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Different types of cryptocurrency include utility, payment, security, and stablecoins. But what are they and how do they work? With around 20,268 cryptocurrencies as of 2022, where do we start?
Here, we present to you Crypto 101: get to know the different types of cryptocurrency and understand how they work… even as a beginner.
Crypto 101: Understanding the Different Types of Cryptocurrency
The first step to making a successful investment is ensuring that you make the right choice. And, speaking of choices, cryptocurrency has a full buffet for you to choose from. At first glance, it can be overwhelming but worry not because we are here to make it simpler for you.
So a basic question that you might have is, how many cryptocurrencies are available for usage and purchase?
How Many Types of Cryptocurrency Are There?
Based on The Motley Fool’s data, more than 12,000 active cryptocurrencies are in the market. But, let the buyer beware, because not all crypto coins are sustainable for the long term. While many have the potential of being a safe investment, many different kinds of cryptocurrency lack the stability to remain for long.
To help you set your mind on the cryptocurrency you will choose, first acquaint yourself with the definitions of some common terms to avoid confusion. You’ve probably heard of coins, altcoins, and tokens as commonly-used terms when talking about cryptocurrency.
ALTCOINS, COINS, AND TOKENS
Coins operate on their own Blockchain with their own Protocol. They are digital money (a.k.a. “digital currency”) similar with physical currency that have value and are transferrable. Further, coins are the main assets of big blockchain networks such as the aforementioned three.
Lastly, Tokens are coins that are built on the foundation of an already-existing cryptocurrency. Simply put, tokens are digital representations of a trade-able asset or utility that you can use for investment or economic purposes within its blockchain.
Now, let’s move to the types of cryptocurrency tokens. In its entirety, there are 9 types: utility, exchange, payment, security, stablecoins, DeFi tokens, NFTs, and asset-backed tokens.
However, only 4 are the primary kinds – utility, payment, security, and stablecoins.
4 Major Types of Cryptocurrency Tokens
In this phase, let us familiarize the four primary types of tokens. Also, see the different kinds of cryptocurrency that fall under them.
1. Utility Tokens
First, we have Utility Tokens that mainly serve as an initial coin offering (ICO) for a company that is preparing to launch a cryptocurrency. When the launch becomes successful, this cryptocurrency will give investors access to the company’s services and products. The utility tokens represent or hold a certain value in the company’s offerings that the client can redeem.
This coin is native to the Binance network. It has a wide variety of uses for payments – travel, entertainment, and bills.
Basic Attention Token (BAT)
This token is tied to the Brave browser and is for incentivizing advertisement views of users. Instead of tracking Brave users’ browsing activity, BAT is used to incentivize users to view advertisements.
The company specializes in cloud storage and offers hard drive rentals using the peer-to-peer payment system in the cryptocurrency network. As a utility token, FIL is usable in accessing the storage space and network.
It is a native token to the Cronos blockchain where users can use CRO to turn crypto into any fiat currency at a lower cost. CRO also facilitates cryptocurrency as an acceptable payment to certain merchants.
2. Payment Tokens
Next, we have payment tokens whose name stands for exactly what it means. They are digital money for payment, buying, and completing business transactions. Further, these are the cryptocurrencies that you can transfer peer-to-peer without an intermediary needed. In other words, it serves as an alternative means of payment and exchange.
This is the most well-known payment token. Released 13 years ago, Bitcoin has now evolved to be useful in different aspects. It was first seen as simply a mode of peer-to-peer electronic cash transfer. But now, it is used as a value store and money to pay for purchases.
It is usable with smart contracts and digital apps. Solana is also linked to NFTs acting as a facilitator in the buying and selling of digital art.
This is one of the proof-of-stake blockchain platforms. It also implements smart contracts, accommodates NFTs, and allows the management of multiple assets.
3. Security Tokens
Third on the list, Security tokens. Defined in the sense of regulated and monitored finance, security means proof of ownership of a certain investor. Traditionally, it takes the form of company shares or bonds.
However, in the crypto world, it refers to a digital representation of one’s ownership and value transfer. This kind of token contains the investment made by a client.
Securitized tokens represent ownership in a specific enterprise and often include voting power. Companies use this kind of token to encourage more investors to hold shares in their companies.
First public SEC-registered security token.
Uses the same blockchain technology as Bitcoin to give companies access to tokenized assets.
Released publicly in 2017, this company specializes in venture funds. They offer tokenized shares to start-ups and help them grow their capital so they can expand operations.
From the root word ‘stable’, we can derive that these kinds of coins offer a level of dependability to investors. Primarily because their value is tied to a currency, product, or precious metal such as gold. Because stablecoins’ prices are much less volatile in comparison to other coins, investors prefer them.
Tether tokens are tied to fiat currencies. This link to real-world currencies helps them achieve stability compared to others. USDT can be used for loans and investments.
USD Coin (USDC)
It is tied to the US dollar. It is accepted as a payment form and used for remittances. Also, traders prefer USDC who want digital assets with lesser volatility and sure returns.
DAI, just like, USDC, is also pegged to the US Dollar and is safe for borrowing money and making investments.
Binance USD (BUSD)
Binance USDC is one of the safe stablecoins with guaranteed ROIs as it undergoes monthly audits and is compliant with NYDF.
In summary, there are a lot of cryptocurrencies that exist. Thus, you can choose which to invest in depending on your goal and vision. Crypto’s rising popularity indicates that it has gained attention from many investors and may indeed hold the key to improving the economy.