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Different Types of Cryptocurrencies Explained

  • Alex Dovbnya
    📚 WikiCoin

    There are more than 2,000 cryptocurrencies in the world, but they are all divided into several basic types. Learn all about them in this guide.


Different Types of Cryptocurrencies Explained
Contents

In 2017, ‘cryptocurrency’ and ‘Bitcoin’ turned into buzzwords and have drawn the attention of millions of people around the world – both finance-savvy and laymen. Today, Bitcoin is lost on very few: young traders switch their preference from fiat currency to the virtual coin, and its market capitalization has reached $277,633,974,104!

However, the creation of mysterious Satoshi Nakamoto, Bitcoin is not the only player on the market – there are thousands of other cryptocurrencies popping up around. In this guide, you’ll learn about different types of cryptocurrency and understand the nature of this phenomenon.

What is Cryptocurrency?

First and foremost, we need to clear up the difference between a virtual currency and a cryptocurrency. A virtual currency serves as a digital analog of any fiat currency (USD, EUR, or RUB) and holds the same value: it can be bought for the same amount of real money, converted into other currency, and used to pay for goods and services online.

Turnover of virtual currency is organized with the help of online platforms: Skrill, Webmoney, PayPal, QIWI, and others. The history of cryptocurrency started from Bitcoin when the technology underlying it enabled peer-to-peer money transfer without trust to any third party. Bitcoin is an open-source initiative, which means it can be developed by any person: that what people did and used to create alternative cryptocurrencies – altcoins.

When we talk about money of different types, cryptocurrency is the only financial asset that does not belong to any government or financial organization. Thanks to blockchain technology, the information about the coin and transfers is anonymous and encrypted, the data is decentralized, and no third party can control the currency. Due to these facts, the global financial sphere is undergoing earthshaking changes: cryptocurrency can break down the authority of governments and simply replace the fiat currencies.

Basic Categories of Cryptocurrencies

There are three basic types of cryptocurrency:

  1. Traditional cryptocurrencies like Bitcoin just serve as a unit of exchange. Like usual fiat currencies, they have a limited inherent value that is attributed to people using it – its price can rise and drop.

  2. Utility cryptocurrencies serve to build an infrastructure on the top of it. Ethereum is a good case in point: it allows developers to generate ‘Smart Contracts’, i.e. the code that can execute coin transactions without middlemen and third-party organizations. Smart contracts can drive decentralized applications and be applied in literally any sphere where communication without trust is required. Another similar cryptocurrency is Filecoin: it serves to create a decentralized data storage system.

  3. Tokens (app or platform cryptocurrencies). This is a cryptocurrency equivalent of an application or a platform that is generated on top of a utility cryptocurrency like Ethereum. Tokens are typically used in the frames of some certain infrastructure for purchases or getting some certain rewards. For instance, Shivom is a decentralized genome data storage platform built on the top of Ethereum: it allows users to share their genetic information with researchers and medical organizations in exchange for a reward. Yumerium is Ethereum-based online gambling platform that incentives users with the proprietary YUM token for testing and reviews games.

The Most Well-Established Cryptocurrencies

Think that all cryptocurrencies are created equal? It’s not so. In fact, Ethereum and NEO are totally different: instead of serving as a digital currency, it allows for building platforms and applications on the blockchain.

In fact, that’s the most widespread way of cryptocurrency application, which contributed to the growth of new altcoins. Let’s observe the most influential types of cryptocurrency:

  • Being the first crypto, Bitcoin rules 40% of the market, and some people believe it will retain number one position. Many modern stores accept Bitcoin payments, and it’s the simplest coin to be turned into real cash. The number of Bitcoins is limited by 21 million: 17 are already mined, and 4 left. That will only increase its price! Despite its popularity, Bitcoin isn’t perfect: its transaction scalability is limited by 3.5-7 transactions per second. Therefore, alternative coins were issued to alter the underlying protocol and improve this value.

  • Litecoin creators addressed this issue and created a crypto with a verification period of 2.5 minutes (opposed to 10 minutes for BTC), and overall coin supply of 84 mln. That lowers the mining rivalry rate and reduces transaction fees. Litecoin not only boosts the speed of P2P transfers by 4 times but uses a memory-intensive proof-of-work system, which makes it more available.

  • Ethereum is the second most popular cryptocurrency after Bitcoin. It enabled the generation of smart contracts – the pieces of code that can be written on the blockchain and are nearly impossible to change. The transactions are anonymous, fast and verified by the network. The key benefit of Ethereum is versatility: it can lie in the foundation of any project that needs coding, decentralization, and security.

  • Ripple was created as a cryptocurrency that enables money transfer between countries. It works the following way: a user converts his currency into Ripple, then the transaction takes place on the blockchain, then the receiver converts Ripple back into the currency he needs. Ripple doesn’t need mining: the fixed supply of coins is enough for current time-locked contracts.

  • Monero is one of the Top-10 currencies. It was launched in 2014 and has quickly gained authority among cryptography amateurs. The currency’s development was driven by the cryptography community and its donations, and today it’s praised for the so-called technology of ‘ring signatures’ that allows for ultimate privacy. Monero currency can be substituted by any other unit.

There’s a myriad of other cryptocurrencies on the market, and their value can fluctuate rapidly. Who knows, probably, Bitcoin’s leadership will be over one day, and cryptocurrencies with more advanced protocols take over.

There is another type of cryptocurrency — its Stablecoins. Their price is tied to real currencies or physical goods (gold, oil) and is the most stable on the cryptocurrency market. For example, Tether tokens are backed one-to-one by US dollars, so the price of cryptocurrency is always equal to 1 dollar or somewhere near.

Bottom Line

Now you know that cryptocurrency is a digital currency that’s based on the principles of decentralization and direct exchange, and what the most influential types of cryptocurrency are. Being independent and easy to use, such assets can completely change the modern economy. This is a revolutionary new way of performing transactions and handling payment data. We are in an accelerating upward spiral without a way to stop or reverse the trend.

Cover image via www.123rf.com
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About the author

Alex covers all things crypto — from major projects, which are fighting tooth and nail to gain the upper hand in the burgeoning industry, to the latest regulatory trends around the world. He’s a firm believer that Blockchain has the potential to reshape pretty much every business out there, and cryptocurrencies are only a stepping stone to the upcoming decentralized revolution.

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