Understanding the Different Types of Cryptocurrency

There was a time when the number and types of cryptocurrency could be counted on one hand. That is no longer possible today. The cryptocurrency market has expanded, expanded, and expanded some more!

In this article, I’ll go over the three major types of cryptocurrency: Bitcoin, altcoins, and tokens. By the end of this guide, you will have learned:

• What are the most popular types of cryptocurrency?
• How many different types of cryptocurrency are there?
• The distinctions between them;
• Each has advantages and disadvantages.

Before diving into the top types of cryptocurrency or even attempting to trade some of them, it’s critical to first understand what cryptocurrency is. If you are already confident in your knowledge in this area, please skip to the next section — scroll down to “The Three Main Types of Cryptocurrency”!

Sounds right? Let’s get started!

What exactly is a cryptocurrency?

The prefix crypto- stands for “cryptography,” which is a technology that protects and conceals information from attackers. You may have heard of cryptography in history class; it was used by the Allies to send and receive secret messages during World War II.

Cryptography is used in a variety of ways by computer technicians today. Cryptocurrency is one of them!

Decryptionary.com defines cryptocurrency as “an electronic money created with technology controlling its creation and protecting transactions, while hiding the identities of its users.” For the time being, you can ignore how different types of cryptocurrency are created and instead concentrate on what they do.

People no longer have to rely on banks to handle their money and personal information (the same goes for credit card companies).

We no longer require banks to process our transactions. Instead, cryptocurrency transactions are processed on the blockchain. The blockchain is a decentralised database.

It is shared because it is run by many different people and companies, rather than just one, as banks are. Nobody has control over the transactions or the cryptocurrencies involved in this manner, and you don’t have to rely on a single company (such as a bank) to handle your money.

Anyway, let’s move on to the three main types of cryptocurrencies.

The Three Main Types of Cryptocurrency

The blockchain brings together the three main types of cryptocurrency. Bitcoin was the first blockchain (skip to the Bitcoin section for more information on how it started and what it does).

After Bitcoin, many new blockchains were created — these are called altcoins. NEO, Litecoin and Cardano are solid examples of altcoins.  Finally, I must introduce you to tokens/dApps — the third main type of cryptocurrencies. Examples of these include Civic (CVC), BitDegree (BDG), and WePower (WPR).

So, let’s get into it!

Bitcoin

Bitcoin was first proposed in 2008. The White Paper was published online by Satoshi Nakamoto. However, it was later revealed that Satoshi Nakamoto was not the real name of this person. Even today, no one knows the true identity of Bitcoin’s creator!

Nobody could have predicted that Bitcoin would become what it is today. Nobody expected it to be the start of a massive technological revolution… but it was. It was the birth of cryptocurrencies, the start of a new era.

You’re probably aware of what happened next. For many years, the primary use of Bitcoin was to trade goods and services on the dark web. Have you ever heard of the Silk Road? That’s exactly what I’m referring to.

Bitcoin experienced significant growth in 2013-14. It then slowed slightly. However, the Bitcoin market continued to rise in 2017. It went a lot further this time.

Bitcoin reached a price of $20,000 per Bitcoin in December 2017. As a result, anyone with 50 Bitcoins or more became a millionaire. 50 Bitcoins would have cost you $10,000 in January 2015. That’s a $990,000 profit! Isn’t that crazy?

What exactly is it?

It is a digital currency that can be sent to others. This could be a gift, a service, or a product. You get the idea — it’s similar to the money in our bank accounts (USD, EUR, etc.). But it’s not physical; it’s digital.

However, that isn’t the only difference. It’s also decentralised, which means it doesn’t rely on a bank or a third party to handle it, as I explained in my definition of a cryptocurrency earlier.

Each transaction in Bitcoin occurs directly between users — this is known as a peer-to-peer network. All of this is made possible by the blockchain. Bitcoin pioneered blockchain technology, which enabled users to send and receive Bitcoin without the use of a third party.

Because you don’t need a third party, you don’t need to identify yourself. You can make payments without revealing who you are.

How does it Work?

When someone sends Bitcoin, the transaction is verified and then stored on the blockchain (the shared database). The information on the blockchain is encrypted — everyone can see it, but only the owner of each Bitcoin can decrypt it. Each owner of Bitcoin is given a ‘private key’, and this private key is how they decrypt their Bitcoin.

But, if the banks don’t verify/process the transactions, then who does?

Remember when I told you that blockchains are run by lots of different people and companies instead of one single company/person? Well, the people and companies that run the blockchain do it using computer power. They run special software on a computer that processes transactions on the blockchain.

Running this software uses a lot of electricity, though. So, how do the people and companies running the nodes pay for their electricity bills? Welcome to mining.

