When you are keen to invest in cryptocurrencies it is important to know what kinds of crypto assets are out there and how each differs from the other. The crypto market does not behave in the same way as does the regular stock market. The three main types of cryptocurrencies are the Bitcoin, altcoins, and tokens. There are also some sub-types like privacy coins and stable coins.
- Bitcoin was the first cryptocurrency to have been introduced in 2008 when Satoshi Nakamoto released the Bitcoin whitepaper. It still continues to be the leading crypto asset in terms of market capitalization. It is a decentralized peer-to-peer currency that enables parties to transfer funds to one another without a third party being involved, like a bank, governmental agency, or financial institution. The network was launched a year after the release of the whitepaper and ever since, this crypto asset has not experienced any downtime, letting people transfer money across borders in hassle-free manner. Bitcoin has been rightly regarded as the best digital alternative to gold and fiat currencies like the USD or GBP.
- The second major type of cryptocurrency is the altcoins. With Bitcoin’s inception in 2008 the altcoins made their entry and these are called “altcoins” as they are considered to be alternatives to the Bitcoin. But, not all altcoins are alternatives to Bitcoins, there are quite a few that are quite distinct from them and have distinct aims and purposes. Some of these altcoins also make use of a distinct algorithm, like Proof of Stake or PoS used by Factom. Here, there will not be any miners for verifying transactions; rather there are stakers who verify transactions just like the miners. These are chosen turn by turn instead of miners who compete against one another to solve a block first. PoS use less electricity because there is only a single staker per block unlike miners who are competing against each other to get the same block. Crypto coins such as Ethereum and NEO turned out to be completely unlike the Bitcoin. These two types of coins were not primarily designed to be digital currencies; rather, they were conceived for the purpose of acting as platforms for creating apps on the blockchain. This is how most of the new crypto coins are being launched; the idea is to create them on blockchains which will enable app building. It was made possible by the founders of Ethereum who came up with “smart contracts”. This can execute transactions automatically when certain things occur. Such “things” are essentially conditions which are part of the smart contract. In a smart contract, there is no need for a third party, whether it is for selling a house or stocks. Unlike the Bitcoin, altcoins can operate on their own in networks using the DLT or distributed ledger technology. All coins including the Bitcoin use DLT but there are differences in their underlying codes; this is what gives altcoins their distinct attributes.
- Tokens are the third type of cryptocurrency that do not own a blockchain. They can be used on decentralized apps or dApps built on blockchains. These dApps are meant for using smart contracts and this is why they use tokens. Tokens do not stand for a physical object; rather, they may be used for buying objects on the dApps. They have a price at which they can be sold and there are buyers for tokens. Tokens however cannot operate independently like the altcoins or Bitcoin.