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Don’t worry. To become a pro in cryptocurrency, you don’t have to study all of them. It’s enough to master how 7 types of cryptocurrency work to know what to expect and which crypto is the best investment.
In this part of the guide, we’ll:
- discover why coins are not tokens
- inspect each type of crypto
- learn how they differ from each other
- examine when you can benefit from them
Let’s roll!
Coins vs Tokens
Many investors who’ve spent years trading fail to learn the basics, like the difference between coins and tokens. The terms may not sound that distinct, but they serve unique purposes.
- Tokens don’t have their own blockchains.
To put it shortly, coins have their own blockchains. Tokens don’t. But that’s not the end. In reality, the difference is much bigger than tokens simply being “homeless” cryptos.
The most famous coins (that are “natives” of their blockchain systems) are BTC and ETH. Crypto tokens are created and work on top of the pre-existing blockchain — for example, USDT. Although they are mostly based on the Ethereum blockchain, some, including USDT, operate different token versions on several blockchains at once.
- Tokens have different purposes, whereas coins are exactly what they sound like — just currency. Tokens can:
- represent physical assets (like NFTs)
- represent securities (like bonds, stocks, or property)
- provide access to utilities or services
- represent your rights and power
NFTs are a prominent example of digital assets. Utility tokens — for instance, Basic Attention Token (BAT) and Golem (GNT) — exist to provide their holders with access to goods and services. Governance tokens are a subtype of utility tokens. They grant access to certain decisions offered by a protocol. One of the earliest examples here is MakerDAO.
So, what’re we left with? Crypto coins like Ethereum, Bitcoin, and Ripple serve as assets that you can invest in. Plus, they have their blockchains. These blockchains can also “rent” space to other digital assets. Assets that live on borrowed blockchains are called tokens. It doesn’t diminish their value, though: tokens are simply different from coins.
Types of Cryptocurrency
Now that you know the difference between a coin and a token, let’s move deeper into the crypto jungle!
As we mentioned before, there are 7 types of crypto that serve different purposes:
- Store-of-value cryptocurrency
Store-of-value cryptos literally “store their value.” These cryptocurrencies are designed to hold or even increase their purchase power over time.
This also usually leads to an increase in price, but price and purchasing power are very different things.
Purchasing power is the number of goods and services one can purchase with a currency unit. Price is the amount of money someone will pay you when buying your crypto.
The difference is clearer if we illustrate it with a practical example.
Let’s go back to traditional cash for a second:
Governments are constantly printing new money. But “more paper” is not the answer. If not followed by an increase in production, money will lose its value and purchasing power. A bag of grain will cost $50 instead of $5. Everything costs more; thus, our money is worthless.
Imagine you’re a tycoon who just invested in a hotel. You operate your business under a government that prints new money all the time. Over the year, your stocks went up by 3% in value. Is it a good thing? Not really. Everything is now more expensive. You have to pay higher for building materials, catering services, and everything else you need for the hotel, including salaries.
We can see the difference between price and purchasing power in how dramatically the price of everyday products, like bread and milk, has changed over the years. 30 or 40 years ago, they only cost a fraction of what they do today. The reason: the value of our currency has dropped, so we need to spend more to buy the same stuff.
According to estimates released by the Census Bureau, Department of Commerce, the average income of families in 1965 was $6,900 per year. The average family income in 2020 was $68,400. Looks good? Yes, but. It’s a big “but.” In 1970, the average house price was from $22,100 to $25,700. Now, it’s nearly $200,000.
So, as you can see, the more money the government prints, the more it loses its purchasing power. The same goes for cryptocurrencies.
Those with unlimited supply lose their purchasing power. This is why paper currencies are not reliable.
What about crypto?
A limited number of coins keeps cryptos from losing purchasing power.
Coins like Bitcoin, which have a limited maximum supply of 21 million, will probably rise over time.
Bitcoin is the largest cryptocurrency by market capitalization, with many other cryptocurrencies relying on it. BTC’s popularity and growing purchasing power put it in the bracket of a store-of-value cryptocurrency. Its limited supply can drive its purchasing power up, higher and higher.
Litecoin (LTC) is another cryptocurrency we could include in this bracket. It also has a limited supply of coins, although Litecoin’s supply, with a maximum of 84 million coins, is larger than that of Bitcoin.
