When Bitcoin was first introduced in 2009, it attracted a small user base, made up primarily of technology enthusiasts and developers who recognized Bitcoin’s potential. Fast forward to 15 years later, cryptocurrencies have significantly transformed from a niche interest to a recognized asset class with its unique financial market.
Since then, the cryptocurrency market has experienced both triumphs and challenges. We have witnessed a rise of new cryptocurrencies, each of which has a unique purpose, and high-profile crashes. Despite this obstacle, the cryptocurrency market remains lucrative.
How cryptocurrencies are classified
New crypto projects are always emerging and cryptocurrencies are classified based on their purpose, functionality, and underlying technology. Kane Pepi of 99 Bitcoins explains how best upcoming ICOs (Initial coin offerings) are a great way for investors to get involved early in a project. It also claims that thousands of ICOs are launched every month, suggesting that there are always new coins to sort through.
Understanding these categories can help you understand the diverse nature of cryptocurrencies and their various functions in blockchain, helping you make an informed decision. It may also help you understand that various cryptocurrencies can fall into more than one category, reflecting their multifaceted nature.
Purpose-Based
This category of cryptocurrencies is defined by their intended use:
- Medium of exchange: This is when cryptocurrencies are designed for everyday use, such as Bitcoin and Litecoin.
- Store of value: These tokens aim to preserve wealth over time, like Bitcoin and Ethereum.
- Utility tabs: These cryptocurrencies provide access to specific services or platforms. For example, Filecoin is used for decentralized storage and Basic Attention token is used for digital advertising.
Based on functionality
This specific classification focuses more on what the cryptocurrency allows the user to do:
- Smart contract platforms: Cryptocurrencies like Ethereum and Solana support the creation and execution of smart contracts.
- DeFi Tokens: Tokens like Uniswap and Aave are used in decentralized financial applications.
- Governance tokens: Tokens like Curve DAO allow their holders to participate in decision-making processes.
Technology based
This specific token is based on its underlying technology:
- Proof of Work (POW): Tokens like Bitcoin and Dogecoin use mining to validate transactions.
- Proof of Stake (POS): These tokens, such as Cardano and Tezos, validate transactions based on the amount of cryptocurrency held.
- Directed acyclic graph: These tokens use a different structure than traditional blockchains. Some examples are IOTA and Nano.
Based on regulatory status
This specific classification may be controversial as the tokens are based on the regulatory status or treatment of cryptocurrencies rather than the concept itself.
- Values: Countries like the US, Canada, and Singapore classify cryptocurrencies as securities. This means that the token is considered an investment contract and investors hope to profit from the efforts of others.
- Raw materials: Cryptocurrencies treated as commodities are considered more like raw materials or goods. These tokens are often considered a store of value or a medium of exchange. Japan and the United Kingdom treat cryptocurrencies as property, similar to commodities.
- Legal course: Cryptocurrencies recognized as legal tender are officially accepted as a valid form of payment. El Salvador was the first country to adopt Bitcoin as legal tender in 2021.
The different types of cryptocurrencies
Payment cryptocurrencies
These digital assets are mainly used for transactions and as store value. Bitcoin and Litecoin are examples of cryptocurrencies that aim to offer a decentralized means of exchange. These cryptocurrencies are the most used in multiple industries.
Platform Coins
Platform currencies are native to blockchain networks that support smart contracts and decentralized applications (dApps). Ethereum and Binance Coin fall into this category. They drive transactions and computational processes on their respective networks. For example, in many DeFi applications, Ethereum is used as collateral for loans or to mint stablecoins.
Stablecoins
Stablecoins are cryptocurrencies designed to maintain a stable value, often pegged to a fiat currency or commodity. Tether is widely used and aims to provide stability in the volatile cryptocurrency market.
Utility tabs
These tokens have specific use cases within blockchain platforms and applications. Basic Attention Token and Filecoin are examples. They often grant access to specific services or products within their ecosystems.
