A cryptocurrency is a form of virtual money that only exists in the digital form. In more technical terms, a cryptocurrency is an encrypted data string denoting a currency unit.
Unlike traditional money that relies on banks and other financial institutions for supply and transactions, cryptocurrency leverages blockchain-based decentralized networks. The blockchain serves as a secure ledger for buying, selling, and transferring cryptocurrency.
Since no central authority is responsible for issuing cryptocurrencies, virtual money is practically immune to the control of government agencies and financial institutions. Cryptocurrency transactions exist as digital entries in a public ledger that records every crypto transaction. People can store cryptocurrencies in digital wallets.
The first-ever cryptocurrency was Bitcoin, introduced to the public in 2009 by a developer (or developers) with the pseudonym Satoshi Nakamoto. After reigning in absolute dominance for a couple of years, rival cryptocurrencies Litecoin and Namecoin began to appear. As more sites began accepting crypto payments, several other digital currencies like Ripple and Ethereum emerged as popular alternatives to physical money.
Even celebrities like Elon Musk, Kim Kardashian, Gwenyth Paltrow, and many others began to actively endorse the digital currency format, taking the crypto craze soaring. Over 10,000 cryptocurrencies exist today, some not-so-popular and some (like Bitcoin and Ethereum) enjoying significant trading volume and backing from investors.
Before we explore the different types of cryptocurrencies available, let’s understand two basic terms: crypto coins and tokens.
You’ll frequently hear the terms crypto coins and tokens in any discussion around crypto, and often interchangeably. However, they are different.
Crypto or Digital coin is used to store value, make payments, or engage in any digital transaction across a decentralized user network. It is much like traditional money, except all transactions are digital. Digital coins are built on their own blockchain and are valid with any merchant using the currency. Bitcoin and Litecoin are classic examples of crypto coins.
On the other hand, a token is built on top of an existing blockchain and has more uses than digital money. For example, a token can be used to verify identity, grant access to an app, share files across a decentralized network, or track product movement through a supply chain. Likewise, non-fungible tokens (NFTs) guarantee ownership of assets, such as a piece of digital art and even physical assets like real estate. A prominent example of a token is Ether, used for transactions on the Ethereum network.
All token categories trade on crypto exchange the same way as coins, making their differences go unnoticed by most traders and investors. Below we have a list explaining the different types of cryptocurrencies based on their use:
1. Utility tokens
These are digital tokens representing a value on the blockchain. Often thought of as vouchers or coupons, you can use utility tokens to access blockchain-based products and services. By buying a utility token, you essentially gain access to the product or service and redeem it for a fixed access value. However, it does not imply that you get ownership of the token. Utility tokens run on a blockchain platform (such as Ethereum).
Examples of utility tokens: Golem (GNT), Basic Attention Token (BAT), and 0x (ZRX).
2. Privacy coins
A privacy coin is a digital asset created for privacy. In other words, only the receiver and sender in a private coin transaction know the exchange details, such as the number of coins transacted. Moreover, only the owner of the privacy coin wallet knows the wallet balance. Unlike Bitcoin, privacy coins do not reveal the wallet address balance and amount of each digital transaction.
Examples of privacy coins: PIVX (PIVX), Monero (XMR), and ZCash (ZEC).
A Stablecoin is a digital currency with its value related to another financial instrument, commodity, or currency. Unlike most highly volatile digital assets, Stablecoins aim to maintain a stable price (and hence the name), making them widely popular among regular traders. The value of a Stablecoin may be pegged to a currency such as the USD or to the price of a commodity like gold.
Examples of stablecoins: Paxos (PAX), USD Coin (USDC), and Gemini (GUSD).
4. Payment tokens
Pretty self-explanatory, payment tokens are used in buying and selling products and services on digital platforms. Unlike traditional transactions involving a bank or other financial institutions, exchanges through payment tokens do not involve intermediaries; however, you cannot invest in payment tokens as security. Most cryptocurrencies and tokens belong to this type.
Examples of payment tokens: Bitcoin, Ethereum, and Monero.
5. Security tokens
A security token is a type of cryptocurrency that derives value from an external asset and is traded as security. Thus, financial regulatory authorities control and govern the issuance, exchange, value, dealings, trading, tokenization, and backing of security tokens. Security tokens typically represent some kind of ownership, such as shares in stocks or equity, and are issued through security token offerings (STOs).
Examples of security tokens: Siafunds (SF), Science Blockchain, and Blockchain Capital (BCAP).
6. Non-fungible tokens
A non-fungible token (NFT) is a cryptographic asset representing a digital certificate of ownership of a one-of-a-kind and non-tradeable item on the blockchain, such as real estate or digital collectibles. Each NFT consists of a unique identification code and metadata differentiating it from other NFTs. Unlike identical cryptocurrencies, you cannot trade or exchange NFTs at equivalency.
Examples of NFTs: William Shatner’s memorabilia, Nyan Cat GIF, and Jack Dorsey’s first-ever tweet.
7. Exchange tokens
Exchange tokens primarily serve as utility tokens for exchanges, and cryptocurrency exchanges create them to raise funding for the platform. In addition, exchange tokens offer several perks to users, such as exclusive coin offerings, discounted transaction fees, and access to voting rights. In other words, users that use exchange tokens to pay various fees within the exchange ecosystem get extra rewards and discounts.
Examples of exchange tokens: Binance Coin (BNB), Gemini USD (GUSD), and FTX Coin.
8. Decentralized finance (DeFi) coins/tokens
DeFi or Decentralized Finance refers to a category of financial products created on the blockchain and operating using smart contracts. These include apps, protocols, and other autonomous computer programs. Developers who create these apps and protocols transfer the ownership of the smart contracts to respective users, giving the latter control over the DeFi coins/tokens.
Examples of DeFi: Chainlink, Solana, and Uniswap