What are the pros and cons of store-of-value cryptos?
The main advantage of store-of-value currencies is that they are a safer and more secure investment compared to others. Plus, they are more likely to go up in value over time. However, it depends on whether a particular crypto had a fair launch or not.
There is also a disadvantage to the store-of-value currencies: it is the limited functionality of such coins. Some people even refer to Bitcoin as a “pet rock,” suggesting that it does nothing but just sit there. The limited functionality is also why some people don’t believe that Bitcoin will be the largest cryptocurrency by market capitalization in the future.
Examples of store-of-value cryptos: Bitcoin, Bitcoin Cash, Bitcoin SV, TrueUSD, Decred.
- Smart contract cryptocurrency
Smart contracts help create tokenized assets and decentralized apps (dApps). As we mentioned before in Chapter 2. Blockchain, they are a system of self-executing code.
The code carries out a set of instructions, which are then verified on the blockchain. For example, if you agree to sell me a book for $10, a smart contract will help you receive $$$ the moment your customer gets the book.
Smart contract cryptocurrencies get their value from their use as payment for smart contract and dApp transactions.
In the banking and financial sector, smart contracts can reduce transaction times and fees by eliminating third parties. Because of its growing popularity, it’s becoming more common for Ether to be accepted even as a means of online payment, with sites such as Overstock, Spotify, and CheapAir now accepting it.
Smart contracts provide an opportunity to create different cryptocurrency tokens.
Cryptocurrency tokens can be fungible and non-fungible. Fungible tokens are cryptos like Bitcoin. Non-fungible tokens are data units that represent unique digital assets stored and verified on the blockchain. Non-fungible tokens are often called NFTs.
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Fungible means that a token operates like a regular cryptocurrency, meaning that it is interchangeable and can be easily exchanged. Money is a good example of this: if we lend you $20, it doesn’t matter if we get the same $20 bill back or not. You could pay us with a different one or two $10 bills or a $10 and two $5 bills. We will still get back the value of the money we originally lent you.
Non-fungible means the opposite: this thing or the item is unique and can’t be replaced with something else. Say, you had Edgar Dega’s Dancers in Blue painting, a complete one-of-a-kind. If you traded it for one of Monet’s paintings or even another Dega, you would be getting something different altogether. In the past few years, we’ve seen the rise of non-fungible tokens, or NFTs, which can be a drawing, a piece of music, or even real estate — anything that can be digitized.
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Most non-fungible tokens (NFTs) are supported by the Ethereum blockchain, Ethereum being the most popular smart contract platform. Some other blockchains have implemented their own versions of NFTs.
These NFTs have extra information stored on the blockchain and work differently than Ethereum’s cryptocurrency, Ether (ETH). NFTs cannot be exchanged or traded at an equivalent rate: as we said, they each have their own value, and one NFT does not equally replace another, even if their monetary value is the same at the time.
What are the pros and cons of smart contract cryptos?
Unlike store-of-value cryptocurrencies, many smart contract cryptocurrencies do not have a maximum supply of coins — they have annual inflation schedules instead.
This leads to the main advantage of smart contract cryptocurrencies. Their value is tied to the size and adoption of the dApp and token ecosystems built on their blockchains. What the hell does that mean? If a smart contract cryptocurrency is heavily supported and adopted, it could have a market cap worth trillions of dollars.
However, the disadvantage here is that we don’t know which smart contract cryptocurrencies will become successful. There is a lot of competition on the market, with new projects constantly popping up. So before picking some crypto and investing money, it is crucial that you do your research.
Examples of smart contract cryptos: Ethereum, BNB, Cardano, Avalanche, Ethereum Classic.
- Oracle cryptocurrency
Oracle cryptos make it possible to bring real-world data to smart contract blockchains.
Most of the apps we use every day require some kind of external real-world data. For example, the time and date, the weather, or the current price of something we would like to buy or sell. Centralized applications get their information from centralized APIs.
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API stands for Application Programming Interface. APIs allow two unrelated systems to interact with each other, establishing an online connection between the data provider and the end user. For example, Facebook receives information about the weather in your area from the weather broadcasting network.
