Understanding the Different Types of Cryptocurrency
Cryptocurrency is a new technological innovation that has generated a significant amount of buzz among investors and entrepreneurs alike. It’s important to understand the different types of cryptocurrency and how each one functions in order to make educated decisions about whether or not it is right for you, and what type might be best suited for your needs.
What are the Different Types of Cryptocurrency?
Different types of cryptocurrency typical fall under one of these two categories:
- Coins – operates on its own blockchain.
- Tokens – operates on another blockchain.
However, there are many different uses of both coins and tokens. The most common use of cryptocurrencies, like Bitcoin, are to act as a store of value that can be transferred to another party. This modern method of payment is the most easily understood use of cryptocurrencies, although there are many other approaches for companies looking to take advantage of blockchain technology. Different types of cryptocurrency include:
- Utility Tokens – Digital tokens that allow users to perform a specific action on a blockchain network. These tokens are unique to their ecosystem, such as ERC-20 tokens that enable functionality of a product or service on the Ethereum blockchain.
- NFTs (Non-Fungible Tokens) – A unit of data (most commonly in the form of an image, video, or audio file) stored on the blockchain. These cryptographic tokens represent individual ownership of an asset, and since each token is unique, NFTs allow entities to easily buy, sell or trade more efficiently without the risk of fraud.
- DeFi Tokens (Decentralized Finance Tokens) – Decentralized applications that run on a specific blockchain and are powered by smart contracts. DeFi applications aim to reconstruct traditional financial systems like banks and exchanges by substituting fiat currency like USD with cryptocurrency.
- Yield Farming Tokens – Tokens used as a modern investment strategy within a DeFi ecosystem. These tokens enable digital staking or bonding of cryptocurrencies in order to receive rewards such as compounding interest or discounted purchases on cryptocurrencies.
- Stablecoins – Coins that aim to keep the price consistent over time, by having their value pegged to a traditional currency such as gold or USD. Stablecoins provide a very low-risk alternative to cryptocurrencies, so that traders can maintain their digital asset value when expecting high fluctuation for other cryptocurrencies.
- Governance Tokens – These tokens give the holder the right to participate in voting within a blockchain project, usually constructed by a Decentralized Autonomous Organization (DAO).
- Security Tokens – Conventional securities such as stocks or bonds that have been converted to a digital asset that lives on the blockchain.
Coins vs Tokens in Crypto
Coins and tokens are both digital assets, but they serve two different purposes. Both assets can be used as a store of value or as a digital currency but the main difference between coins and tokens is that coins run on their own blockchain, while tokens run on existing, independent blockchains.
What is a Crypto Coin?
A crypto coin, also called a virtual currency or digital currency, is a type of unregulated, digital money, which is issued and usually controlled by its developers. Bitcoin is the most popular crypto coin in the world, with different coins having different values. There are many coins to choose from but some of the ones more popular than others are Bitcoin, Ethereum, Litecoin and Solana.
What is a Crypto Token?
A crypto token is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions and to control the creation of additional units. It may represent a share in a company, a right to dividends or interest, or represent an ownership stake in an idea or business.
What are the Most Popular Cryptocurrencies?
Bitcoin is the most popular cryptocurrency out there – in terms of market capitalization. Bitcoin was created in 2009 and has a current value of $7,630 per coin. Ripple (XRP) is the second most popular cryptocurrency with a market cap of $43 billion and a price per coin of .24 cents. Litecoin is another popular cryptocurrency with a market cap of $3 billion and a price per coin of $151.
The Bottom Line
Cryptocurrency is much more than Bitcoin. There are countless altcoins that serve various use cases within the different types of cryptocurrency. Both tokens and coins are essential parts of the crypto ecosystem, enabling people and organizations to interact with blockchain technology for benefits much beyond what traditional currencies can offer. Understanding the differences between different types of cryptocurrencies is paramount to making sound investments or getting involved in the exciting new opportunities of blockchain.
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