What types of cryptocurrency are there?
When Bitcoin launched in 2009, there was only one cryptocurrency. Fast forward over a decade, and now there are over 10,000 crypto to choose from, with more being created daily.
Although Bitcoin is the original, several different types of cryptocurrency have emerged, but they all follow the same foundational model:
- Decentralized. Cryptocurrency is built on a decentralized network called the blockchain.
- Encrypted. Cryptocurrency is all secured by cryptography, which is a secure programming technology.
- Stored in Digital Wallets. All crypto is stored in a digital wallet, whether a software or hardware wallet.
Cryptocurrency can be classified in several ways. Let’s break down the details of each type of cryptocurrency, what they are used for, and how to differentiate each type.
Types of Cryptocurrency
Cryptocurrency can be categorized into several different types, based on their technology, use case, and value. Here are the different types of cryptocurrency and how they are classified:
As the original cryptocurrency, Bitcoin was created by a person (or persons) with the alias Satoshi Nakamoto in 2009 in response to the 2008 financial crisis. Bitcoin was designed as a reward for users who process financial transactions on a distributed ledger network known as the blockchain.
Created to help decentralize peer-to-peer financial transactions, Bitcoin has continued to grow its network of node operators, validators, and end users, and the value of Bitcoin has grown at an incredible pace since its inception. The value of Bitcoin is due to its limited supply (capped at 21 million coins), and continued cultural and institutional adoption worldwide.
Bitcoin reached a market cap of over $1 trillion in 2021 (although it has dropped below that), but its historic growth is also coupled with massive price volatility. Bitcoin continues to grow in popularity, and its network processes over 200,000 transactions per day.
Overall, Bitcoin stands in a class of its own as the original cryptocurrency, and all other cryptocurrencies that have followed are an attempt to improve upon it.
Altcoins is a term that is used to describe any cryptocurrency that is not Bitcoin. When the first “alternative coins” were launched, they were typically a spinoff of Bitcoin, using its open-source code to develop a new cryptocurrency.
Since altcoins are a broad category that include all cryptocurrencies that are not Bitcoin, it includes several different types of crypto, including stablecoins, meme coins, utility tokens, governance tokens, and security tokens. It also includes all new types of projects and coins that are developed.
There are now thousands of altcoins available, all with unique projects behind them. The most popular alternative cryptocurrency is Ethereum, which makes up nearly one-quarter of the total crypto market cap. Many other altcoins have become popular crypto investments and have grown to a market cap of over $1 billion.
While Bitcoin is inherently volatile, altcoins are more so. With a much smaller market capitalization than Bitcoin, altcoins’ value can fluctuate wildly, meaning prices can increase or decrease very quickly.
Overall, altcoins are now roughly half of the total cryptocurrency market, and are continuing to grow in popularity.
Stablecoins are a type of cryptocurrency whose price is algorithmically pegged to a less volatile asset, most commonly a national fiat currency (such as the U.S. dollar). Some stablecoin prices are pegged to assets such as precious metals, or even to other cryptocurrencies. Stablecoins were created as a less-volatile way for investors to own cryptocurrency and use it as a cash-equivalent for trading and transacting.
There are several popular stablecoins that are pegged to the U.S. dollar, including Tether (USDT) and U.S. Dollar Coin (USDC). These crypto are unique in that they are backed by actual U.S. dollars or other assets to equal the total market cap value of the coin. These “fiat-collateralized” coins give faith to holders because each coin is backed by cash and cash-equivalents.
Stablecoins have come under scrutiny from the U.S. government because many of them are pegged to the U.S. dollar, which is the world’s most popular reserve currency. In 2021, the President’s Working Group on Financial Markets (PWG) created a report on stablecoins, and called for further investigation and regulation from the SEC. In the report, criticism of fiat-backed stablecoins (such as Tether) point out that most of the reserves are not actually held in U.S. dollars, but rather in other investments, such as short-term treasury notes.
Although stablecoins have become one of the most popular coins to own in crypto, impending regulation from the U.S. government and other regulatory authorities is likely on the horizon.
Tokens are a type of cryptocurrency that are built on an existing blockchain, such as the Bitcoin or Ethereum network. These crypto assets are not considered currency, but rather an asset on the blockchain that serves a specific purpose.
Tokens typically fall into one of three categories:
Utility tokens are designed to pay for actions on an existing blockchain network. These actions include executing transactions, minting of new tokens, publishing of nun-fungible tokens (NFTs), or virtually any other function a programmer wants the token to perform.
These tokens are best used with smart contracts, which are a type of program that exist on the blockchain to automatically facilitate a transaction between parties. The use cases have expanded to include a wide range of decentralized applications, such as crypto gaming, NTFs, and many others. Utility tokens are the programmable asset that is used on all of these applications.
Ether (ETH) is the most popular utility token, used exclusively on the Ethereum network. Ether is used to pay data processing fees (known as “gas fees”), allowing users to perform a wide range of functions on the network.
Since most crypto projects operate on a decentralized model, many of them allow holders of their native tokens to have voting rights on the project. These governance tokens are a type of utility token, but are specifically designed to give power to the community for future direction of the crypto project.
For example, iIf a crypto project wants to spend funds on upgrading its network or purchasing assets to grow the platform, users can vote by “staking” (locking up) their governance tokens for the idea they want to vote on. After the vote is complete, users receive their tokens back. Users with more governance tokens have more voting power, and thus can help guide the direction of a project by owning more of its tokens.
