Types of Cryptocurrencies and Their Differences

Before you learn what types of cryptocurrencies there are, you need to understand the very concept. Cryptocurrency is a digital coin that is designed for making payments. That is, it works like regular money, just in electronic form. With cryptocurrencies, you can pay for any product or service or make a profit by selling them. And this is an important aspect – such a digital asset is used specifically for making payments. Each crypto coin has a market capitalization, and it is important to pay attention to it before choosing an asset for investment.

In turn, cryptocurrencies can be divided into bitcoin and altcoins. Let's talk about them in more detail.

Bitcoin is the world's main cryptocurrency. This is the first digital asset that appeared in 2009. At the moment, it is also the most expensive cryptocurrency; its price once exceeded $60,000. The key features of BTC are as follows:

• Proof-of-Work algorithm. Thanks to it, cryptocurrency mining is available using a rig (a set of high-power computers) or an ASIC miner.

• Limited issue. A maximum of 21 million BTC crypto coins can be issued. Due to this, the cryptocurrency is deflationary – there is no pressure on the price due to too many coins issued.

• There are no accounts on the bitcoin network. This ensures a certain degree of anonymity.

In addition, thanks to the popularity of bitcoin, many companies began to develop infrastructure and systems for accepting payments in BTC. Therefore, bitcoin is the most widely used coin for financial transactions compared to other cryptocurrencies.

Speaking about the types of cryptocurrencies and their differences, it is important to talk about altcoins. Altcoins are all alternative cryptocurrencies, except bitcoin. These can be either digital coins based on the Bitcoin blockchain (such as Bitcoin Cash or Bitcoin Gold) or coins that have their own blockchain and completely different characteristics.

Ethereum remains the most famous altcoin – it is the main competitor of Bitcoin. Ethereum has become popular primarily due to its innovative technologies. The blockchain of this cryptocurrency has opened up a number of opportunities for crypto enthusiasts:

• Creation of decentralized applications and ecosystems.

• Smart contract technology (smart contracts are only executed after both parties have met their terms).

• Ability to create tokens. The Ethereum network has special standards for their development.

Another innovation that is common to many Ethereum-based cryptocurrencies is staking. Unlike Bitcoin, which uses the Proof-of-Work algorithm, a number of cryptocurrencies use the Proof-of-Stake protocol. This means that you can earn additional profit just like with a bank deposit by freezing cryptocurrencies for a certain time. The volume of emission of altcoins can be both limited and unlimited. Therefore, there are both deflationary and inflationary cryptocurrencies.

There are more than 7,000 altcoins. Some of them are illiquid and unpromising, but some can give even higher profits than Bitcoin. Before investing in these cryptocurrencies, it is better to study the overview of altcoins and their price dynamics.

Many novice crypto investors confuse cryptocurrency and token. However, these are different things. Unlike cryptocurrencies, a token cannot be considered a means of payment. These assets are not used for transactions. If a cryptocurrency can be compared to a fiat currency, then a token is more like a stock. It carries certain information and gives the owner some privileges. For example:

• Provides ownership of an object.

• Allows to receive some services within a specific platform.

• Makes it possible to obtain short-term loans, etc.

Another important difference between tokens and cryptocurrencies is that tokens do not have their own blockchains. They are always released on a ready-made platform. The most popular platform for creating them is Ethereum, which has even released its own token standards, such as ERC20.

An example of a token is Terra (LUNA). The Terra project aims to facilitate the development of stablecoins, and the LUNA token allows you to pay for services within the network.

Stablecoin is a relatively new part of the cryptocurrency market. It is important to know that cryptocurrency, in its traditional meaning, is not tied to any asset. The cost of a cryptocurrency is determined only by supply and demand from market participants. High volatility provides high risks with potentially high returns but at the same time makes it difficult to use cryptocurrencies for real payments. Stablecoins are designed to fix this problem.

Stablecoins are special cryptocurrencies that are pegged to real assets. The value of each unit corresponds to or is as close as possible to the price of the asset to which it is linked. For example, stablecoins can be linked to the following assets:

• Fiat money – dollars, euros, pounds sterling, etc.

• Oil of various grades, other energy carriers.

• Precious metals – gold, silver, etc.

The advantage of stablecoins is that they are more convenient to use for payments, and the transfer of these cryptocurrencies into fiat money is quite simple. Also, on many platforms, stablecoins are used to buy and sell other cryptocurrencies without using fiat money.

The most famous example is Tether USD (USDT). This stablecoin is backed by the US dollar and is traded at a close rate. It is used both for paying for cryptocurrencies and for other payments on the Internet. The total issue of Tether USD already exceeds $2.5 billion.

NFT is rapidly gaining popularity, so it is important for traders to know what it is. NFT is a non-fungible token. If ordinary tokens carry similar information, then each NFT is unique. They encrypt certain information, for example:

• Drawings.

• Texts.

• Music.

• Animations.

• Videos, etc.

Unlike other digital assets, NFTs are not traded on classic exchanges. You can buy them on special NFT marketplaces. Also, each person can place their tokens and earn on them. An alternative way to make money on NFTs is to buy a token and resell it then.