What are the 10 different types of cryptocurrencies
Key Takeaways: Types of Cryptocurrencies
- There are more than 13,000 cryptocurrencies right now, and many more are being made every day.
- Even though most cryptocurrencies are based on Bitcoin, they all have their unique features and uses.
- Cryptocurrencies can be put into groups based on how they are used, what they are like, and many other factors.
On January 3, 2009, an anonymous person or group of people going by the name Satoshi Nakamoto released Bitcoin, which is still the biggest cryptocurrency by market cap. Bitcoin showed that blockchain-based virtual currencies could work and caught the attention of investors, the tech community, and idealists who saw it as the future of money. People were especially impressed by Bitcoin’s decentralization, immutability, censorship resistance, and scarcity.
Even though Bitcoin was the first digital currency that could be used by the public, it is not the only cryptocurrency. There are more than 13,000 other cryptocurrencies. These cryptos can be put into different groups based on how they can be used, how useful they are, and many other factors. Read on to learn more about the different kinds of cryptocurrencies and get some ideas on how to diversify your crypto portfolio.
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Types of Cryptocurrencies
There are many cryptocurrencies, and each one is designed to do something different. However, most of them are based on the same ideas as Bitcoin:
- They aren’t made, run, or backed by a central authority like the government or central bank.
- They use blockchain technology to live on a distributed ledger.
- Cryptography is used to keep them safe.
- They are kept in blockchain wallets, which let their owners see and take care of them.
Satoshi might have made Bitcoin act as a medium of exchange (like fiat currency), but now cryptocurrencies are used for more than just that. Since blockchain lets developers use cryptography to make almost anything, some cryptocurrencies are made to be investments and stores of value that can be traded on marketplaces or exchanges.
Other crypto projects serve a lot more than just as ways to invest and store value. For example, NFTs are one-of-a-kind crypto tokens that represent real-world things like art, music, real estate, game items, etc. Fear of missing out is the other reason why there are different kinds of cryptocurrencies (FOMO). Because crypto has grown so quickly in the last five years, developers and investors are always looking for ways to come up with and invest in the “next Bitcoin.”
Now, let’s take a look at some of the different types of Cryptocurrencies :
Coins – Types of Cryptocurrencies
Coins are digital currencies that have ledgers. They are the local currencies that make the tax and reward systems on their chains work. For example, miners on the Bitcoin network get paid in Bitcoin (BTC), while validators on the Ethereum network get paid in Ethereum (ETH). For any transaction on the Ethereum network, a user must pay a gas fee in Gwei, which is a unit of Ethereum’s native currency, ETH.
Some coins, like Bitcoin, keep their value and can be used instead of fiat money. Bitcoin is a good way to store value because there will only ever be a maximum of 21 million coins. This makes it different from fiat money and inflation.
Other coins can only be used in certain chains. For example, Ripple uses its coin, XRP, to make it easier for people to send money across borders. XRP acts as a bridge cryptocurrency and is used to pay transaction fees. XRP is the best way for banks, payment service providers, and crypto exchanges to trade with each other to make settlements happen quickly and cheaply.
Tokens – Types of Cryptocurrencies
Tokens are cryptocurrencies that are built on blockchains. They are native to the blockchains on which they are built. When making a token, you use a template instead of starting from scratch with the code. This makes it faster and easier to make tokens than it is to make coins.
The cryptography part of the blockchain makes it easier to make unique tokens that work with the chain’s infrastructure, like Ethereum’s ERC-20 token standard. Tokens are also easy to spot because the fees for their transactions are paid for in the native coin of the blockchain they are based on. Take the Uniswap exchange, a decentralized exchange (DEX) built on the Ethereum blockchain. Even though Uniswap has its token, UNI, you need ETH to pay gas fees when using it.
Stablecoins – Types of Cryptocurrencies
A stablecoin is a type of cryptocurrency whose value is tied to a stable asset, like the U.S. dollar or gold, to keep its price stable. They are made so that you can get all of the benefits of cryptocurrency without having to deal with the wild price swings that plague the cryptocurrency market. Volatility makes crypto unattractive for everyday use and even as a store of value, since even bitcoin, the biggest crypto by market value, has big price swings. Price chart for Bitcoin from November 15 to November 22, 2022.
Stablecoins are very important in the crypto space because they let traders get out of positions without having to convert their cryptocurrency back into fiat money. They do this by keeping a 1:1 ratio with the asset they are pegged to.
These are the four different kinds of stablecoins:
Fiat-Collateralized Stablecoins – Types of Cryptocurrencies
Most stablecoins are backed by real money on a one-to-one basis. The fiat collateral is held by a central issuer or holder. It has to be in line with how many stablecoin tokens are in circulation. By market cap, the top three fiat-backed stablecoins are Tether (USDT), USD Coin (USDC), and Binance USD (BUSD).
Crypto-Collateralized Stablecoins – Types of Cryptocurrencies
These stablecoins are backed by another digital asset (or a basket of assets) as collateral. Instead of using custodians to hold the collateral, crypto-collateralized stablecoins use smart contracts. When you buy (mint) these stablecoins, you lock your crypto in a smart contract vault to get tokens of the same value. Then you lock your stablecoin in the vault (burn) to get the collateral you locked earlier. Dai (DAI) is the largest crypto-collateralized stablecoin by market cap.
Algorithmic Stablecoins – Types of Cryptocurrencies
Instead of using fiat or crypto collaterals to keep the price stable, algorithmic stablecoins use special algorithms and smart contracts to control the number of tokens in circulation. When the token price falls below the target, the algorithm reduces the number of tokens in circulation. When the token price rises above the target, it increases the number of tokens in circulation. Frax (FRAX) is a stablecoin that is often used as an example.
