The crypto market has seen some ups and downs in the last couple of years. Yet, the current market value for crypto sits around $1 trillion. That makes it a temptation for anyone looking to expand their investment portfolio beyond the traditional areas of retirement accounts, real estate, and stock market investments.
Yet, the crypto market remains a largely unknown quantity to many would-be investors. People have heard of crypto, and some even know that it has something to do with blockchain, but they get hazy after that.
It turns out that there are several types of crypto. If you’re wondering what those types are, keep reading for an overview.
Before delving too deeply into the different types of crypto, there are some cryptocurrency essentials you should know about. Let’s dig into those.
Cryptocurrencies are, by their very nature, unregulated by any formal body. No government issues cryptocurrency and, by the same token, no government passes laws that will protect cryptocurrency value.
Cryptocurrencies operate using a blockchain system. Without belaboring the technical points, blockchain uses something called a distributed ledger.
That means that copies of the information in the ledger, such as transactions, are stored in multiple places. That distributed feature makes altering the ledger a monumentally difficult task, which helps ensure the validity of the record.
The coins or tokens you mine or buy employ fairly sophisticated encryption. That encryption helps ensure a certain level of anonymity, but it also helps secure your coins or tokens against theft. In most cases, only you hold the encryption key to access your coins or tokens.
As a purely digital currency, you need a purely digital container for your cryptocurrency. Most people employ digital wallets on their phones that store key information, such as your encryption key and information about the coins or tokens you hold. These wallets typically work with a specific coin, rather than any cryptocurrency.
Mining vs Buying
There are two main ways that people get crypto. One approach is through crypto mining.
Essentially, you use computers to solve high-level math problems. When you solve the problem, you get a coin or token. This is both an energy-intensive process and, often, a long-term process.
The other, easier way people get cryptocurrency is by buying it on a crypto exchange. These exchanges are where people acquire popular crypto types, such as:
Some websites, such as Cointiply, also let you pick up coins by playing games or completing tasks.
One of the two main crypto types is coins. The key thing that you should understand about coins is that they only come from a dedicated blockchain system. In other words, the blockchain infrastructure only exists to support cryptocurrency mining.
The most famous example of this approach is Bitcoin.
The coin-based approach was specifically developed to provide an alternative, digital-only form of currency. This is separate from the more traditional fiat currencies that people use in their everyday lives.
Fiat currencies are physical currencies, such as dollars. Even if your bank account represents that money digitally, it ultimately ties back to a physical currency.
Altcoins also operate using dedicated blockchain systems. They aren’t alternatives to the approach. Rather, they are alternatives to Bitcoin, which is the first and original cryptocurrency.
In other words, any coin that isn’t Bitcoin is an altcoin.
The other main type of crypto is crypto tokens. For investors, the terms coins and tokens often amount to the same thing. The terms get bandied about as synonyms, yet there are important differences between coins and tokens.
For one thing, you don’t get tokens from a dedicated blockchain system the way you get coins. Tokens borrow a blockchain infrastructure, typically from an existing coin.
A coin is something you can think of as a native asset on the blockchain infrastructure. It’s something the blockchain system natively supports.
A token is something that you can consider a non-native asset. It uses the system, but it’s not something the system builders intended to support at launch.
Tokens differ from coins in another important way. The only function of a crypto coin is to serve as a kind of currency. They don’t do anything else.
Tokens can function in three main ways. The most obvious way is as a type of cryptocurrency. That’s the way that interests most investors.
A second key way that tokens can function is a security token. You can think of this function as being similar to a stock or bond.
For example, let’s say that a company must raise some capital to support a new initiative. They could issue stock to sell on the open market. Alternatively, they could issue tokens that represent fractional ownership in the company.
The final way that tokens see use is as utility tokens. Unlike security tokens, utility tokens typically serve a specific purpose on a specific platform. For example, a platform could issue tokens to its users as a way of vanity-tipping content creators on the platform.
A utility token has no intrinsic value, and holders cannot readily convert them into cash.
Limited Vs. Unlimited
You can also separate crypto into limited and unlimited types. Limited crypto types are typically coins that have a hard upper limit, such as Bitcoin.
There is a finite number of Bitcoins. When the last one gets mined, that’s it.
Other coins, such as Dogecoin, have an unlimited supply. While an unlimited supply does keep the price down, it also helps keep the price more stable.
Types of Crypto and You
Understanding the different types of crypto can help make your crypto investment adventure a little smoother. For example, if you want less volatility, you can look at unlimited coins.
If you’re looking to use crypto to invest in companies, you’d spend most of your time looking at security tokens. If you’re only interested in an unregulated currency, you’d stick with pure crypto coins.
Looking for more crypto information? Then check out some of our other posts.