Cryptocurrency is a virtual/digital token used as a medium of exchange maintained and recorded in decentralized networks. These tokens/coins do not have any intrinsic value. Instead, they acquire a value from the demand and supply of the token/coin. These coins come in different types based on technology and usability.
What are the types of Cryptocurrencies?
There are thousands of cryptocurrencies in the crypto market. Many of them have been termed dead. Still, there are 9004 active/ listed cryptocurrencies according to Coin Market Cap. From a broader perspective, types of cryptocurrencies can be categorized into four groups which are Central Bank Digital Currencies CBDCs, Payment Currencies, Stable Coins, and Utility Tokens.
Why there are so many types of cryptocurrencies?
The biggest reason for such a huge influx is the lack of barriers and regulations. Cryptocurrencies work on decentralized networks; hence, no central authority controls and maintains them. Anyone with little technical knowledge can launch his/her own currency or hire someone to make it on his/her behalf with an investment as low as 50 USD.
Moreover, cryptocurrencies aimed at solving real-world problems, especially in blockchain technology and decentralized networks, have attracted people and shown impressive growth.
Let’s discuss these types of cryptocurrencies one by one.
1. What are CDBCs (Central Bank Digital Currencies)
Countries have started to opt for issuing digital currencies equivalent to their Fiat currency. They are aimed to reduce the stress on their fiat currency and to provide ease for transactions especially for growing international e-commerce. According to the Atlantic Council, 11 countries have already issued digital counterparts of their currency, whereas around 120 countries are in the advanced stage of the development phase.
However, there are some differences between traditional cryptocurrencies and CBDCs.
- CBDCs are issued by mainstream financial institutions like central banks of respective countries, whereas anyone can launch cryptocurrencies.
- CBDCs are controlled and regulated by a central authority, governments or central banks, whereas traditional cryptocurrencies are not controlled or regulated by any central authority.
- CBDCs have the same intrinsic value as their fiat counterpart, whereas cryptocurrencies do not have any inherent value.
Lastly, cryptocurrencies are always based on blockchain technology, whereas there is no such compulsion for CBDCs, till now, all the issued CBDCs are based on traditional networks.
2. What are Payment Cryptocurrencies?
As the name suggests, it is a type of cryptocurrency that is used to make online P2P transactions as a medium of exchange for goods and services. The sole purpose of developing such cryptocurrency is to facilitate transactions; other aspects of blockchain technology like dApps, smart contracts, or consensus mechanisms cannot be developed on them.
Payment cryptocurrencies are limited in number, that’s where they get value for transactions. As they are limited and cannot be created over time, their value increases with time. Since they are deflationary in nature, they provide an ideal opportunity for making investments. Payment cryptocurrencies include Bitcoin, Litecoin, Dogecoin, Bitcoin cash, and Monero.
3. What are Stablecoins?
The value of cryptocurrencies has seen drastic ups and downs, which is a major impediment to their future. Stablecoins have been developed to cater to the issue of high volatility. These coins are designed to provide a store of value for future utilization. They can be easily exchanged to fiat currencies. Stable coins are pinned with a fiat currency, especially USD and EUR, to provide stability. The issuer of stablecoins manages reserves of fiat currency to guarantee a stable value for its cryptocurrency. These are based on blockchain, although they are pegged with a fiat currency but there is no scope for government interventions. They function just as other cryptocurrencies do. Stablecoins are further divided into four subcategories.
• Fiat backed stablecoins: a fiat currency backs the value in this type of stablecoin. Tether (USDT) is a good example of this type of stablecoin.
• Crypto-backed stablecoins: a high-valued cryptocurrency backs the value of such a stablecoin. For example, Wrapped Bitcoin (WBTC) is backed by Bitcoin.
• Commodity backed stablecoins: a commodity is used to back the value in such stablecoins. Tether Gold (XAUT) is an example of commodity stablecoin.
• Algorithmic: These types of stablecoins are not backed by any physical entity to stabilize their value. Rather, they use algorithms. DAI is a perfect example of algorithmic stablecoins.
4. What are Utility Tokens?
Utility tokens are also referred to as infrastructure tokens. These types of cryptocurrencies are issued/launched for a specific purpose on blockchain technology. Utility tokens offer a platform for the development of smart contracts and dApps for the financial ecosystem to discourage the role of intermediaries. These cryptocurrencies are generally open-sourced and uncapped, which means with time and requirement, more tokens will be created; hence, their value is likely to fall in the future.
Utility tokens are further subdivided into five subgroups according to their use case (the specific task cryptocurrency performs in the blockchain is called the use case). These include Non-Fungible Tokens (NFTs), Finance Tokens, Service Tokens, Governance Tokens, and Media & Entertainment Tokens.
Non-Fungible Tokens
Fungibility is an important aspect of money. Cryptocurrencies and fiat currencies are both fungible (mutually interchangeable), but NFTs are non-fungible, so naturally, they cannot be treated as a currency. These are unique tokens based on blockchain technology. NFTs are counterparts of conventional artwork in the digital domain. Just like traditional art works, they provide an opportunity for investments.
Finance Tokens
Finance tokens are also referred to as exchange tokens. These are decentralized finance (DeFi) tokens with the specific task of granting access to cryptocurrency exchanges. Binance coin (BNB) is an example of finance coin.
Service Tokens
Service tokens are created to provide a specific service in the digital world, for example, by providing storage clouds that replace current centralized clouds like Cloud, Google Drive, etc. These are also based on blockchain and use cryptography for security. Arweave, BitTorrent, and Storj are some examples of service tokens.
Governance Tokens
Governance tokens are issued to ensure the participation of individuals holding governance tokens in the decision-making of cryptocurrency projects. The owners can shape the direction of future developments of blockchain technology. Luna is traded on all major platforms and is an example of a governance token issued by the Terra network.
Media & Entertainment Tokens
These are tokens used for entertainment and games. These are mostly associated with animal meme characters. These are highly volatile cryptocurrencies providing good opportunities for highly profitable trades. According to Coin Gecko, Bonk is the highest gainer of 2023 among all cryptocurrencies which is meme-coin.
Bottom Line
There are more than 9000 active cryptocurrencies currently available. Cryptocurrency is categorized into four major categories based on its utility and the nature of the currency. Investing in the crypto market is quite complex; it is important to understand the types before logically reaching a conclusion.
