There are about 23 thousand cryptocurrencies on the market. All coins differ in origin, principles of operation and methods of use. In order not to get disoriented, users call them differently and divide them into groups. Let's figure out what types of coins are on the crypto market and what they can be used for.
5 crypto terms to know
The very first cryptocurrency, bitcoin (BTC), appeared in 2008. It was created by an anonymous Satoshi Nakamoto. The identity of bitcoin's creator still remains the main mystery of the whole crypto industry. Nobody knows who he is, where he lives, what he is doing right now. On April 26, 2011, Nakamoto disappeared from the online world, and all the responsibility related to bitcoin maintenance fell into hands of the community.
With Bitcoin's growing popularity, other coins started to appear on the market. They were called altcoins – alternative coins. Many of them differ from bitcoin significantly, so over time, cryptocurrencies began to be divided into classes. Also the new terms for naming them appeared: cryptocurrency, token, coin, digital asset.
Altcoins examples: Tether, Tron, USD Coin.
Cryptocurrency is the universal name for all digital assets on the blockchain that can be used for settlements. Sometimes the term refers only to payment instruments with their own blockchain, which are also called L1-networks or first layer networks.
Blockchain is a data storage technology that has become widespread thanks to Bitcoin. It is based on the distribution of data by blocks that are stored in an open-source ledger. Each of the blocks is connected to the next and the previous one, and blockchain copies are stored on many computers. This approach is called decentralized because it does not have a central authority, which helps protect the data from any unapproved changes.
Cryptocurrencies examples: Bitcoin, Ethereum, Litecoin.
Token is a cryptocurrency that provides settlements as well as opens access to other features, such as participating in projects voting programs or fees discounts. The token always runs on the blockchain of another project (unlike cryptocurrencies in a narrow understanding, which necessarily have their own core blockchain network). It turns out that a cryptocurrency can exist without tokens, but tokens can't exist without a cryptocurrency's blockchain. Most tokens operate on so-called smart contracts.
Smart contract is a computer program in a form of digital agreement that provides the written terms based on the available information. Here is an example: the developer made a smart contract requiring the swapping of US dollars into euros every time 1000$ accumulates on the user's account. After accessing the data and making sure that the required amount is there, the program automatically changes dollars to euros.
Tokens examples: Toncoin, Arbitrum, Binance Coin.
Digital asset 💰
Digital asset is another common name for all virtual assets, regardless of how they are used. Classic cryptocurrencies, tokens, and non-fungible tokens (NFTs) can be called digital assets.
Digital assets examples: Bitcoin, Tether, Bored Ape.
3 technical crypto types
All coins on the market work differently, so they are divided into classes depending on their technical features.
Classic cryptocurrency 🏛️
A classic cryptocurrency includes coins that run on their own blockchain. The term usually refers to the coins of the first generation, which are suitable only as a savings tool and sometimes can be used for transactions.
Classic crypto is inferior to modern analogues in terms of usability. They do not have many features that other coins can provide. It is very difficult for developers to update such a cryptocurrency, but it is the most capitalized one.
Classic cryptocurrency examples: Bitcoin, Litecoin.
A new generation crypto 🦾
This category includes all technically more advanced cryptocurrencies than bitcoin and its relatives. For example, Ethereum, with its smart contracts, is a new generation of cryptocurrency, despite the fact that ETH, like BTC, is an L1 network.
Such coins provide wider options than the classic ones. New-generation cryptocurrencies are easier to use for settlements, and their networks are usually suitable to run and build on new crypto projects. According to DeFi Lama, there are more than 600 applications running on Ethereum, with a total amount of $28 million in blocked funds.
Applications are a variety of programs (crypto wallets, games, social networks) that support cryptocurrency. Blocked funds are assets that other projects intentionally keep in the project network for its optimal operation.
Stablecoins are tokens with the price pegged to a specific asset, the US dollar in most cases. Stablecoins are issued on the blockchains of various new-generation cryptocurrencies, for example, Ethereum and Tron.
