What types of cryptocurrency are out there?

The world of cryptocurrencies is ever changing and there is a steady flow of new cryptocurrencies being launched every day. 

In this constantly shifting and often temperamental world of digital finance, cryptocurrencies can be very different in how they perform and what they offer.

The first thing to look at is what are the different types of cryptocurrency and how does the market work for those types of crypto?

Types of cryptocurrencies

Cryptocurrencies, commonly referred to as cryptos, are digital currencies that use a decentralised network to carry out secure financial transactions. Anybody can create a crypto-asset whenever they want, which means there can be thousands in circulation at any given time. 

For more on this, the Reserve Bank of Australia explains how cryptocurrency and blockchain technology (including mining) works on their website.

The most important thing to remember is that cryptocurrencies are highly speculative and volatile. Their price fluctuates more dramatically because they are influenced not only by supply and demand, but also investor and user sentiments, media hype and any possible government regulations. This combination of factors leads to uncertainty and inevitably to higher volatility.

You might hear a number of different and conflicting ideas about exactly how many types of cryptocurrency there are. The general and accepted consensus is that there are four main types which are: Coins, Tokens, Stablecoins and Non-Fungible Tokens (NFTs).

Coins 

Coins are probably the most well-known of the cryptocurrencies and these have their own independent blockchain, like the two largest in Bitcoin (BTC) and Ethereum (ETH) with a market cap of around $580 and $227 billion respectively, according to CoinMarketCap.com at the time of writing. 

As a digital currency, it is based on a network which is spread over a vast number of different computers. Because it is secured by special cryptography it is almost impossible to counterfeit or double-spend. Cryptocurrency is made faster and cheaper to transfer money by its decentralised system. The digital blockchain technology eliminates the danger of a single point of failure.

Tokens 

Tokens are created with smart contracts—specialised, self-executing programs that run on blockchains which specify things like a token’s total supply, issuance, and its features and functions. Crypto tokens outnumber cryptocurrencies because of their flexible use cases, and relative ease of development. They are used for more than just holding and exchanging value and can represent decentralised voting rights, digital collectibles in the form of NFTs, or even blockchain-based versions of real-world assets like the US dollar. 

Two popular examples of tokens are Uniswap (UNI) and Chainlink (LINK), which both exist on the Ethereum blockchain.

Stablecoins 

Stablecoins are cryptocurrencies which are tied to a stable asset’s value, like the U.S. dollar. That stability means that if the value of something like Bitcoin or Ethereum suddenly drops, investors are able to move their funds into stablecoins thus protecting their portfolio from further losses. Their goal is to offer better price stability by maintaining reserve assets as collateral or through algorithmic formulas that are designed to control supply.

Non-Fungible Tokens (NFTs) 

NFTs are a type of cryptographic token representing a unique asset or item, meaning they are not interchangeable and have a certified ownership and authenticity. NFTs can represent both digital or real-world items like artwork and real estate. Their popularity relates to their use in digital artwork, music, and other forms of creative output. 

NFTs can be traded and exchanged for money, cryptocurrencies or other NFTs, depending on the value the market and owners have placed on them such as the creation of a token for an image of a cat. Some may pay thousands for that NFT, while others might consider it worthless. 

The success of any cryptocurrency depends on who the team is behind the project, their goals and how they will achieve them. Researching that team and reading the crypto whitepaper which should outline the goals and strategies of its usage is invaluable. Pay attention to how trustworthy that white paper is as it should be free of mistakes, grammatical and spelling errors. Having no white paper at all is a major red flag for that cryptocurrency.

The value of cryptocurrencies

There is a fundamental difference with a traditional currency versus cryptocurrency.

It’s important to know that unlike a national currency as a legal tender, cryptocurrencies have no such legislated value. Their worth is dictated purely by what people are willing to pay for them. 

The fascination with these currencies is largely about the power to speculate on their value (as in buying cryptocurrencies to make a profit) rather than ‘related to their use as a new and unique system for making payments.’^[1]

The price of cryptocurrencies is primarily affected by its supply, market demand, availability, and competing cryptocurrencies. With Bitcoin, it has been noted by numerous sources, including Nasdaq.com, that based on the current circumstances and scheduling, all Bitcoin will be mined and in circulation by 2140. The amount of coins circulating will stay fixed at that level permanently.

What that means to a change in value will depend on a number of factors. Even with a finite amount of coins, the volatility of the market cannot be ignored.

According to MoneySmart (an arm of ASIC – the Australian Securities and Investment Commission), the main concern with cryptocurrencies is that it is a very high-risk and volatile investment. The value can rise or fall quickly and there are no guaranteed returns. 

Weighing up the risks

Whilst there are market fluctuations in all forms of trading, it is considered more likely and volatile when it comes to cryptocurrencies. 

Being a digital asset, there is the added risk of your details, account or asset being hacked. 

Despite constant upgrades to security and issues with hacking, it is still considered a vulnerable landscape. For example, Ethereum states that ‘…learning best practices when using cryptocurrency is essential. Crypto can be fun and exciting, but there are also serious risks.’^[2]

The added concern is that scammers often look for cryptocurrencies because they can be quickly sent overseas with limited oversight and little chance of recovery.

There is a different type of crypto investment where you don’t actually own the coin.

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