Confusion over crypto? Try these 3 types first.
Important Points
- Pure cryptocurrencies, such as Bitcoin, are regarded as online money.
- USDT and other stablecoins are popular for trading and hedging against volatility.
- Tokens indicate ownership of a project or network.
The term "cryptocurrency" now refers to much more than just Bitcoin (BTC 1.13 percent ). As a result, determining where to begin might be difficult. To assist with this, we can categorize cryptocurrencies according to their properties. This classification aids in differentiating one form of cryptocurrency from another.
While there are many more sorts of cryptocurrencies than the three we will discuss here, they are a wonderful place to start. The first type of cryptocurrency is pure cryptocurrency, such as Bitcoin. The second type of cryptocurrency is stablecoin, which is backed or pegged to fiat currency. The final type is tokens, which are similar to stocks but are issued by cryptocurrency companies.
Pure cryptocurrencies
A pure cryptocurrency is designed to function as a kind of money on the internet. Bitcoin was the first cryptocurrency made to be the native currency of the internet, but it has a lot of competition.
Shortly after Bitcoin's inception, several projects arose that tried to improve on Bitcoin's model. Other coins, such as Ethereum (ETH 3.85 percent), have imitated Bitcoin model features like node count and block rewards.
As new projects arose, they experimented with the number of computers that ran the network (node count) as well as the issuing of new coins (block rewards). The number of nodes is a rough indicator of how decentralized and robust a coin is. The block rewards, in large part, govern a cryptocurrency's monetary policy. That is, how many coins are there and when are new ones introduced into circulation?
The main takeaway from pure cryptocurrencies is that they are self-contained financial assets that are best viewed as online money.
Stablecoins
The value of stablecoins is tied to a fiat currency, such as the US dollar. They are enticing because digital currencies or dollars are stable and familiar. Stablecoins, in most situations, get to enjoy the perks of cryptocurrencies, such as near-instant transfer times and low transaction fees.
Stablecoins are designed to avoid price fluctuation, which is the main disadvantage of pure cryptocurrencies. For this reason, stablecoins are the preferred asset to trade against pure cryptocurrencies. They enable traders to take and hold profits on a stable asset rather than being concerned about price fluctuation.
Although the goal of stablecoins is for the price to remain tied to the appropriate asset, some have lost their peg. This is due to the fact that not all stablecoins are backed by fiat currency deposits. When this occurs, stablecoin holders may be unable to redeem their coins for the original asset or anything of similar value. Some stablecoins' prices are determined by algorithms, which have been shown to be less dependable than stablecoins with actual backing.
Tokens
This cryptocurrency category, often known as "crypto tokens," is fairly broad. Because of their ease of creation and distribution, tokens account for more than 99 percent of digital currencies.A token is often used to represent a share in a cryptocurrency project, platform, or network.
Many tokens are launched through a procedure known as an initial coin offering (ICO). This is analogous to a corporation going public via an initial public offering (IPO). At this point, investors may purchase tokens from project administrators if they believe in the company's use case or direction. In general, the more ways a token can be used within an app or product, the higher its value is likely to rise.
Paying platform fees, enrolling in particular firm products, and participating in project governance are all examples of use cases. After a token is launched, its price will fluctuate as the project evolves and the market develops.
A significant portion of crypto tokens are governance tokens. These tokens function similarly to stock in a firm. They are used to vote on the project's direction, how the budget is spent, and which new features should be developed next. DAO, which stands for "decentralized autonomous organization," is the moniker given to this unique type of firm. Tokens are a crucial aspect of these organizations' governance and represent a step forward in administrative decision-making.
There are numerous subcategories.
Although pure cryptocurrencies, stablecoins, and tokens are wonderful places to start, there are several subcategories that can provide a more detailed understanding. The interaction between various high-level categories of cryptocurrencies is what constitutes the overall crypto business. The vast majority of it falls into one of these three groups. Non-fungible tokens (NFTs) are a notable exception, but they are a sort of cryptocurrency that deserves its own page.