Understand the types of cryptocurrencies: A simple guide

Reading time: 4 minutes

When we talk about types of cryptocurrencies, we immediately think of Bitcoin. There is no doubt that Bitcoin is the dominant currency in this environment, but there are several other cryptocurrencies, with different objectives, functions and use.

Cryptocurrencies are divided into coins and tokens. Coins are run by the blockchain itself, mainly for payments. The token runs on another blockchain and has numerous use cases.

Crypto assets can be subdivided into eight types of cryptocurrencies based on their usability. Let’s understand a little more about them.

1 – Payment Currencies

Payment currencies can be used to make payments, whether for goods, services or bills. The market is growing, more and more companies are accepting payments with digital currencies.

In addition to being decentralized, payment currencies are anonymous, transparent and fungible. Its value can vary, according to the speculation that revolves around the project or protocol.

The volatility of these currencies is something very unstable, without values they can suffer from sudden drops, as well as large appreciations.

We can cite as an example of these coins Bitcoin itself, which presents one of the best performances of the decade.

2 – Blockchain

Blockchains are responsible for building an ecosystem capable of increasing the use of cryptocurrencies, leaving the payment environment, allowing the creation of digital assets (tokens) and decentralized applications, all within the platform itself.

A great example of these platforms is Ethereum, which has been standing out for allowing smart contracts to be built and executed without any third-party control or interruptions.

3 – Privacy Currencies

As the name already mentions, these coins are focused on privacy, further increasing the level of anonymity regarding owners and values. These coins offer extra layers of encryption.

Payment coins are considered to be pseudo-anonymous as they only protect some, but not all, information. Transactions carried out can be tracked through connection nodes, KYC verification and in the public ledger.

Privacy coins, on the other hand, have extra layers of encryption, which prevents tracking. Currencies like Monero and Zcash have been standing out in the market.

4 – Utility Tokens

Tokens are used to create a product or service based on a blockchain. Payment coins themselves are an example of utility tokens.

They can still be used to grant specific access or services to certain users, or even give voting rights.

An example of such tokens is the Basic Attention Token (BAT), it rewards creators and improves digital advertising through the Brave browser.

Another example is Siacoin (SAI), which presents a decentralized peer-to-peer cloud storage solution.

5 – Security Tokens

Security tokens are used for the crowdfunding process of a new blockchain or cryptocurrency project. To be considered a security token, it must pass the Howey test and be subject to federal security regulations.

One example is Spice VC, which is a security token specializing in venture capital, it gives investors exposure to the massive growth potential of blockchain.

types of cryptocurrencies

6 – Stablecoins

Stablecoins have become popular among traders for protecting against volatility, keeping prices stable, unlike other types of cryptocurrencies.

There are two types of stablecoins: fiat collateral and cryptocurrency collateral. The fiat guarantee is backed by fiat currencies such as the dollar or the euro, while the cryptocurrency guarantee is backed by cryptocurrencies.

Despite price stability, it is important to be aware that stablecoins are not risk-free. They may not be able to hold their values, and currency holders need to trust that there are sufficient reserves in the asset backed by a stable currency, called counterparty risk.

Examples of stablecoins are the Paxos and Tether coins, which peg the value of the token to assets such as the dollar, euro, pound, and even precious metals.

7 – NFT

Non-Fungible Tokens (NFT) are cryptographic tokens that represent something unique. Therefore they are not considered as non-fungible, fungibility is a basic characteristic of money, it represents the ability to be exchanged for a similar unit.

NFTs are indivisible, rare and cannot be falsified, they are verifiable and their information is stored in smart contracts.

These tokens can be used by applications that have unique digital items or collectibles such as many games, as well as land and virtual art.

8 – DeFi

DeFi is responsible for allowing cryptocurrency trading on decentralized exchanges, betting, lending, trading derivatives and even participating in pooled lotteries.

The main objective of DeFi is to make all financial services accessible in the future, with just an internet connection and a smartphone.

Leave a Reply

Your email address will not be published. Required fields are marked *