Cryptocurrencies have gone from a niche interest to an exploding market and with this the types of cryptocurrencies have evolved. There’s an ever-increasing variety of cryptocurrencies, each with its own purpose and advantages. Understanding the different types of currencies is key to taking advantage of this exciting financial technology.
Tokens and coins
Cryptocurrencies can generally be divided into two categories: tokens and coins. Coins are currency-based, meaning that they can be used as a means of payment. Tokens, on the other hand, have utility-based functions, typically concerning access to a product or service. For instance, certain tokens grant holders special access to events or platforms. Tokens are not designed as a medium of exchange and thus cannot be directly used for payment purposes.
Centralised vs decentralised Crypto
Another key distinction in the world of cryptocurrencies lies between centralised and decentralised tokens. Centralised coins are run by a central authority such as a government or bank, meaning that its use is highly regulated. Decentralised tokens, meanwhile, are dispersed across many computers and not controlled by any single organisation. This allows it to be free from potential interference or manipulation by any given authority.
Hybrid system of Cryptocurrencies
In addition to these main types of cryptocurrencies, there is also a hybrid system known as “stablecoins”. These coins are designed to provide an additional layer of stability through the use of either a pool of assets and/or an algorithm that can regulate the value by connecting it with the fiat-backed dollar. Stablecoins attempt to provide users with an avenue to carry out transactions and store wealth without being affected by the volatility associated with traditional cryptocurrencies.
Distributed ledger (Blockchain) technology
Distributed ledger technology (DLT), also known as blockchain technology, is the foundation of all cryptocurrencies. It is a secure, decentralized and public digital ledger used to record transactions between two or more parties. Instead of relying on a central repository to store transactions, DLT replicates them across many nodes, or computers that are connected to a network. This decentralisation ensures that no single entity has control over the data. It also allows for faster and more efficient processes.
Platforms, security tokens, and stables coins
Platform tokens, security tokens, and stable coins are the other types of cryptocurrencies that exist in the market. Platform tokens are based on an underlying platform and are used to receive services or access features associated with that platform. Security tokens are digital assets similar to stocks or bonds but they allow investors to gain ownership of a portion of a company without having to go through traditional routes such as IPOs. Lastly, stable coins are backed by fiat currencies or other forms of collateral and tend to be more resistant to volatility.