Exploring the Types of Cryptocurrency Coins and Tokens
There are many types of cryptocurrency coins and tokens in the world today. The last I checked, there were over 5000 odd cryptocurrencies on Coinmarket cap *head spins*.
Learning about these crypto-assets can sometimes feel overwhelming or daunting. Trust me, you’re not alone, I feel the same way — given that I’m not exactly tech-savvy. Fortunately, navigating around these cryptocurrencies becomes a lot easier when you separate them into their function categories (i.e. what they were created for).
Most cryptocurrency can be identified either as a coin or token. Strictly speaking, a coin is usually used as a means of payment. Whereas a token has wider functions. Each cryptocurrency has unique features and usage. There are, however, times when the terms are used interchangeably as some cryptocurrency are not mutually exclusive. There is no “one way” to classify cryptocurrencies, and this article serves as a general guide.
Types of cryptocurrency coins
There are usually three types of cryptocurrency coins — payment currencies, privacy coins and stable coins. Here some brief explanations the three of them:
- Payment Currencies
As the name suggests, these crypto-assets are mainly for payments. Although every crypto asset can theoretically be used for payments, some merchants tend to prefer payment currencies such as Litecoin, Bitcoin and Ethereum. For example, some loans are issued out in payment currencies such as Bitcoin and Ethereum.
- Privacy Coins
There are crypto-assets created with a niche focus on privacy. Perhaps this is a solution to a world where there is an increasing demand for customer data. When a transaction is made using privacy coins, only the sender and receiver know the number of coins transacted. Furthermore, the balance of a privacy coin wallet address is only known to its owner. This unique characteristic of privacy coins differs to those of Bitcoin and Ethereum; where transaction amounts and wallet address balances, although anonymous, are not private. Crypto assets like Zcash, Monero and Dash are some examples of privacy coins.
- Stable Coins
These assets are increasingly popular. Not only do cryptocurrency traders prefer them, everyday Kiwis who wish to load up their crypto debit cards, and pay for goods and services favour them due to their minimised volatility (i.e their prices do not fluctuate much). No one wishes to load their crypto debit card only to find that the exchange rate has changed and its ‘not quite enough’ for payment. Different stable coins have different means in ensuring their stability. While some are backed by fiat currencies (i.e. currencies issued by a country’s central government such as USD), others are collateralised by crypto-assets. Some popular stable coins include USD coin, Tether or Dai. However, it is important to note that some stable coins are not issued on their blockchain, for example, Tether is issued on the Bitcoin blockchain.
Types of cryptocurrency tokens
Generally speaking, there are three broad categories of cryptocurrency tokens — security tokens, governance tokens and utility tokens. Although in some countries, such as Switzerland, the categories of cryptocurrency tokens are more refined in their classification.
- Security Tokens
Such a token typically represents some stock or equity in a project that issues them. In a traditional investment context, it is like a company issuing shares. Tokens are issued through an Initial Coin Offering, where the person is buying these cryptocurrencies as a form of investment with the expectation of profit. In countries such as Switzerland, these tokens are regulated the same way as traditional securities
- Governance Tokens
Governance tokens offer their holders the power to influence decisions concerning the coin’s protocol. Just like how software needs to be updated or patched now and then, cryptocurrencies too, need to continuously upgrade to make sure their codebases are relevant, functional, and legal. These tokens are built for on-chain governance, meaning stakeholders are able to collaborate, debate, and vote on how to manage a system. For example, the Maker Protocol uses the MKR token. MKR holders use their token to vote for the risk management and logistics of the Maker system.
- Utility Token
These cryptocurrency tokens are sometimes known as application tokens. Token holders have a right to use the network and can assist in building an internal economy within the system. For example, Sia’s utility is cloud storage. “Renters” on Sia use Siacoin to purchase storage space from a worldwide network of hosts, and these hosts receive Siacoin in exchange for storing data.
Build and diversify your crypto-assets portfolio
The world of cryptocurrencies is vast and it’s evolving quickly. All the different types and categories of cryptocurrencies explained above serve very different purposes, and sometimes their uses may overlap. Hopefully, this article helps to break down the key differences.
Understanding the types and categories of cryptocurrencies may be useful when making decisions about which cryptocurrency to purchase, or how you can diversify your crypto asset portfolio.
For example, almost everyone who owns shares or index funds will somehow be exposed to the tech industry at some point. And this is because they see potential growth in the industry because of how important technology is in our everyday life.
Similarly, one might see a prospective demand for a type of cryptocurrency coin and token because of the purpose it serves or its usability. My six-year-old nephew much prefers me buying Enjin tokens for his birthday because he can use it to trade for items that can be used on Minecraft/Enjincraft.
This content is provided for informational purposes only and should not be relied on as advice when making any purchase decision.