Since the release of Bitcoin in 2009, there have been a plethora of new cryptocurrencies. Why is that? Similar to stocks and other assets, different cryptocurrencies fulfill various investment needs. In this article, we expand on the different types of cryptocurrencies and we hope to help you better understand which ones are suited for you.
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What is cryptocurrency and why should you care?
Cryptocurrency is a digital form of currency that is secured by a cryptographic system. The majority of cryptocurrencies utilize a blockchain system that decentralizes the currency. Due to this decentralized system, the popularity of cryptocurrencies comes from there being a lack of government interference or manipulation.
Cryptocurrency has been coined as the “money of the future” since this decentralization has solved the problem many traditional currencies have faced. Many banks across the nation, and internationally, have been looking closely at cryptocurrencies and these advancements in fintech.
How many cryptocurrencies are there in the world?
Currently, there are over 18,000 currencies available. Since there is a vast amount of currencies available to trade, the total market cap of all cryptocurrencies is around $2.023 trillion.
Moreover, in a 24-hour period, it is speculated that cryptocurrencies trading volume is around $75 billion. Cryptocurrency has dominated the fintech market and continues to do so. However, not every currency is similar, each cryptocurrency tries to provide different functionalities and features.
Categories of cryptocurrencies
There are various categories of cryptocurrencies. We will look more in-depth on the main categories of cryptocurrencies and what unique features these currencies provide.
Bitcoin was the first cryptocurrency ever released. Invented by Satoshi Nakamoto in 2008, and then provided to the public in 2009, paved the way for cryptocurrencies. Since this coin is the first cryptocurrency, it has its own category within the cryptocurrency space. It does not fall under any other category and is only referred to as Bitcoin.
Altcoin is a category that refers to cryptocurrencies that are not Bitcoin. Some popular cryptocurrencies that would fall under this Ethereum and its currency Ether (ETH). These currencies share some of Bitcoin’s key qualities but differ in other ways. This includes, and is not exclusive, to the altcoins altering their production of blocks and how they validate transactions.
Unlike Bitcoin and Altcoin, tokens represent an asset that resides within their own blockchain. A cryptocoin, for example, is a digitized version of its underlying value of the currency. However, tokens are an asset that is oftentimes utilized to serve as a transaction unit in the blockchain. Moreover, tokens can eventually become a cryptocurrency coin.
What’s the point of having different cryptocurrencies?
Similar to other investments, having a diversified portfolio has been proven to maximize returns. Since certain cryptocurrencies specialize in specific functions, whether that be blockchain technology or payment use, investors can use this to their advantage.
By spreading your money across multiple cryptocurrencies, it helps you minimize portfolio risk and level out one’s overall performance. Since no one can predict systematic risks, like an economic downturn, it is important to invest in both currencies that move parallel to the market as well as against. Similarly to stocks and other assets, it is important to hedge against these risks across different sectors and, in this case, in different cryptocurrencies.
Since cryptocurrency is the heart of the fintech industry, it is constantly improving. These developers have created a safer blockchain system, figured out ways to reduce fraud, and other factors to improve the safety of the overall cryptocurrency.
Moreover, each currency provides a unique form of innovation. Certain coins prioritize the safety of their consumers and have specific insurance policies set in place, whereas others do not prioritize these safety measures. This is one of the main reasons why it is important to diversify your crypto portfolio.
Forking exemplifies how the crypto sector is continuously evolving and progressing. Forking takes place within a blockchain when groups of miners and developers cannot make an agreement on new updates within the networks.
When this happens, these developers and miners take two separate paths forward. This leads to new, and often better, variations of the cryptocurrency. Forking showcases how having multiple types of crypto can help drive the creation and successful coins.
8 popular cryptocurrencies
After hearing about the different types of cryptocurrencies, let’s see the top 8 most popular cryptocurrencies.
This decentralized financial asset runs off a blockchain system. Since it is the original cryptocurrency, Bitcoin created the idea of blockchain mining. Blockchain mining is done by solving complex cryptographic mathematical problems in order to validate the block transaction within the blockchain.
Since each transaction is connected to a block, there is no way for an entity to alter this information within the network making this technology very trustworthy. Moreover, since Bitcoin runs off of blockchain technology it is a decentralized system so there is no government interference.
Another unique feature of Bitcoin is that there is a hard cap on the coin’s supply. Due to this, the coin has been able to maintain its overall value throughout the market space. Last but not least, due to the coin’s popularity it has been able to integrate into the majority of financial spaces. More companies have accepted Bitcoin as a form of payment due to its high value.
