The 3 Main Types Of Cryptocurrencies

Oct 8, 2020 04:19 PM ET
The 3 Main Types Of Cryptocurrencies

Overview

With the ever-growing and far-reaching influence of Bitcoin, we may forget for a moment there are a few other types of cryptocurrencies that exist. Most enthusiasts and analysts in the crypto space conclude that most coins that emerged after Bitcoin were merely forks or clones of Bitcoin. While there are at least 5100 cryptocurrencies (and counting), we can class these currencies into three groups:

  • Bitcoin

  • Altcoins

  • Tokens

As a quick simplification, Bitcoin is the predecessor of all cryptocurrencies; altcoins are all other coins that aren’t Bitcoins, and tokens are coins that exist using the networks of altcoins. Before delving into the respective distinctions, it would help to understand the common links or similarities all three of these have. While each of them is unique to each other, they all have a few shared underlying themes.

Similarities with Bitcoin, altcoins, and tokens

At their core, all cryptocurrencies run on blockchain technology. The simplest analogy to understand blockchain is by literally breaking the term into its two main syllables, block, and chain. A blockchain is a continuous chain of blocks where each block contains every transaction in the network. For there to be a new block added to the chain every time, a process known as mining occurs, which is performed by advanced computers. 

Mining involves solving extremely complex mathematical equations to verify a block according to the hash algorithm programmed into the software. Anyone can become a miner if they possess the technologically-demanding equipment to mine the coins. This part brings in another fundamental aspect that governs all cryptocurrencies: decentralization.

Unlike fiat currencies controlled by governments and central banks, miners control the circulation of digital currencies. A miner can be anyone with an advanced computer compatible enough with the network. Decentralization is only possible through blockchain since the technology acts as a public ledger where everyone in the network agrees and validates the transactions. 

This transparency allows for the network to weed out bad actors in the rare case they may arise. It would require one to have substantial computational power to hack or alter the blockchain severely. Therefore, decentralization really means there’s no central authority that owns the network and which makes the decisions, unlike with fiat currencies.

What is Bitcoin?

What is Bitcoin

Everyone knows Bitcoin is the mother of all cryptocurrencies, the first successful project in the space eventually gaining mainstream acceptance. The coin officially launched on the 3rd of January, 2009, by the mysterious person or group known as Satoshi Nakamoto. Outlined in the whitepaper, Bitcoin is primarily touted as a digital, decentralized peer-to-peer payment network. It has successfully fulfilled this purpose, being with the most-traded crypto worldwide, owning about 60% of the market share (worth roughly $196 billion).

The main advantages of using Bitcoin are low transaction fees than old-school financial institutions and decentralized control. Intrinsically, Bitcoin has risen astronomically in value since its inception and has acted successfully as a storer of value and medium of exchange. However, there are arguments over the latter since validating Bitcoin transactions take at least ten minutes to an hour (in seldom cases, longer), depending on how busy the network is. 

As a storer of value, awareness is increasing daily over why Bitcoin could be the ‘new gold’ where investors use the currency as an investment vehicle and a hedge against inflation. The main price we know of Bitcoin is against the dollar. Thus, with growing concerns over the inflationary rate of the dollar, we could see an astronomical rise in Bitcoin’s value sooner than later.

The last important feature of Bitcoin is its finite supply. As per the whitepaper, only 21 million Bitcoins are meant to exist. As of 08 October, 2020, there are approximately 18 500 000 BTC. Despite the mass daily creation of these coins, the four-year halving still means we should reach 21 million coins in 2140. Halving refers to the reduction of mining rewards by half, also consequently reducing the supply of the coin in the same manner. Not all coins have halving in them, and some coins are pre-minted.

What are altcoins?

What are altcoins

Altcoins are coins that are ‘alternatives’ to Bitcoin or that aren’t Bitcoin. These would have been inspired by Bitcoin, though they serve numerous functions than their counterpart. Some of these functions include faster transaction times, seamless international money transfers, and decentralized applications, to name a few. 

Altcoins use many of the same principles of its predecessor, like blockchain programming, decentralization, circulating supply, and computational mining. Currently, there are at least 5100 altcoins in existence. The most-traded altcoin is Ethereum with a market share of close to 12%, worth about $38 billion. According to CoinMarketCap, the top 5 most-traded altcoins are Ethereum, Tether, XRP, Bitcoin Cash, and Binance Coin.

What are tokens?

What are tokens

Tokens are cryptocurrencies that run using another cryptocurrency’s blockchain. They tend to exist for more application-specific purposes instead of a regular, transacting currency. We could consider tokens as altcoins, though technically, they are still tokens since they piggyback on another coin’s blockchain. CoinMarketCap statistics show there are at least 1500 tokens that run using the blockchain networks of 24 cryptocurrencies. 

By far, Ethereum has the most tokens running on its platform, but other cryptocurrencies that also lead in this regard include Omni, NEO, Binance Coin, and TRON. The top 5 most-traded tokens presently, according to CoinMarketCap, are Tether, Chainlink, Crypto.com, USD Coin, and UNUS SED LEO, all deployed on Ethereum’s blockchain.

Conclusion

With the sheer number of cryptocurrencies that exist today, we can easily blur the lines of the different kinds. At their core, all cryptocurrencies make use of encryption and decentralization. It’s essential to understand the purpose of each coin in question to understand what makes it unique compared to another.


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