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Smart contract cryptocurrency blockchains need real-world data for their dApps to have real-world applications and use cases. This data is provided by oracle cryptocurrencies.
The difference between APIs and oracle cryptocurrencies is that the data feeds of the latter are decentralized. Like smart contract cryptocurrency coins, oracle tokens are also used to pay the fees for getting this data.
What are the pros and cons of oracle cryptos?
The main advantage of oracle cryptocurrencies is that the demand for their tokens is likely to grow.
The main disadvantage is that a large number of them didn’t have a fair launch. This means that when the price of those tokens rises, there is a huge risk for those team members and private investors to sell, which will prevent the price from going even higher.
The most popular oracle cryptocurrency is Chainlink (LINK), with a current market cap of $3 billion.
- The Arbo company uses Chainlink to receive data about the weather so that it can evaluate weather risks.
- The Theta Network applies Chainlink to receive viewership data to fight online advertising fraud.
Examples of oracle cryptos: Chainlink, Universal Market Access, WINklink, Band Protocol, iExec RLC.
- Payment cryptocurrency
Payment cryptocurrencies aim to replace the payment systems we use today. In addition, they sometimes utilize smart contracts.
We’ve already discussed some of the problems traditional payment systems face, such as excess fees for third parties and a long time to process transactions.
Payment cryptocurrencies make it possible to complete such payments within seconds at a fraction of the cost.
What are the pros and cons of payment cryptocurrencies?
The main advantage of payment cryptocurrencies is that they have the highest chance of mainstream adoption, and their target market is the most lucrative. Their main disadvantage, however, is that it is highly unlikely that any of them will replace traditional money anytime soon.
Launched in 2017 as an alternative to Bitcoin, Bitcoin Cash (BCH) is one of the most well-known payment cryptocurrencies. Bitcoin Cash sees consumer payments as more essential to growing its value in the short term, so users find it better suited for online spending.
Examples of payment cryptos: Bitcoin Cash, Tether, USD Coin, Binance USD, XRP.
- Privacy cryptocurrency
Despite the advanced and sophisticated level of encryption and privacy offered by pretty much all cryptocurrencies, full anonymity is unlikely to be guaranteed by any. This is because blockchain transactions are recorded and accessible on the public ledger. Your real-world identity can be connected to your wallet, especially if you use an exchange that requires your personal information.
Privacy cryptocurrencies are designed to preserve your privacy as a primary goal. As with all cryptos, transactions are registered on the open ledger, but this type of crypto helps to make your identity truly anonymous.
What are the pros and cons of privacy cryptocurrencies?
The main advantage of privacy cryptocurrencies is that they are… well, really private. They offer complex privacy features and reassure investors that their transactions cannot be linked. The disadvantage of privacy cryptocurrencies is that they are frequently targeted by regulators. Governments claim that they are commonly used for illicit and illegal activities, with some privacy cryptocurrencies being removed from exchanges as a result.
Monero’s (XMR) popularity has been rising, mainly due to its ability to help anonymize users and its focus on private payments. Monero transactions are much more difficult to trace because they use ring signatures and stealth addresses.
Examples of privacy cryptos: Monero, Zcash, DASH, Horizen, Verge.
- Exchange tokens
Exchange tokens are like a mix of membership subscriptions and shares of the company’s stock. They are owned and operated by crypto exchanges and work like a subscription.
Exchange tokens can give you a whole load of benefits, such as reduced trading fees and VIP access to early coin and token sales. And they are like shares of the company’s stock because the exchange token’s performance depends on the popularity of the platform. The reason is that almost every exchange will do buybacks and burn some of the circulating supply of its exchange tokens using a portion of trading fees.
Some exchange platforms, like Binance, have built their smart contract cryptocurrency networks. To use them, you need to exchange their tokens. That adds an aspect of demand for them.
What are the pros and cons of exchange cryptocurrencies?
The key advantage of exchange tokens is that they are likely to increase in value. The core disadvantage is that their benefits don’t come as quickly as those of other cryptocurrencies, and sometimes, these gains aren’t even totally guaranteed.
As these exchanges grow bigger, pressure from regulators intensifies. For example, Telegram’s attempt to develop TON, its own blockchain network, was shut down after a legal battle with the US Securities and Exchange Commission.