- Blockchain technology
- Decentralization, meaning no government interference
- Immutable, meaning unable to change block information
- Hard cap supply
Bitcoin Cash (BCH)
Bitcoin Cash is a type of currency that validates transactions quickly within the Bitcoin network. Due to this, one is able to cut down processing times as well as save money from having to pay processing fees.
As of now, one BCH now costs less than a penny and is able to process over 200 transactions within a second. Overall, BCH network is able to handle a larger amount of transactions per second in comparison to the Bitcoin network.
It is speculated that the rise of Bitcoin Cash is inevitable due to these unique qualities. Moreover, it is projected its future value to be more than $800, which it surpassed back in May 2021.
- Functions within the Bitcoin network and blockchain
- Can handle more than 200 transactions per second
- Cuts down processing time
- Saves investors money on transaction fees
Produced as a fork from Bitcoin’s blockchain, Litecoin has many similarities to Bitcoin. However, Litecoin does not have a hard supply cap allowing it to be more accessible to investors.
It is speculated that there is currently around $84 billion worth of Litecoin currently in the crypto market. Moreover, Litecoin uses a Scrypt algorithm making it a safer system than other alternatives. Additionally, one can use other cryptocurrencies to purchase Litecoin, providing flexibility for investors.
- Can handle large transaction volumes in blockchain technology
- Safer mining system thanks to the Scrypt algorithm
- Oldest altcoin since it was produced as a fork from Bitcoin
- No hard supply cap
- Flexibility in payment
Ether is a cryptocurrency produced by the Ethereum network. The Ethereum network is a peer-to-peer platform in which participants can complete transactions with each other. Since this is a peer-to-peer platform, it facilities smart contracts through a decentralized system. Moreover, this cryptocurrency is the second-largest digital currency in 2021 due to its market capitalization.
- Fuel of Ethereum network
- Second largest cryptocurrency
- Uses blockchain technology to replace consumer data storage
- Moved to a proof-of-stake (PoS) system
Ripple’s digital currency, XRP, acts as a bridge between other currencies. This includes both fiat and other cryptocurrencies. This network is blockchain-based, though it utilizes a different form of transaction confirmation than blockchain mining.
Ripple uses a third-party system of bank-owned servers to confirm these transactions instead. Additionally, Ripple is known to use less energy than Bitcoin transactions, which contributes to its high transaction fees.
- Blockchain system with no blockchain mining
- Bridge between other cryptocurrencies and fiat currencies
- Uses less energy
- High transaction cost
Tether is a blockchain based cryptocurrency that is a stablecoin. The majority of cryptocurrencies have been known to be highly volatile, however, Tether aims to have a stable crypto value for long term investors. They do this by being a fiat-collateralized stablecoin and are pegged to the U.S. dollar. However, it cannot be exchanged for USD.
- Stablecoin pegged to US dollar
- Best for investors who want low volatility
Binance Coin (BNB)
Although initially on the Ethereum network, the Binance Coin now functions on the Binance network and has its own blockchain. This coin was initially created to supplement discounted trading fees in 2017.
However, it has now expanded to include other transaction fees. Moreover, it includes travel bookings, entertainment, and some financial services. In order to protect the value of Binance Coin every quarter Binance burns one-fifth of its coins.
- Functions on Binance network and blockchain
- Burns one-fifth of its coins on a quarterly basis to maintain the value
- Can be used for financial services, trading fees, and other transactions
Terra is also an open-source blockchain platform specifically designed for stablecoins. Specifically designed for the network’s system and mining, Luna is Terra’s staking token.
Luna essentially mitigates any high volatility within Terra’s network of stablecoins. Luna is staked and used within Terra’s blockchain miners who validate these transactions. Moreover, as the platform of Terra expands, Luna’s price and value increases as well.
- Essential in Terra’s blockchain validation
- Price increases while Terra’s platform usage increases
- Absorbs volatility from other stablecoins
How to invest in different types of crypto
Investing in different types of cryptocurrencies is a great way to diversify your portfolio and mitigate risk. One can look to invest in different types of cryptocurrencies from online trading platforms.
This can span from trading websites specifically made for cryptocurrencies while other platforms, which have a broader range of assets, also include a small selection. Cryptocurrency is the future of money and a great investment. Start investing in cryptocurrency now and see all the benefits one can reap from it.
Is it good to have multiple cryptocurrency?
Yes, it is good to invest in multiple cryptocurrencies since different currencies specialize in certain features.
What is the point of holding cryptocurrency?
Since the majority of cryptocurrencies (aside from stablecoins) have high volatility, when you hold onto cryptocurrency you can take advantage of the price increases.
Do you have to pay taxes on crypto?
Yes, you do have to pay taxes on crypto only if you sold, exchanged, or disposed of it.