The nodes are rewarded for verifying transactions — they’re rewarded with new Bitcoin. This is how new Bitcoins are created. You can compare it to gold mining, in which the miners are rewarded with gold. In Bitcoin mining, the nodes are the miners — they mine for new Bitcoin.

Altcoins

Bitcoin was nearly synonymous with cryptocurrency in its early days because it was the only coin for many years and established early market dominance. As a result, future coin-based cryptocurrencies were dubbed altcoins. Altcoins, also known as alternative coins, are any type of coin-based cryptocurrency that is not Bitcoin.

Altcoins, like Bitcoin, are based on blockchain technology. Altcoin creators frequently tout their cryptocurrencies as having advantages over Bitcoin, such as faster transaction speeds and increased security. When compared to altcoins like Ethereum, which support applications and smart contracts, Bitcoin, which was originally designed to transfer wealth and record those transactions, is somewhat limited. Some altcoins, such as USD Coin, are pegged one-to-one with a fiat currency, making them less volatile than Bitcoin.

Tokens

Tokens are digital assets built on the blockchain of another cryptocurrency. In general, creating a token is easier than creating a coin. Tokens can be built on any programmable blockchain, essentially piggybacking on an already developed and validated complex network, whereas coins require a specific underlying blockchain. Because the Bitcoin blockchain does not support token creation, all tokens are classified as altcoins.

Tokens frequently have broader applications than coins. Most, for example, can be used in financial services on the public blockchain, a practise known as decentralised finance, or DeFi. These services include earning interest, purchasing insurance, borrowing, lending, and other activities that a traditional bank would normally support. Non-fungible tokens, or NFTs, are also gaining popularity as a a way to buy and sell digital artwork.

Market capitalization, or market cap, is a metric used to measure the relative size of a cryptocurrency, i.e. the total value of all the coins that have been mined. Market cap is calculated by multiplying the number of coins in circulation by the current market price of a single coin.

 

Bitcoin

Bitcoin was one of the first cryptocurrencies, with specifications and proof-of-concept documents published in 2009. It still controls roughly half of the cryptocurrency market. Once 21 million bitcoins have been issued, all new bitcoins will be issued. To maintain a consistent and predictable rate, the number of bitcoins created each year is automatically halved.

Ethereum

Ethereum, the second most popular cryptocurrency after Bitcoin, bills itself as “the world’s programmable blockchain,” allowing people to use other digital assets such as bitcoins and altcoins on the network, as well as store data and run decentralised applications, in addition to powering ether, the currency of the Ethereum blockchain.

Tether

Tether, which was founded in 2014, is the first blockchain-enabled platform to facilitate the use of traditional currencies. Tether tokens are referred to as stablecoins because they are pegged 1-to-1 to a fiat currency, which can provide price stability. Tether tokens are a token-based system built on multiple leading blockchains. Tether is linked to currencies such as USD, EUR, offshore Chinese yuan, and gold.

Binance Coin

Binance Coin, which was initially based on the Ethereum network, is now native to its own Binance blockchain. As a deflationary measure, Binance has implemented a quarterly auto-burn programme that removes approximately 50% of Binance Coin tokens from circulation.

USDC (US Dollar Coin) 

USDC is a stablecoin that is linked to the US dollar. The system enables traditional currency to be tokenized and used online and across blockchains. USDC can be changed back into traditional US dollars at a 1-to-1 rate.

Cardano

Individual Cardano cryptocurrency units are known as ada. Cardano tokens can power a variety of financial services in addition to serving as currency. The total supply of tokens is limited to 45 billion. Around 33.6 billion tokens were in circulation as of February 2022.

Solana

The blockchain platform and its native cryptocurrency are both called Solana. Solana, which will be launched in April 2020, promises users faster operation and lower transaction fees than Ethereum. It runs on a “proof of stake” blockchain, which uses less power than a “proof of work” blockchain like Bitcoin and is thus more environmentally friendly.

XRP

XRP is the native digital asset of the XRP Ledger blockchain. XRP is a payment-specific cryptocurrency that can be traded on over 100 markets and exchanges worldwide. XRP is designed to act as a bridge between difficult-to-match fiat currencies, facilitating easier international transactions.

Terra

Terra is a stablecoin that is linked to the US dollar via an algorithm and a reserve token called Luna. This is in contrast to most stablecoins, which are linked to traditional currencies via cash or cash equivalents. New coins are only minted when a certain percentage of Luna is burned, making it slightly less decentralised than other networks. When you use the coins to make a purchase, the transaction generates a fee, just like a credit card transaction. Then, much like a stock dividend, that  fee is distributed to people who own Luna tokens.

Polkadot

Polkadot protocol aims to integrate blockchains by creating a cryptocurrency network that connects them with “parachains.” The Polkadot token, DOT, is used both as a governance token and for staking, which is how the network verifies transactions and issues new DOT.