Coins Memes
Meme coins often start out as a joke, but can gain significant value thanks to community support and social media trends. Dogecoin and Shiba Inu are well-known meme coins. Its value is largely driven by community sentiment and viral marketing.
Privacy Coins
Privacy coins focus on providing enhanced anonymity for transactions. Monero (XMR) and Zcash (ZEC) are examples. They use various cryptographic techniques to hide transaction details.
Non-fungible tokens (NFT)
NFTs are unique digital assets on blockchain networks. They are used to tokenize items such as digital art, collectibles, and virtual real estate. Each NFT has a different value and cannot be exchanged homogeneously. NFTs are used in games as in-game assets, in sports such as NBA Top Shot, allowing fans to buy, sell, and trade officially licensed “Moments.” Fashion brands like Gucci and Nike use NFTs for exclusive collections, and in finance, NFTs can be used as collateral for loans.
Security sheets
Security tokens are digital ownership of real-world assets, similar to traditional securities. They are generally subject to federal securities regulations and may be shares of a company or other assets.
DeFi Tokens
DeFi (Decentralized Finance) tokens are used in applications that aim to recreate traditional financial systems using blockchain technology. Aave and Compound are examples of cryptocurrencies that facilitate lending, borrowing, and other financial services.
Governance tokens
Governance tokens provide voting rights in decentralized autonomous organizations (DAOs) and blockchain projects. The owners will participate in the decision-making processes about the future of the project.
The difference between ICO and pre-sales
A cryptocurrency presale, also known as a pre-ICO, is an early token sale event that occurs before the main Initial Coin Offering (ICO). Tokens are usually sold at a discounted price to early investors. They often have lower fundraising goals compared to the main ICO. Pre-sales can help projects obtain initial funding and generate community interest.
An ICO, on the other hand, is a fundraising method used by cryptocurrency startups to raise capital. They are quite similar to initial public offerings (IPOs) in traditional finance. Investors receive tokens in exchange for established cryptocurrencies such as Bitcoin or Ethereum. ICOs can be a source of capital for new companies, often avoiding traditional regulations.
The Telegram ICO in 2018 was one of the largest in history. earning more than $1.7 billion.
How are they different?
- Moment: Presales usually occur before the main ICO, usually weeks or months in advance. ICOs occur after the pre-sale phase, as the main public token sale event.
- Token price: Presales offer tokens at a significantly discounted rate, often 30% to 50% lower than the ICO price. ICOs sell tokens at a higher price compared to pre-sale.
- Target audience: Pre-sales are usually aimed at larger investors, private investors or initial backers. ICOs are open to the general public and have a broader audience.
- Token supply: Presales usually offer limited tokens, usually between 5% and 15% of the total supply. ICOs offer a larger portion of the total token supply.
- Risk level: Pre-sales carry a much higher risk since the project is often still in the early stages of development. ICOs have a lower risk since the platform or protocol is closer to launch.
- Minimum investment: Pre-sales typically have higher minimum investment requirements, while ICOs typically have lower minimum investment thresholds.
- Aim: Pre-sales are often used to raise initial funds for project development and to cover ICO launch costs. ICOs aim to raise the majority of funds for the project and distribute tokens more widely.
- Smart contracts: Presales and ICOs typically use separate smart contracts to manage token distribution.
Conclusion
Cryptocurrencies have come a long way. Today, cryptocurrencies have diverse functionalities and are increasingly integrated into various industries and transactions. Understanding the different cryptocurrencies, their purpose and use cases provides valuable information for those considering adopting or investing in them.
Also Read: Bitcoin Hits $103,399 ATH Amid Pro-Crypto SEC Leadership News
Disclaimer: The information provided on AlexaBlockchain is for informational purposes only and does not constitute financial advice. Investments in cryptocurrency, including but not limited to ICOs, IDOs, presales and other token offerings, involve significant risk. You are solely responsible for conducting a thorough investigation (DYOR) and exercising due diligence before making any financial commitment. It is strongly recommended that you seek professional financial advice before making investment decisions. Read the full disclaimer here.
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