Stablecoins solve the high volatility issue of cryptocurrencies. If bitcoin in a few hours can both significantly rise and tragically fall, stablecoin's rate almost never changes.
Learn about stablecoins and their technical features. And also check our list of the best stablecoins.
Stablecoins examples: Tether, USD Coin, Binance USD, Dai.
3 ways to use crypto
Cryptocurrencies can also sort by the ways they can be used. There also are three categories.
💳 Payment tool
All cryptocurrencies on the market are payment tools, which means they can be used to pay for goods and services. But before using it, it is important to clarify the legality of the transaction in a certain country.
In some countries, the authorities have not clearly decided on the status of cryptocurrencies. For example, US regulators are torn between two classes: securities and commodities. Both categories are far from crypto as they are more suitable for settlements than securities and commodities, because they are much easier to buy, sell or exchange. Learn more about the legalization of cryptocurrencies.
In July 2022, Deloitte analysts found that almost 75% of retailers are considering crypto payments for their businesses.
💰 Investment tool
Not all coins are directly used for payments. For example, bitcoin nowadays is more suitable for being a saving tool. That is how and why such transformation happened:
😢 The bitcoin network can't maintain a large supply of transactions. Due to the lack of scalability (the ability of the network to cope with the increased volume of transactions), BTC transactions have become expensive, which is not well for a payment tool. The chart below provides a fee comparison of bitcoin and other assets over the year. Bitcoin is the upper blue curve:
🤏 The bitcoin supply is limited. A total of 21 million coins will be issued. There are already more than 19.3 million on the market. Popular theory tells us that limited supply makes bitcoin a good investment tool with highly potential growth. It can be confirmed by the chart, which compares the amount of already mined bitcoins (blue line) with the BTC rate's (black curve):
📈 Bitcoin is highly volatile. In just a few minutes, bitcoin's price can change significantly, which makes it extremely difficult to use as a tool for settlement because goods and services have a fixed price (and it stays the same despite bitcoin's fluctuations). Just compare the chart of the most capitalized Tether (USDT) stablecoin with the bitcoin one above (look at the dollar rate on the right; stablecoin rises and falls by a few cents, and bitcoin does by several thousand dollars). This is a little exaggerated, but still it is more convenient to pay with anything but BTC.
🎟️ Utility token
Utility tokens are digital assets that provide access to some services/goods/benefits. Here are a couple of examples:
📎 The largest crypto exchange Binance token, Binance Coin (BNB), allows to reduce trading fees, for example, while exchanging one coin for another.
📎 Many decentralized finance (DeFi) projects have tokens that give users an opportunity to participate in voting processes that determine the platform's future.
📎 Crypto exchange Bitfinex issued UNUS SED LEO tokens to increase audience loyalty amid the confiscation of the platform’s funds by the authorities. On a regular basis, the company allocates part of the funds to buy coins from the market and burn them. The emission reduction helps support cryptocurrency rate growth. At the same time, UNUS SED LEO owners have access to the Bitfinex trading fee discounts.
Of course, utility tokens also can be used for payment, investment, and savings.
To be short
«Cryptocurrency», «coin» and «digital asset» mean almost the same. The main thing is not to call bitcoin an «altcoin» (altcoin is a term used for all coins that came after bitcoin). You also should be careful with the word «token», which is used to determine coins that run on other cryptocurrency's blockchain and provide access to additional features within the community.
There are several approaches to the cryptocurrencies classification. Most often, they are divided according to technical features and usability. At the same time, all cryptocurrencies have two common features: the same ancestor bitcoin, and the ability to use them for settlements.
🤔 Don't know what to choose? Read our article about the 6 best cryptocurrencies for investment.
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This article is not an investment recommendation. The financial transactions mentioned in the article are not a guide to action. Itez is not responsible for possible risks. The user should independently conduct an analysis on the basis of which it will be possible to draw conclusions and make decisions about making any operations with cryptocurrency.