’s explore some of these fast-emerging new cryptocurrencies, which probably have the potential to become the next Bitcoin or Ether.

Some other famous cryptocurrencies are:

• Litecoin
• Ravencoin
• Flux
• Dogecoin - Though it started as a joke or a meme, it’s fast becoming a serious cryptocurrency and is definitely worth exploring. Afterall, as the trend suggests, whatever Elon Musk touches turns into gold.