Since its creation in 2009, bitcoin has become a revolutionary digital currency. Because it allows peer-to-peer payments (between individuals) without the intervention of a third party such as a bank, it has triggered a tidal wave of other cryptocurrencies and digital assets using blockchain technology. The blockchain is a public digital ledger in which information about each transaction is given a unique “hash” (or identity) and added to the end of the ledger.
Cryptocurrency coins vs tokens
First, you need to know the difference between a coin and a token. When talking about cryptocurrencies, you may hear the terms “coin” and “token” used frequently. Although these terms may seem interchangeable, there is a difference and it is important not to confuse them.
A digital coin is created on its own blockchain and acts the same as traditional money. It can be used to store value and as a medium of exchange between two parties doing business with each other. Bitcoin and Litecoin are examples of coins.
Tokens, on the other hand, are much more useful than simple digital currency. Tokens are created on top of an existing blockchain and can be used as part of a software application (to grant access to an application, verify identity, or track products moving through a supply chain ), or they can even represent digital art (as with NFTs, or “non-fungible tokens”, which certify that something is unique).
There’s even been experimentation with using NFTs with physical assets, like artwork and real estate. Ether is an example of a token, which is used to transact on the Ethereum network .
Why are there so many types of cryptocurrencies?
Blockchain technology is open source, which means that any software developer can use the original source code and create something new with it. That’s what the developers did. It is estimated that there are over 4,500 different cryptocurrencies in circulation at the time of this writing, and this number is constantly growing. For reference, only about four years ago the number of cryptocurrencies exceeded 1,000.
This increase is partly explained by the relative ease with which new cryptocurrencies can be created. The source code of one can be used to build another. For example, the Ethereum network can be used to create your own personal digital coins. And sometimes there are “forks” in the software code that change the governance rules of a crypto, which can lead to the creation of a new crypto. Bitcoin Cash was created in 2017 following a Bitcoin fork that allowed more transactions to be recorded on a single block of the blockchain.
The surge in cryptocurrency prices has prompted many developers to pile in to try and get a piece of the action. And blockchain technology has uses that go beyond just digital currencies (we’ll get to that in a minute). So, while some cryptos might be a bubble that will eventually burst, the decentralized nature of the technology and the vast scope of its application in the software world is itself a reason why there are so many cryptos. .
Main types of cryptocurrencies
Bitcoin is considered the first cryptocurrency created, and everything else is collectively referred to as an “ altcoin ” (a word derived from “alternative coin”). While it’s hard to say which are the best cryptocurrencies, bitcoin and some of the larger altcoins are top options due to their scalability, privacy, and breadth of functionality they support. .
The most popular cryptocurrencies are:
There really isn’t a “best” cryptocurrency, as each one has different characteristics depending on what the developer designed it for. Here is an overview of some of the most popular digital coins and how each is used.
Bitcoin is considered the first decentralized cryptocurrency using blockchain technology to facilitate digital payments and transactions. Instead of relying on a central bank to control the money supply in an economy or on third parties to verify transactions (such as your local bank, credit card issuer, and merchant’s bank), the Bitcoin’s blockchain acts as a public ledger of all transactions in Bitcoin’s history.
This ledger allows a party to prove ownership of the bitcoin they are trying to use and can help prevent fraud and other unapproved tampering with the currency . A decentralized currency can also make peer-to-peer money transfers (such as those between parties located in two different countries) faster and less expensive than traditional currency exchanges involving a third-party institution.
Ether is the token used to facilitate transactions on the Ethereum network. Ethereum is a platform that uses blockchain technology to enable the creation of smart contracts and other decentralized applications (meaning the software does not have to be distributed on app exchanges like Apple’s App Store or the Google Play Store, where it could be forced to give a 30% share of any revenue to the tech giants.
Thus, Ethereum is both a cryptocurrency (actual coins are measured in units called Ether) and a playground for software development.
Binance Coin is available on the Binance cryptocurrency exchange (along with other digital coins available for trading). Binance Coin can be used as a type of currency, but it also facilitates tokens that can be used to pay fees on the Binance exchange and to power Binance’s DEX (decentralized exchange) for building apps.
XRP / Ripple
XRP is a digital currency based on the RippleNet digital payments platform, built by the Ripple company. It was designed for financial institutions to scale digital payments across the globe and reduce transaction costs associated with typical cross-border funds transfers. Short-term lines of credit can also be extended using XRP.
Tether is what is known as a stablecoin, a currency pegged to fiat currency – in this case, the US dollar. The idea behind Tether is to combine the advantages of a cryptocurrency (like the absence of financial intermediaries) with the stability of a currency issued by a sovereign government (as opposed to the wild price fluctuations inherent in many cryptocurrencies) .
Originally conceived as a joke poking fun at rampant cryptocurrency speculation, Dogecoin has seen its value skyrocket, thanks to the support of the likes of Tesla CEO Elon Musk and Dallas investor and owner Mark Cuban. Mavericks.
Dogecoin, whose mascot is a Shiba Inu dog, was designed to be used as a form of digital payment, like Bitcoin. However, Dogecoin makes it faster and easier to register payments, but it also has no limit on the number of coins that can be created over time (unlike Bitcoin, which was designed with a cap on the number of rooms that can be created).
Are there different types of cryptocurrency trading?
Investing in cryptocurrencies is a bit different from investing in the shares of a company. Stocks represent ownership of a company and a right to the profits it generates. On the other hand, the purchase of coins of a cryptocurrency is a speculative bet on the evolution of the price of this digital currency, which can be very volatile and is subject to the law of supply and demand, the digital currency is not in itself a dynamic asset.
Cryptocurrencies can be exchanged for other digital currencies or for fiat currencies (like the US dollar) using a digital wallet on a trading app .
But there are other ways to make money than trading. Some cryptocurrencies can be “staked” for rewards. Once an investor has purchased a cryptocurrency, it can be held in an account and used to verify transactions made on the blockchain network.
This method of funding a blockchain network is known as “proof of stake”, and the owner of the cryptocurrency can earn a type of dividend by staking their holdings, which are usually paid in coins or tokens. additional.
In addition to trading digital currencies, derivatives contracts are also available on Bitcoin and Ethereum from leading derivatives exchange CME Group. Derivatives such as futures and options are mainly used as a hedge against price fluctuations of the underlying asset.
Where to buy all types of cryptocurrencies?
With so many cryptocurrencies in circulation today, there is no single place that provides access to all cryptocurrencies. However, Coinbase is one of the largest exchanges and currently supports over 100 cryptocurrencies (including most of the top 10 cryptocurrencies by market capitalization).
Binance is another top trading platform and it is where Binance coins and tokens can be traded.
To conclude on the different types of cryptocurrencies
There are thousands of different digital currencies that use blockchain technology for an incredibly diverse list of applications in the digital economy. Bitcoin is by far the most popular cryptocurrency because it has gained traction with a younger generation of consumers, but developers are constantly innovating blockchain technology and its uses.
These developments give a lot of value to other platforms, like Ethereum, because they are used to create new software. For investors trying to plan into the future, this could be very attractive as decentralized blockchain could erase third parties from business transactions and make payments more efficient around the world.