Bitcoin is undoubtedly a dominant force in the crypto industry. For many, it is almost synonymous with cryptocurrency. But in reality, there are more than 18,000 cryptocurrencies in circulation. The number of cryptocurrencies has increased by over 350 times since 2013. The cryptocurrencies can be classified into two parts on the basis of nomenclature: Bitcoin and Altcoins. Altcoins is a term that refers to all the other cryptocurrencies except Bitcoin. The recent revelation by US senators Kirsten Gillibrand and Cyntia Lummis- that most altcoins can be considered securities by the SEC, is likely to spark a new debate over the types of crypto assets.
Mainly, cryptocurrencies have two major classifications: coins and tokens. Coins run on their own blockchain, while tokens run on another blockchain. Tokens serve many different purposes. These purposes are known as use cases. It is the use cases that define the utility of a cryptocurrency. These use cases are used to classify cryptocurrencies. On the basis of use cases, there are eight different types of cryptocurrencies.
Types Of Cryptocurrencies
- Payment Currencies: As the name suggests, payment currencies are used to make payments. Cryptocurrencies like Bitcoin ($BTC) and Litecoin ($LTC) are the most common types of payment cryptocurrencies. While most cryptocurrencies can be used to pay for things or make payments, payment currencies can be used to buy goods and services. There are several businesses globally that accept BTC as payment. Payment currencies use blockchain technology to encrypt, regulate and verify transactions.
- Blockchain Economies: Different types of crypto assets serve different purposes. Blockchain economies take the use cases of crypto assets beyond payment. Ethereum ($ETH), Ethereum Classic ($ETC), and Cardano ($ADA) are the most common examples of blockchain economies. Ethereum allows developers to build distributed applications (Dapps) without any interference from third parties. Similarly, Cardano emerges as a scalable platform, allowing developers scalability, interoperability, and sustainability. Cardano aims to overcome the limitations of second-generation cryptocurrencies like Bitcoin and Ethereum.
- Privacy Coins: True to their name, privacy coins are focused on enhancing privacy. Thus, these types of crypto assets have extra layers of encryption. The focus is on maintaining the secrecy of critical transaction information such as owner details and amount. Monero ($XMR) is the most common privacy coin. Monero transactions are literally untraceable as the identities of sender and receiver are secret. Dash and Zcash are some other common privacy coins.
- Utility Tokens: Utility tokens serve certain purposes within the blockchain economy. These types of crypto assets facilitate blockchain-based services. The service may include giving voting rights to community members or giving users access to certain services within the blockchain economy. Crypto assets that fail to qualify according to the Howey Test are classified as utility tokens. Howey Test determines if a transaction represents an investment contract or not. The majority of utility tokens are ERC-20 tokens running on the Ethereum blockchain. Basic Attention Token ($BAT), Siacoin ($SIA), and VeChain ($VET) are some of the most common utility tokens.
- Stablecoins: Stablecoins are a trader’s best friend during extreme fluctuations in the crypto market. Stablecoins are a specific type of crypto assets pegged to FIAT like USDT. Different stablecoins use different methods to maintain price stability. Tether ($USDT), USD Coin ($USDC), and Binance USD ($BUSD) are some of the most common stablecoins.
- Security Tokens: Security tokens or securities are the opposite of utility tokens. Meaning they pass the Howey Test. These types of crypto assets are used for crowdfunding a new crypto or blockchain project. Since security tokens represent a stake in a blockchain project, they can provide a reasonable profit in the long term. SPiCE VC and Blockchain Capital are the two most common security tokens.
- Decentralized Finance (DeFi): The emergence of decentralized finance has revolutionized global finance by removing intermediaries. The key aim of DeFi is to eliminate the inefficiencies in traditional finance. DeFi tokens are the types of crypto assets that aim to make financial services more accessible in different parts of the world through the internet. DeFi comes with a wide range of services and earning opportunities for users, including lending, borrowing, staking, and yield farming. DeFi is emerging as a way for users to earn a passive income. Chainlink ($LINK), Nexus mutual ($NXM), and Near ($NEAR) are some of the most common DeFi tokens.
- Non-Fungible Tokens: Non-Fungible Tokens or NFTs are digital collectibles that represent anything rare like a piece of art, music album, or an image. An NFT is essentially a cryptographic token. No two NFTs are the same. The rarity of an NFT is the key metric to determining its value. NFTs rose to prominence after the former Twitter CEO sold his first-ever tweet as an NFT for a whopping $2.9 million. Cryptokitties, Pak’s The Merge, and Everydays: The First 5000 Days are some of the most popular NFTs.
Final Word
The crypto industry is evolving rapidly, and the aforementioned types of crypto assets are a reflection of this evolution. Unlike the first few years, there are plenty of opportunities for investors to earn a passive income within the crypto industry. But, it is extremely important to know about the emerging trends to make the most of the crypto boom.