3 Basic Cryptocurrency Types and Why They are Often Misunderstood

There's a good amount of confusion surrounding the types of cryptocurrency that exist. Cryptocurrency is a blanket term that is often used to explain the entire blockchain market space. In the following article, we’re going to breakdown the types of cryptocurrency and how they relate to each other.

Understanding Cryptocurrency Types

Cryptocurrencies have been revolutionizing the way value is transacted and business is conducted. Since their start more than a decade ago, hundreds of cryptocurrencies have been successfully created and are being used every day all over the world. At the very highest level, there are three primary types of cryptocurrency: Payment Tokens, Security Tokens, and Utility Tokens.

Payment Tokens:

A payment token is a cryptocurrency that is strictly used for transactions of value. As the name implies, a coin is a form of currency and can be exchanged for goods or services. Bitcoin is the first, most famous, most widely adopted coin in the world.

Altcoin is the term given to one of the hundreds of other coins that followed in Bitcoin’s footsteps. The majority of these Altcoins claim to improve some aspect of the Bitcoin protocol and are becoming more valuable every day. Many of these Altcoins have their own independent blockchains and operate separately from other networks.

Examples include: Bitcoin cash, Zcash, Monero, Litecoin, and Dash to name a few.  

Security Tokens:

A security token is a token that can represent anything from stock in a company, to intangible digital assets, to stakes in real estate. You can think of these much like traditional securities traded on the stock market. Security tokens are really exciting right now because they provide many investment opportunities that were never available before.

Many platforms like Polymath and Harbor have been created to help facilitate the creation of SEC compliant securitization of assets on the blockchain.

Utility Tokens:

These are tokens that give users access to some kind of benefit on a given network. The easiest analogy for utility tokens would be coins at an arcade. You buy arcade coins with fiat currency and they let you play games, but if you leave with them they have no value in the real world.

Utility tokens can come in the form of specific discounts or be redeemed for goods and services on the network, or Dapp (Decentralized App), to which they belong.  are tokens that allow you to perform valuable actions on their networks but do not have the same properties off network.

Some of the most famous utility tokens are: Binance Coin, 0x, and the Basic Attention Token (BAT)

The Cryptocurrency Ecosystem

A complex ecosystem exists where all the different cryptocurrency types are created and interact with each other. This ecosystem is consists of a platform and exchanges that work together to transact different types of value. By far the largest platform is Ethereum.

Ethereum and Similar Platforms:

There are more than a few platforms out there that support token creation, but none is more widely used than the Ethereum platform. Most tokens are created on the Ethereum platform. Programmers can use Ethereum to build Dapps powered by smart contracts. Ether, the native cryptocurrency of Ethereum platform is both a utility token and a payment token. Transactions that occur on the platform require a transaction fee in the form of Ether.

When a token is created on the Ethereum platform it’s priced in Ether, not dollars. During an ICO, you send Ether to the token’s smart contract and you receive a proportional amount of that token in return.

Exchanges:

After the initial creation of a token, it can be traded through an exchange. Binance is the largest cryptocurrency exchange where you can trade different types of tokens. The exchanges are a vital part of the ecosystem because they allow market trends to influence the value of tokens. Without exchanges, there would be less incentive to participate in its systems that require utility tokens to operate.

While the benefits of exchanges are well known, they are not without their downsides. Cryptocurrencies are extremely secure when transacting peer-to-peer. Transactions that are conducted peer-to-peer and recorded on a blockchain are cryptographically secured and impossible to hack or reverse.

Exchanges work by centralizing user’s private key information and holding funds in escrow. Essentially, if an exchange is hacked, everyone trading on it could lose all their money. This problem is being solved by distributed exchanges like IDEX, but they have not been as widely adopted as Binance.

Conclusion

Understanding the different types of cryptocurrency and how the interact allows you to make better investment decisions. Hopefully, now you see why calling all types of tokens "cryptocurrencies" is somewhat of a misnomer.