Commodity-Backed Stablecoins – Types of Cryptocurrencies
These stablecoins are backed by real estate, precious metals, oil, and other commodities. Gold is the most popular collateralized asset, and the best gold-backed stablecoins are Tether Gold (XAUT) and PAX Gold (PAXG). Commodity-backed assets let people invest in assets that might be hard to get a hold of locally and add liquidity to a class of assets that doesn’t have much of it.
Exchange Tokens – Types of Cryptocurrencies
Exchange tokens are digital currencies that crypto exchanges give out. To get more people to use cryptocurrencies, exchanges have become a more direct way to trade them. They are now the main way to get into the crypto world. They offer their exchange tokens, which may come with trading fee benefits like better APR or APY for users who stake their exchange tokens.
Exchange tokens are often given out to raise money for business growth. But not all exchanges have their tokens. Whether or not an exchange does so depends on what its goals are. Among the most common uses of exchange, tokens are a way to pay, for governance, and to increase liquidity. Most of the time, these tokens are useful in their exchanges and give their owners member-based benefits (like trading bonuses). Binance’s native token, BNB, has one of the largest market caps among exchange tokens.
Types of Cryptocurrencies – DeFi Tokens
DeFi tokens are digital currencies that are built into decentralized apps. They usually have a specific function in DeFi apps, which makes them technically utility tokens. Developers put out DeFi tokens on the blockchains that power their apps. Most DeFi apps run on the Ethereum network, so most of these tokens follow the ERC-20 standard.
DeFi tokens are often used as rewards to get more people to use their protocols. In particular, DeFi users who lock their assets in a protocol’s liquidity pool can get these tokens as a reward. When you lock assets in a liquidity pool, you leave yourself open to smart contract risks and temporary loss. So, developers must give token rewards to the Web3 community to give it much-needed liquidity. The UNI from Uniswap is the governance token of the DEX.
This means that UNI holders can vote on proposals like how to use the treasury or how to improve the DEX in the future. These tokens can be given to users for free or they can be earned through a process called “liquidity mining.”
Types of Cryptocurrencies – Meme Tokens
People call cryptocurrency projects that are based on memes “meme tokens.” Some of these, like Dogecoin and Shiba Inu, has a market cap of more than a billion dollars. These tokens thrive on hype. They start as fun tokens based on popular memes like Doge, and as the community joins in, they gain speed.
Types of Cryptocurrencies – Governance Tokens
Governance tokens are digital currencies that let the people who own them decide what will happen to web3 projects in the future. The main thing they do is spread out decision-making and give the community a say in how projects are run. All people who own governance tokens can help decide where the project goes in the future. If you have a lot of tokens, you get more votes when you vote on proposals. Holders have a say in everything, from how money is spent to what features are added or taken away from a protocol.
Most projects have a standard way for developers to submit proposals, which makes it easy for them to do so. If a proposal goes to a vote, the token holders use their voting power to vote for or against it. These tokens are an important part of how decentralized autonomous organizations make decisions (DAOs). The COMP token from Compound is a well-known governance token. It lets people in the Compound community vote on important decisions, like whether COMP rewards should be cut out completely.
Types of Cryptocurrencies – NFTs
NFTs aren’t exactly cryptocurrencies, but they are unique tokens that can be used to prove ownership of real-world or digital items. They can stand for anything, from digital files like music and videos to real estate and event tickets. By making these things into tokens that live on the blockchain, they are easier to trade and fakes are less likely to happen. One of the most popular NFT sets is the Bored Ape Yacht Club (BAYC).
One thing that makes NFTs special is that even if you make 200 copies of the same item and give each of them the same number of NFTs to show who owns it, each copy will be able to be told apart from the others because each NFT token has its metadata. This means that even if 200 investors have items that look the same in their web3 wallets, each can say that their copy is unique.
Types of Cryptocurrencies – GameFi Tokens
GameFi is a new blockchain trend that combines the ideas of DeFi and NFT. GameFi uses a “play-to-earn” model, which is different from “pay-to-win” games. In “pay-to-win” games, players can buy upgrades to give themselves an advantage over other players. The model involves giving players reasons to take part in activities and move forward.
Some GameFi has gone beyond the basics and added DeFi features like staking, where players deposit tokens to earn interest and other rewards that they can use to buy more in-game items or unlock new potential. Axie Infinity’s AXS is one of the best GameFi tokens in the crypto space. It is a governance token that lets people shape and vote on the direction of the Axie Infinity game.
Types of Cryptocurrencies – Wrapped Tokens
One way to think about networks like Bitcoin and Ethereum is as a group of different ledgers that are spread out. Since blockchains are separate, they can’t smoothly talk to each other. Also, native coins like Bitcoin can’t be used on non-native chains like Ethereum because only the Bitcoin blockchain “understands” the Bitcoin language.
Wrapped tokens are digital currencies that let you move the value of a native asset to an asset that is not native to it. Wrapped Bitcoin is one of the most well-known wrapped tokens (WBTC). WBTC is worth the same as one Bitcoin, so 1 WBTC should always be worth 1 BTC. In other words, WBTC keeps track of how much BTC is worth. Wrapped tokens make native coins more useful on other chains. For example, you can use WBTC on the Ethereum ecosystem to take part in DeFi activities like lending, staking, yield farming, and more.
Conclusion Types of Cryptocurrencies
We talked about the different kinds of cryptocurrencies, like coins and tokens that are wrapped in paper. There are more than 13,000 cryptocurrencies, and CoinGecko has more than 80 categories, such as Move-to-Earn, yield farming, and the different ecosystems in the space. In this article, we’ll talk about 10 of these categories to give you an idea of what different cryptocurrencies do in the crypto space and to help you get started navigating the market.
Do you have questions about how to find your ideal niche? Let us know in the comments below!
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