The Binance coin (BNB) is an example of an exchange token. It is used to pay fees (i.e., exchange trading and listing the exchange levels) on different platforms. Benefits, such as a 50% discount on fees, exist as incentives. BNB’s current market cap is just over $70 billion.
Examples of exchange cryptos: Binance Coin, KuCoin Shares, 0x Protocol, Bancor Token.
- Meme coins
Meme coins have no specific use or purpose. They are just for fun! Sometimes they can be dangerous, though, as people will try to scam you with them. The most popular meme coins are SHIBA INU (SHIB) and Dogecoin (DOGE).
If someone said to you, “Hey, give me $200, and I will make you a millionaire,” you would probably tell them to “get lost” and see through this scam. However, when someone says the same bullshit about meme coins, people seem to believe it.
Some investors regard this type of crypto as an opportunity to buy cheap and sell high: they understand the hype around meme coins will cause them to grow in value. But given the market cap, dollar value, and supply of many of these coins, this increase is unlikely to be very big.
You should always pay attention to the market cap and maximum supply of meme coins. For example, SHIBA INU has a max supply of one quadrillion tokens, and its market cap is already at $6 billion. For SHIBA INU to reach a value of $1, people need to invest billions and trillions. And that will never happen.
Most of the other meme coins also have similar massive supplies, meaning they won’t be reaching $1 in value soon either. In Chapters 5, 6, and 7, we will go into greater detail about crypto trading and how to build your portfolio.
The pros and cons of memes… coins?
These meme coins have no real end game. It’s a big difference between them and other cryptocurrencies. Real coins, such as Bitcoin or Ethereum, solve real-world problems and change how we pay for things and how some industries work.
You can try your luck and invest, but it is not worth the time, effort, and risk. Meme coins are the most manipulated cryptos, and their main purpose is to make their creators rich by tricking innocent investors.
DOGE, however, is a little bit different as it offers merged mining with Litecoin, yet it has a long way to go before any investors can make any real profits, regardless of how many tweets and memes Elon Musk shares about it.
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Merged mining is an act of mining two or more cryptocurrencies at the same time without sacrificing the overall mining performance. A miner uses their computational power to mine blocks on multiple chains at once by utilizing Auxiliary Proof of Work (AuxPoW). All cryptocurrencies involved in merged mining must use the same algorithm. Some suggest that merged mining can help smaller blockchains increase their security by leveraging it against the hashing power of bigger blockchains. However, many developers disagree with this, saying that it just provides a false sense of security.
Auxiliary Proof of Work (AuxPoW) ensures that the work done on one chain is valid on another chain. The blockchain that provides PoW is called the parent blockchain, while the one that accepts it is the auxiliary blockchain. Both cryptocurrencies involved must use the same algorithm.
Summary time
So, to give a brief recap, there are 7 types of cryptocurrencies, each with its own advantages, disadvantages, and uses:
- Store-of-value cryptocurrencies hold and increase value over time. In terms of cryptocurrencies, they are relatively safe and stable. However, their limited functionality is sometimes seen as a disadvantage.
- Smart contract cryptocurrencies help create tokenized assets and dApps. They get their value from their use as a payment method for smart contracts and dApp transactions. Ethereum is the most popular smart contract cryptocurrency, with a market cap of $166 billion.
- Oracle cryptocurrencies bring real-world data to smart contract blockchains that need this information for their dApps to have real-world applications and use cases.
- Payment cryptocurrencies aim to replace our current payment systems. They have the highest chance of mainstream adoption, and their target market is the most lucrative. However, this is unlikely to happen anytime soon. Bitcoin Cash (BCH) is a well-known example of a payment cryptocurrency.
- Privacy cryptocurrencies preserve your privacy when you’re making transactions or using dApps. Generally, they are well-designed and built to last, but they are a common target for regulators. Monero (XMR) and Zcash (ZEC) are two examples of this type of cryptocurrency.
- Exchange tokens are owned and operated by the cryptocurrency exchanges they belong to. Binance coin (BNB) is probably the most well-known example of an exchange token.
- Meme coins have no actual real-world use or advantage. However, skillful investors can understand in advance which tokens will be hyped up and buy them early to sell them later on at a higher price. Dogecoin is the most famous example of a meme coin.
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