Types of Cryptocurrencies, Explained

Types of Cryptocurrencies, Explained

These days it seems everyone is either buying, trading, selling, or even creating a new type of cryptocurrency. Even though popular coins of the likes of Bitcoin, Ethereum, Cardano, and Solana continue to dominate in terms of market capitalization, more and more new cryptocurrencies are coming into play. To give you an idea, the total number of cryptocurrencies worldwide has increased from 66 in 2013 to over 10,000 as of February 2022.

To keep up with the number of cryptocurrencies available on the market, each one can be classified based on their different levels of utility, popularity, and practicality.  The purpose of creating new cryptocurrencies is often to leverage blockchain technology and offer improvements to different industries. The benefit of being able to differentiate types of cryptocurrencies is the opportunity to have a deeper understanding of their underlying technology and the knowledge to diversify your crypto portfolio.  Listed below are 5 different categories of cryptocurrencies to look out for when making your next investment.

Payment cryptocurrencies

As the term “currency” suggests, cryptocurrencies were first created as a means of digital payment. The first cryptocurrency, Bitcoin, was invented to give global users more control over their finances by holding their wealth on a decentralized network. As such, many of the payment cryptocurrencies are created to improve upon Bitcoin’s structure in terms of processing speed, environmental impact, and scalability.

Payment cryptocurrencies are those that are more commonly accepted by merchants as an alternative to fiat currency. Merchants can use cryptocurrency payment gateways to process these transactions and receive an amount of a cryptocurrency in exchange for goods and services. These cryptocurrencies are not just used to exchange for other cryptocurrencies, but increase your purchasing power in the real world as well as the digital world. For example, PayPal allows users to check out for certain purchases using Bitcoin, Ethereum, Bitcoin Cash, and Litecoin, which are some of the more common payment cryptocurrencies.

Stablecoins

Stablecoins are cryptocurrencies that stabilize their market value by pegging it to a reserve asset like fiat currency or gold. This allows them to have a less volatile price than other types of cryptocurrencies because their value stays relative to an external asset. These types of cryptocurrencies can be attractive for long-term investors as the price is expected to stay relatively stable over time. Although, this means that investors should not expect to see a high ROI in the short term when investing in stablecoins.

While they can be used for long term investment, they are more commonly used as a means of exchange for other cryptocurrencies. Their stable value can help save on trading fees overtime during periods of high volatility in the crypto market.

When looking to make an investment in a stablecoin, it’s important to confirm that the issuer of this cryptocurrency has provided a reserve report. This can help guarantee that its value is being derived from a stable asset.

For more information on the different types of stablecoins and their impact, check out this article.

Infrastructure cryptocurrencies

Cryptocurrencies that are used to finance programs on a blockchain network and help run its platforms are called infrastructure cryptocurrencies. One of the most well-known infrastructure cryptocurrencies is ether. Ether is used to fuel the Ethereum network and pays the operating costs of developing and running decentralized applications, or “DApps” on its platform.

In short, they are called infrastructure because they support the development of the blockchains they operate on. Although, in some cases, infrastructure cryptocurrencies can also be used to link different blockchains together to allow transactions across different networks. Because of their ability to make improvements in the blockchain space, many users look towards these cryptocurrencies as the future of crypto.

Utility tokens

Although they are both considered as cryptocurrencies, tokens are different from coins. Tokens are unique in the sense that they are not used for monetary exchange. Instead, tokens represent ownership of a specific asset. Utility tokens hold value by representing a user’s right to a product or service offered by the issuer of that token. Many companies use these tokens to finance their projects by selling them in exchange for access to their products and services. Chainlink or LINK is an example of a utility token that can only be used to buy services known as “oracles” on its network.

It’s kind of like going to an arcade and buying game tokens to use the different machines; once you leave the arcade, those tokens can’t be used anywhere else. More and more NFTs are starting to be considered as utility tokens because they give owners exclusive access to new products and services offered by the seller. For example, purchasing a CryptoKitties NFT serves as a ticket to unlock games, puzzles, and other features on the CryptoKitties website.

Meme coins

Amongst all these different types of cryptocurrencies, there are even some that were created as memes inspired by jokes that have gone viral on social media. The first meme coin was DOGE, inspired by a funny misspelling of the word “dog.” It later inspired other dog-themed coins and incentivized a number of creators to bring other meme coins into circulation based on upcoming trends.

Meme coins are at risk of being more volatile than other cryptocurrencies because they are not backed by anything. Not to mention, meme coins have a much larger, if not unlimited supply, in comparison with other cryptocurrencies. This high market cap allows for billions of these coins to be mined and brought into circulation. Generally, there are generally very few mechanisms in place to remove them, which supports the large volume of these coins on the market.

Regardless, this does not mean that they do not hold any value. Certain meme coins have been known to draw the attention of many users, including celebrities like Elon Musk, which helps drive up their value.

Now that you’re familiar with the different types of cryptocurrencies, you can start buying your own crypto. Signing up with Bitbuy allows you to buy and sell all the cryptocurrencies listed above and more!

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