Cryptocurrencies are a sort of digital currency that allows users to send payments to one another directly through an online platform rather than through a bank. Most cryptocurrencies are only worth what buyers are willing to pay for them on the open market; there is no statutory or intrinsic value attached to them. National currencies, on the other hand, derive some of their value from their status as legal tender.
There are three broad categories in which cryptocurrencies can be classified:
- Coins, such as Bitcoin and altcoins.
- Tokens are assets that can be programmed and stored within a platform’s blockchain.
- Even though the terms “crypto,” “coins,” and “tokens” are sometimes used interchangeably, it’s critical to know the differences between them in order to get a grasp on the fundamentals of cryptocurrencies.
Coins vs. tokens
A digital coin is formed on its own blockchain and functions in a similar fashion to traditional money in many ways. It can be used to hold value and as a medium of exchange between two parties engaged in commercial activity. Bitcoin and Litecoin are two examples of digital coins.
Tokens, on the other hand, can be used for a variety of purposes other than simply as digital money. Different developers employ tokens in software applications since they are built on top of an existing blockchain. They enable access to decentralized applications, enable earnings from NFT airdrops, etc. It is common for tokens to be produced and distributed via an Initial Coin Offering (ICO), which is quite similar to a stock offering.
Altcoins vs. bitcoin
In the cryptocurrency world, the word “altcoins” refers to any cryptocurrency that is not Bitcoin.
As the name implies, they’re Bitcoin alternatives. The majority of digital currencies are altcoins, which number over ten thousand. Transaction speeds and energy efficiency were two of the primary goals for early altcoins. There are numerous uses for newer cryptocurrencies, depending on the intentions of their creators.
Because of its smart contract capabilities and the growing popularity of non-fungible tokens, Ethereum, the most generally recognized altcoin, has risen tremendously since its 2015 inception. Every altcoin has its own history and a distinct community. In the long run, the price of some of these assets could rise because they are both popular and functional.
The different classes of coins and tokens
Platform cryptos
A platform cryptocurrency’s goal is to eliminate middlemen, develop marketplaces, and even launch additional cryptocurrencies. It’s the foundation for a wide range of future applications.
In the cryptocurrency world, Ethereum is the best example of a “platform” cryptocurrency. Smart contracts run on Ethereum, a decentralized platform. Without any danger of downtime, fraud, or even censorship, smart contracts are an application that runs as intended and does not need to be updated. Ethereum serves as a foundation for a slew of new digital assets.
Meme coins
Despite the fact that they were made purely for amusement and had no monetary value, these are now worth millions of dollars. Meme coins are speculative assets based on the idea of community-driven pumped-up trading. They serve no practical use. The vast majority of them are completely pointless.
Inexperienced investors should steer clear of these types of cryptos because of the inherent risk they carry. They can go belly up at any time, which implies their value is nil. However, there are few that have lasted the test of time. For instance, even though Dogecoin (DOGE) and Shiba Inu (SHIB) began as meme coins, they’ve already joined the crypto fray.
Also, recently, Shiba Inu’s founder, Ryoshi, disclosed that the Shiba Inu Core Devs (SICD) are hard at work constructing the “Oshiverse,” a metaverse that will be available to players.
Privacy coins
Privacy coins are used to make blockchain transactions private and anonymous by concealing their origin and destination. Hidden wallet balances and addresses are just two of the methods used in these anonymous cryptos to conceal their users’ transactions. If you don’t want anyone prying on your financial activity, they make it difficult to figure out who sent what to whom.
Three of the most popular privacy coins are Monero, Dash, and Zcash. One of the few privacy coins that are always secret, Monero is a standout. You can’t turn off the privacy features on Monero like you can on Zcash, for example. Zcash, on the other hand, is a privacy coin that enables transparent transactions for users who opt to be transparent.
Stablecoins
Stablecoins are digital coins tethered to other valuable assets like gold, fiat currency, or in some circumstances, other crypto coins held in reserve. The reserve is the collateral for the stablecoin. When a stablecoin holder withdraws their tokens for cash, the reserve is depleted in proportionally equal amounts. Stablecoins like USD Coin, Tether, and Terra USD are just a few examples. In contrast to other more volatile forms of cryptocurrency, stablecoins have piqued the interest of governments throughout the world.
Stablecoins promise to be stable since they are linked to more stable assets like the US dollar or the euro, rather than cryptocurrencies, which fluctuate constantly. Aside from providing price stability, stablecoins also serve to mitigate some of the volatility associated with investing in cryptocurrencies.
Stablecoins also make it easier to trade digital assets on crypto exchanges, which increases the market’s liquidity. Some government authorities are concerned about the potential dangers stablecoins represent to consumers and the financial markets if they remain uncontrolled. The basis for their concern is certainly warranted.
For example, at the beginning of the year, Tether had a market value of $4 billion, according to CoinMarketCap. Now, it stands at $83 billion. In the past, regulators have punished the company for making deceptive assertions regarding its reserve amounts. However, it presently claims to have enough reserves to match 100% of the coins it has issued.
Utility cryptos
A utility cryptocurrency serves a certain purpose. A utility cryptocurrency like Ripple (XRP) exemplifies this concept. Ripple is utilized by a wide range of financial organizations because of its ability to transmit fiat money at a low cost and with high efficiency.
In summary
Investing in cryptocurrencies is a new and largely untested field. Nobody has a crystal ball to predict which cryptocurrencies will endure. Generally, you should never invest more than you can afford to lose, no matter how well-versed you are in cryptocurrency. Despite this, you should familiarize yourself with cryptocurrencies and the technology that underpins them, as they will play a significant role in the coming years.
