In the broadest sense, theres two main types of cryptocurrency: coins and tokens. However, we can categorize cryptocurrencies further based on their use case, underlying technology and other factors.
If we take a look at how many types of cryptocurrencies there are, we can find more than 24,000 different cryptos on the market today. This can make the crypto market intimidating and difficult to navigate for newcomers.
However, finding your footing in the world of crypto becomes much easier once you understand the different types of cryptocurrency and what different cryptocurrencies are used for.
From a very broad perspective, we can divide different cryptocurrencies into two large categories: coins and tokens. When evaluating any given cryptocurrency, this distinction is the first step to understanding the type of cryptocurrency we are dealing with.
The term coin is used to describe cryptocurrencies that are the native asset of a blockchain platform. In most cases, coins play a key role in securing their blockchain platform, and are also the only asset that can be used to pay transaction fees on the network. The most prominent examples of such cryptocurrencies are BTC and ETH, which power the Bitcoin and Ethereum networks, respectively.
Lets briefly explain the concept of a coin using BTC as an example. If you want to send a transaction on the Bitcoin network, you will need some BTC in your wallet to pay the transaction fee. In addition, Bitcoin miners are incentivized to participate the network through BTC rewards issued by the Bitcoin protocol, so BTC also plays a key role in ensuring that the Bitcoin network is secure.
When it comes to coins, we often also categorize them according to the technology they are based on. In terms of technology, the most important aspect of coins is the consensus mechanism they utilize to achieve consensus about the state of transactions and balances between all the participants in the network. The two main types of consensus mechanisms are Proof-of-Work and Proof-of-Stake.
The term token is used to describe a cryptocurrency that are built on top of another coins infrastructure. For example, the Ethereum blockchain can be used to issue tokens examples include USD Coin (USDC), Uniswap (UNI), The Graph (GRT) and thousands of other tokens.
If you want to transact with any of these tokens, you will need some ETH in your wallet, since the Ethereum network only accepts ETH as payment for transaction fees. Tokens issued on the Ethereum network benefit from its security, but can be fine-tuned to serve specific use cases that ETH might not be the most suitable for.
Of course, Ethereum is not the only blockchain that can be used to issue custom tokens. Other blockchain networks like BNB Chain and Solana can be used for this purpose as well. These platforms have their own coins like BNB and SOL, which are necessary for paying transaction fees when using tokens issued on those networks.
Another approach to defining the types of cryptocurrencies is to categorize them according to their use cases. For example, some coins are primarily designed to facilitate payments, while others are used for more complex use cases like smart contracts and decentralized applications.
Here are the main types of crypto according to their primary use case.
Bitcoin was the first cryptocurrency ever released and its inventor Satoshi Nakamoto described it as a peer-to-peer electronic cash system. While the technology that makes Bitcoin possible is very intricate, the purpose of Bitcoin is not difficult to understand Bitcoin is a digital form of money that facilitates transactions directly between users without requiring intermediaries like banks.
In addition to Bitcoin, theres quite a few other cryptocurrencies that are focused almost entirely on peer-to-peer transactions. This includes cryptocurrencies like Litecoin, Dogecoin and Bitcoin Cash.
Cryptocurrencies with smart contracts capabilities provide more flexibility than traditional payments-focused cryptocurrencies like Bitcoin. Ethereum was the first cryptocurrency to introduce support for general-purpose smart contracts.
Cryptocurrencies like Ethereum make it possible for anyone to create a smart contract and deploy it to the network for anyone to access. Ethereum has been used to create a whole host of decentralized applications such as decentralized crypto exchanges, lending protocols, non-fungible token marketplaces, decentralized lotteries, publishing platforms, social networks and much more.
Examples of cryptocurrencies with smart contracts support include Ethereum, Solana, Cardano, Avalanche, Tezos and many others.
If youve ever taken a look at a price chart for Bitcoin, Ethereum or almost any other cryptocurrency, youve probably seen that their price can change dramatically in a short period of time. While this volatility makes cryptocurrencies attractive for traders and some types of investors, it makes cryptocurrencies less convenient for everyday use.
Stablecoins are a type of cryptocurrency that aims to address the problem of price volatility. Stablecoins are cryptocurrencies that are designed to maintain a steady price, usually by being pegged to a fiat currency like the US dollar or the euro.
Stablecoins are usually issued as tokens on a blockchain, most commonly Ethereum. Stablecoins benefit from the security and decentralization of blockchain networks, but avoid the price volatility displayed by most other cryptocurrencies.
Currently, the most popular stablecoins on the market are USDT and USDC. Both of these stablecoins are pegged to the US dollar, and are designed to trade as close as possible to $1 at all times.
