Cryptocurrencies can be categorized into three main types: Bitcoin, altcoins (which include stablecoins), and tokens, which in turn include DeFi tokens. Each of these groups has its own characteristics.
Bitcoin and altcoins are not money in the traditional sense, although they fall into the category of cryptocurrencies. These are complex digital products with their own cryptographic codes and encrypted records.
To become cash, cryptocurrencies undergo complicated procedures involving special technologies.
We examine the unique attributes and distinctions of various cryptocurrencies.
Bitcoin
Bitcoin holds the distinction of being the first and most popular digital currency.
It is a globally distributed electronic payment system that enables users to perform transactions with each other, without the presence of intermediaries such as banks or other financial institutions.
Bitcoin is commonly viewed as a digital substitute for fiat currencies and gold and continues to hold the top spot in market capitalization among all cryptocurrencies.
What is an altcoin?
Altcoins, created after Bitcoin, include all cryptocurrencies except for the first one. Their share in the cryptocurrency market is approximately 40% in 2023.
Bitcoin's introduction in 2008 along with its source code initiated the creation of thousands of other cryptocurrencies. These are known as alternative Bitcoin coins (altcoins), with some bearing significant similarities to Bitcoin.
For instance, Charlie Lee, who made Litecoin, said that his digital currency was similar to Bitcoin. Litecoin is a worldwide payment network in which people can send money to each other.
Some other digital currencies have different purposes than Bitcoin. For instance, Ethereum was the first blockchain platform on which developers could program and launch decentralized apps and smart contracts.
IOTA was developed to improve data transfer and financial transactions for the Internet of Things (IoT) and machine economy (machine-to-machine — machine interaction or M2M). IOTA uses Tangle, which is its own distributed ledger technology.
Similar to Bitcoin, all altcoins can operate independently using their own DLT networks. Blockchain is a well-known DLT; however, each altcoin differs owing to its unique base code.
What are stablecoins?
They are cryptocurrencies linked to certain assets, such as strong fiat currencies (e.g., the US dollar or euros), commodity prices (e.g., gold), or other cryptocurrencies, which lower price changes. Tether and Binance USD are the most popular stablecoins in 2023.
Some stablecoins lack reinforcement, such as Carbon and Havven coins, and their exchange rates are regulated by issuing or burning assets.
This is made possible via blockchain technology that encrypts transaction details. Cryptocurrencies aim to accelerate and simplify transactions.
Tokens
Tokens are a distinct type of cryptocurrency that differs from blockchain-based models. Instead, they are stored in a distributed information system called blockchain. This system confirms that the owner of a digital token has the right to certain civil objects.
Put simply, tokens act as accounting units that substitute financial assets (such as securities, indices, raw materials, and gold) in the digital realm. They are digital receipts from the token's creator, which makes it liable to provide specific objects to the token holder.
Tokens are different from Bitcoin and altcoins in that they cannot operate independently. As a result, they are layered on top of an existing crypto network (usually an Ethereum and blockchain) and managed through smart contracts.
Special software is typically required to access tokens.
There are various types of tokens, such as capital tokens which consist of company securities (shares), and service tokens that are used by online platforms to represent points, in-game currency, reputation, etc..
Asset-backed tokens are a form of commitment to products and services.
The latter is particularly fascinating. Tokens' capability to represent nearly any asset has granted cryptocurrency investors access to traditional financial instruments.
Tokenized versions of shares, goods, currencies, cryptocurrencies, real estate, and more, have disrupted the finance world. Tokens create new investment opportunities and are valuable to investors. It is unclear who launched them.
Currently, CoinMarketCap reports approximately 1,500 tokens being used on 24 different cryptocurrency platforms, with the majority being hosted on Ethereum. More than half of the top 100 cryptocurrencies, including Huobi (HT), Binance Coin (BNB), USD Coin (USDC), and Uniswap (UNI), are based on this platform.
The Tether (USDT), the top stablecoin, was launched on the Omni Layer platform with three other tokens. NEO, a platform for smart contracts and dApps, introduced the NEO token, which was once seen as a Chinese rival to Ethereum. TRON, the top platform for dApps, has numerous tokens operating on it, including the BitTorrent Token (BTT), which quickens downloads on the BitTorrent file exchange protocol.
What are DeFi tokens?
When discussing cryptocurrencies, it is important to note DeFi tokens, as they have gained popularity with investors.
DeFi projects are financial platforms that are decentralized and offer services such as exchanges, wallets, and lending. This sector experienced a significant surge in activity, similar to the 2017 ICO.
DeFi projects have a significant characteristic: developers cannot access user funds, and transactions occur exclusively between users. Recently, DeFi platforms have begun creating and distributing their tokens, resulting in substantial price hikes. For example, yEarn Finance's DeFi platform released its YFI token on July 18, 2021. Within seven days, its market value skyrocketed from $35 to $4,800 and ultimately reached $13,533 on October 22 of the same year.
Some DeFi tokens can increase dramatically per day, leading to bubbles that may burst unexpectedly.
Crypto Forks
When discussing cryptocurrency creation, we must discuss forks. Many well-known currencies, such as Litecoin and BCH, are forks of Bitcoin.
A fork is a modified copy and branch of a cryptocurrency. There are two types of forks in cryptocurrency: soft and hard.
A soft fork is a gentle change to cryptocurrency that can be undone and does not break the main protocol.
A hard fork is an inflexible modification of a cryptocurrency that contradicts the main protocol and splits the network into two parts that cannot connect with each other.
Conclusion
Consequently, we reviewed the different types of cryptocurrencies and their characteristics.
Bitcoin is an original digital currency that holds the top spot in the market because of its large capital.
Altcoins refer to all other digital currencies apart from Bitcoin. Each altcoin aims to differentiate itself from the original in various ways.
Tokens are digital units of currency used to represent financial assets such as stocks, raw materials, and gold. The token's essence is that its creator promises to give you something in exchange.
Regardless of these digital assets, all types of cryptocurrencies (Bitcoin, altcoins, and tokens) are revolutionizing the world by making financial services free from the control of governments, regulators, and even banks.
