Different types of cryptocurrencies and why they were created

Since Bitcoin’s debut over a decade ago, a variety of cryptocurrencies have emerged and will continue to spring up. According to data from Coinmarketcap, there are over 22,000 cryptocurrencies in circulation today. That’s astonishing considering the fact that the new technology was launched just above a dozen of years ago. 

However, there’s a distinction between a crypto coin and a token. Bitcoin and some major cryptocurrencies like Ethereum that run on their own blockchain are considered coins while crypto tokens are created on blockchains that already exist. 

In simpler terms: Unlike coins, tokens don’t need to have their blockchain and can exist as part of the ecosystem of another network. For example, thousands of tokens run on the Ethereum network.

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In this article, we are going to examine the different types of cryptocurrencies and what they are used for. 

Bitcoin 

Bitcoin is the first and most widely recognised cryptocurrency. It was launched in January 2009 by Satoshi Nakamoto, a presumed pseudonym for a person or group whose true identity remains a mystery till this day. 

Bitcoin is based on the ideas laid out in a 2008 whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” The paper details methods for “allowing any two willing parties to transact directly with each other without the need for a trusted third party.” 

Bitcoin is a digital currency that exists independently of any government, state, or financial institution. It enables peer-to-peer exchange of value in the digital realm through the use of a decentralised protocol, cryptography, and a mechanism to achieve global consensus on the state of a periodically updated public transaction ledger called a ‘blockchain.’

The market price of bitcoin and users has risen astronomically over the years and has gone beyond being an ‘alternative gold’. Bitcoin is now useful for transacting value outside of the traditional financial system. 

People use Bitcoin to, for example, make international payments that are settled faster, more securely, and at lower transactional fees than through traditional settlement methods. 

Altcoins 

Altcoin is a combination of the two words “alternative” and “coin.” It is generally used to include all cryptocurrencies and tokens that are not Bitcoin. This simply means that Ethereum, Binance Coin, Solana and thousands of other cryptocurrencies are altcoins. 

Altcoins can have different purposes beyond just serving as a digital currency. Most early altcoins were intended to improve on Bitcoin’s performance or serve some other purpose. Ether (ETH) is used on the Ethereum network to pay transaction fees and pay network participants for the transaction validation work their machines do.

Stablecoins 

A stablecoin is a cryptocurrency with a value pegged to another asset’s price. If functioning correctly, a stablecoin pegged to the United States dollar would always be valued at $1. Notable stablecoins include Tether $USDT and USD Coin $USDC. 

There are two types of stablecoins: collateralised and algorithmic stablecoins. Collateralised stablecoins maintain a pool of collateral to support the coin’s value. That is, an equal amount of collateral is taken out of the coin’s reserves whenever someone sells their tokens. Tether (USDT), which is pegged to the US dollar, is probably the most prominent stablecoin. However, there is a controversy surrounding the reliability of its reserves.

Algorithmic stablecoins on the other hand use algorithms to control their supply and thus maintain their price peg. A handy example is TerraUSD ($UST), which was originally pegged at $1 by creating and destroying a sister coin called Luna. Every time TerraUSD was bought or sold, a respective amount of its sister token, Luna, was created or destroyed. This strategy worked great until May 2022 when panic caused people to cash in their TerraUSD in arguably the most catastrophic crash in crypto history as TerraUSD de-pegged from its $1 price and slid to near zero, along with Luna. 

Basically, cryptocurrency trading and use have been marked by volatility since launch and stablecoins aim to reduce this overall volatility by pegging their value to an asset. With this, people in developing countries can hedge against inflation and economic instability by saving in $USDT and other stablecoins. 

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Memecoins 

A memecoin is a term for popular cryptos that are depicted with comical or animated memes and supported by enthusiastic traders and followers. Dogecoin, which was branded around the “doge” Shiba Inu dog meme, started the trend around 2015. 

However, what began as a joke became a verifiable cult asset as users flocked to the asset and as a result, more memecoins began to crop up. According to Coinmarketcap, over 300 memecoins are now in circulation. Prominent ones include Shiba Inu, Baby Doge, Floki Inu, Dogelon Mars and many other tokens that may offer more entertainment than Utility. 

Most meme coins are purely entertainment instruments, unlike Ethereum and other utility currencies tied to specific blockchain features. While they might be fun, they are also highly risky investments and may hold little or no intrinsic value which means they can fall as quickly as they rise. 

To put this into perspective, $DOGE today is down over 90% of its all-time high in 2021. But this is an important lesson for all cryptocurrency investors to take note because memecoins are majorly pump-and-dump schemes. 

Conclusion 

It is important to know that there are many different types of cryptocurrencies out there, so it’s advisable to put some thought into understanding which coins or tokens will be right for you.