With most cryptocurrencies (including Bitcoin and Ethereum) the entire history of transactions facilitated by the network is completely transparent and accessible to anyone. By using a block explorer, you can look up information on any given transaction, including its amount, sender, recipient and much more.
This kind of design obviously presents some problems when it comes to privacy. If someone can match your cryptocurrency address to your real-world identity, this represents a significant breach of your financial privacy.
Privacy coins are cryptocurrencies that help users maintain their privacy. In such cryptocurrencies, users can verify that transactions on the network are legitimate and follow the protocols rules. However, the details about each transaction are hidden from the public. The most notable examples of privacy coins are Monero and Zcash.
Now, lets quickly run through the most popular cryptocurrency types on the market so you can get a better understanding of what the crypto landscape looks like.
Bitcoin was the first cryptocurrency to ever be released, and its still the most valuable cryptocurrency in terms of market capitalization. Bitcoin was first described in a 2008 whitepaper by someone using the pseudonym Satoshi Nakamoto, whose real identity remains a mystery to this day. The Bitcoin network itself launched in early 2009.
Bitcoin provides a highly decentralized and secure way for users across the world to send transactions to each other on a 24/7 basis. Due to its unique architecture, the Bitcoin network is extremely resilient to censorship and manipulation attempts.
Bitcoin was practically worthless when it was released in 2009, but its value has seen a tremendous increase over the years. In 2021, the market capitalization of Bitcoin surpassed $1 trillion for the first time in history.
Ethereum is a cryptocurrency with general-purpose smart contracts capabilities. It was initially proposed in 2013 by Vitalik Buterin. The Ethereum blockchain officially went live in July of 2015.
Due to its immense flexibility, Ethereum can be used for a wide range of use cases. Ethereum can be used for issuing custom tokens, conducting token sales, decentralized exchanges, NFTs, lending protocols, decentralized lotteries and much more.
In the years following its launch, Ethereum has established itself as one of the largest cryptocurrencies by market capitalization, second only to Bitcoin. Ethereum currently has a dominant position in the smart contracts sector both in terms of its user and developer base.
Ethereum initially launched with a Proof-of-Work consensus mechanism, similar to Bitcoin. However, the network transitioned to a Proof-of-Stake consensus mechanism in 2022. This drastically reduced its energy consumption and laid the foundation for future upgrades that will make Ethereum much cheaper and faster to use.
USDT is a stablecoin issued by Tether. The purpose of USDT is to follow the value of the US dollar as closely as possible, giving cryptocurrency traders access to an asset that can be transacted on the blockchain just like any other cryptocurrency while avoiding price volatility. USDT tokens are issued on many different blockchains, including Ethereum, Solana, TRON and others.
USDT has established itself as the largest stablecoin by market capitalization, reaching a peak of about $83 billion in 2022. USDT is used very prominently on cryptocurrency exchanges as a substitute for the US dollar, and USDT-denominated trading pairs are often among the most liquid in the cryptocurrency market.
BNB Chain is a blockchain platform that was launched in 2020 by the Binance cryptocurrency exchange. Initially, this blockchain was called BNB Smart Chain, but the name was changed to BNB Chain later in an effort to pivot the network towards greater decentralization and reduce its reliance on Binance.
The native asset of the BNB Chain blockchain is BNB, a cryptocurrency that was first issued by Binance in 2017. The BNB Chain platform is heavily based on Ethereum, but implements a more centralized consensus mechanism that allows it to offer significantly faster and cheaper transactions than Ethereum.
Thanks to its efficiency, BNB Chain has emerged as one of the most popular alternatives to Ethereum. In addition, the BNB cryptocurrency is among the 5 most valuable cryptocurrencies on the market today.
XRP is a cryptocurrency that first launched in 2012. Thanks to its unique consensus mechanism, XRP can process a much larger number of transactions than Bitcoin while keeping the cost per transaction at a fraction of a cent.
When talking about XRP, its crucial to mention Ripple, a United States-based fintech company. Shortly after XRP was created, the cryptocurrencys founders gifted 80% of the XRP supply to Ripple.
Ripple implements the XRP cryptocurrency in its cross-border payments solutions, and holds a large part of the XRP supply. However, most of the companys XRP holdings are in escrow.
Hopefully, our article helped you understand the different types of cryptocurrency and how they are distinct from each other. Once you spend more time in the crypto markets, you will be able to easily identify what type of crypto you are dealing with just by learning some basic facts about the cryptocurrency youre interested in.
If youre already comfortable with the different types of cryptocurrency and want to start your crypto investment journey, check out our ultimate guide to investing in cryptocurrency.
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Different Types of Cryptocurrency Explained - CoinCodex
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