This democratic approach to product development has been popularized by Decentralized Autonomous Organizations (DAOs). Governance tokens help facilitate the functions of the DAO, with the ultimate goal of avoiding any centralized organizational control of a crypto project.
Security tokens represent an investment in a company or ownership of an asset. The big difference between regular cryptocurrencies and security tokens is that security tokens are treated as a security, and are held to any national regulations for trading and investing in them.
Security tokens are most similar to shares of stock in a company, and represent an investment in the future of a company. Security tokens are issued similar to stocks, and shareholders may have voting rights as well. Overall, buying a security coin is a direct investment into a company, and is not considered currency.
There are tens of thousands of cryptocurrencies in existence, but most of the crypto total market cap is invested in the most popular ones. Here are a few common (and valuable) cryptocurrencies:
Bitcoin is the original cryptocurrency, and is still the most popular. Bitcoin is paid to users as a reward for processing transactions on the Bitcoin network. Bitcoin was created to facilitate a peer-to-peer payment system, but its limited supply and decreasing reward rate has caused investors to view it as a store of value, similar to gold.
One bitcoin was originally valued at fractions of a penny, but is now trading over $35,000 per coin as of 2022. The massive increase in price, as well as institutional and government adoption across the globe has propelled cryptocurrency into an entirely new asset class.
Overall, Bitcoin remains the undisputed “King of Crypto,” as adoption continues to grow.
As the brainchild of Vitalik Buterin, Ethereum was created to improve upon Bitcoin as a financial payment network, but with the added functionality of smart contracts to allow developers to build applications on top of Ethereum. These decentralized applications (DApps) helped expand cryptocurrency into more than just a financial transaction network, and has given rise to decentralized gaming, advertising, metaverse, NTFs, and even movies.
Ethereum is the second-most popular cryptocurrency, with a market capitalization of over $300 billion as of 2022. Its explosive growth is due to the increase in DApps, as well as institutional adoption and investments. Ethereum is a clear leader in the NFT movement and the move toward Web 3.0 — a future, more decentralized version of the Internet. The Ethereum network continues to add more projects daily.
Binance Coin (BNB)
Binance Coin (BNB) is a utility token used for fees and transactions on the Binance exchange. It is also widely traded on many crypto exchanges, and is one of the most popular cryptocurrencies on the market.
Binance Coin was created in 2017 by the Binance exchange, and offers traders discounts for paying transaction fees using BNB. As the largest exchange (by volume) in the world, BNB quickly became one of the most held cryptocurrencies in the world, with a market cap of over $60 billion as of 2022.
Binance Coin can be used to make direct retail purchases through Binance payment app partners. This also includes paying for services, travel, and entertainment, as well as participating in new token sales (initial coin offerings, or ICOs) offered on the Binance exchange.
Cardano (ADA) is a popular cryptocurrency that is designed for decentralized applications and smart contracts, using a proof-of-stake consensus model. This means that network operators do not need to provide computational resources to validate transactions, making it a much less power-intensive network than Bitcoin.
Cardano recently added smart contracts to its network in 2021, and over 100 decentralized applications were launched, with many more in development. Cardano’s founder, Charles Hoskinson, also helped found Ethereum, and his ambitious roadmap for Cardano has made it one of the most popular cryptocurrencies on the market today.
Litecoin was developed in 2011 using Bitcoin’s source code, and was one of the first altcoins to be created. For a long time, it was the second-most popular cryptocurrency, and is still widely traded today, with a market cap of over $6 billion.
Litecoin was created to provide faster transactions than the Bitcoin network, and founder Charlie Lee achieved this goal, processing nearly four times faster than Bitcoin. Litecoin also has a limited supply, which is exactly four times the total Bitcoin available to be mined (84 million).
Although Litecoin remains popular to this day, it doesn’t offer much more utility than Bitcoin, and has not received the institutional and widespread adoption that Bitcoin has.
The original meme coin, Dogecoin (DOGE) was launched as a joke in 2013 by Billy Markus and Jackson Palmer. With an unlimited supply, it was never meant to be valuable, and was used for tipping users on Reddit and Twitter.
More recently, billionaires such as Elon Musk and Mark Cuban promoted the coin on Twitter, causing a massive increase in its price. This has caused the DOGE community to add more utility to the coin, lowering the inflationary supply of Dogecoin, and working with companies to be able to use DOGE as a currency to make purchases.
DOGE continues to be a popular cryptocurrency, with a market cap of over $15 billion. It is more volatile than many cryptocurrencies, considering the price can rise or fall based on tweets from Elon Musk. While some still consider it a joke, DOGE has proven it has staying power in the crypto world.
The world of cryptocurrency continues to expand at a record pace, with thousands of projects launching every year. The types of cryptocurrency continue to evolve as well, with new functionality and utility being developed to support projects that are reaching beyond the financial world.
Bitcoin remains the most popular cryptocurrency in the world, commanding over 30% of the total crypto market cap, but altcoins such as Ethereum, Cardano, and others are gaining market share. With the advent of new ways to mine cryptocurrency and process transactions in a faster and less energy-intensive way, altcoins will continue to grow in use cases and value.
It’s safe to say cryptocurrency is here to stay, but it will continue to be a volatile and speculative investment as the asset class grows.