When Bitcoin was first introduced in 2009, it attracted a narrow user base, mainly consisting of tech enthusiasts and developers who recognized Bitcoin’s potential. Fast forward to 15 years later, and cryptocurrencies have significantly transformed from a niche interest to a recognized asset class with its one financial market.
Since then, the crypto market has experienced both triumphs and challenges. We’ve witnessed an increase in new cryptocurrencies, each serving a unique purpose and high-profile collapses. Despite this hurdle, the crypto market remains lucrative.
How Cryptocurrencies Are Categorized
New crypto projects are always emerging and cryptocurrencies are categorized based on their purpose, functionality, and underlying technology. Kane Pepi from 99 Bitcoins explains how the best upcoming ICOs (Initial Coin Offerings) are a great way for investors to get in early on a project. He also states that thousands of ICOs are launched every month, suggesting that there are always new coins to be categorized.
Understanding these categories can help you understand the diverse nature of cryptocurrencies and their various roles in blockchain, helping you make an informed decision. It can also help you understand that various cryptocurrencies can fall into more than one category, which reflects 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 are aimed at preserving wealth over time, such as Bitcoin and Ethereum.
- Utility tokens: These cryptocurrencies provide access to specific services or platforms. For example, Filecoin is used for decentralized storage, and the Basic Attention Token is used for digital advertising.
Functionality-Based
This specific classification focuses more on what the cryptocurrency allows the user to do:
- Smart contract platforms: Cryptocurrencies such as Ethereum and Solana support the creation and execution of smart contracts.
- DeFi tokens: Tokens such as Uniswap and Aave are used in decentralized finance applications.
- Governance tokens: Tokens such as Curve DAO allow holders to participate in decision-making processes.
Technology-Based
This specific token is based on their underlying technology:
- Proof-of-work (POW): Tokens such as 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. Examples are IOTA and Nano.
Regulatory Status-Based
This specific classification can be controversial since the tokens are based on the regulatory status or treatment of cryptocurrencies rather than the concept itself.
- Securities: Countries like the USA, Canada, and Singapore classify cryptocurrencies as securities. This means that the token is seen as an investment contract and investors expect profits from the efforts of others.
- Commodities: Crypto treated as commodities are viewed more like raw materials or goods. These tokens are often seen as a store of value or a medium of exchange. Japan and the United Kingdom treat crypto as property, which is similar to commodities.
- Legal Tender: 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 a store value. Bitcoin and Litecoin are examples of cryptocurrencies that aim to offer a decentralized medium of exchange. These cryptocurrencies are the most widely used across multiple industries.
Platform Coins
Platform coins are native to blockchain networks that support smart contracts and decentralized applications (dApps). Ethereum and Binance Coin fall into this category. They fuel 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 crypto market.
Utility Tokens
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.
Meme Coins
Meme coins often start as jokes but can gain significant value due to community support and social media trends. Dogecoin and Shiba Inu are well-known meme coins. Their 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 obscure transaction details.
Non-Fungible Tokens (NFTs)
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 distinct value and cannot be exchanged on a like-for-like basis. NFTs are used in gaming as in-game assets, in sports like the NBA’s Top Shot that allows 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 Tokens
Security tokens are digital ownership of real-world assets, similar to traditional securities. They are usually subject to federal securities regulations and can either be shares in 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. Holders will participate in decision-making processes regarding the project’s future.
The Difference Between ICOs and Presales
A crypto presale, also known as a pre-ICO, is an early token sale event that occurs before the main Initial Coin Offering (ICO). Tokens are typically sold at a discounted price to early investors. They often have lower fundraising targets compared to the main ICO. Presales can help projects secure initial funding and build community interest.
An ICO, on the other hand, is a fundraising method used by cryptocurrency startups to raise capital. They are pretty similar to Initial Public Offerings (IPOs) in traditional finance. Investors receive tokens in exchange for established cryptocurrencies like Bitcoin or Ethereum. ICOs can be a source of capital for startups, often avoiding traditional regulations.
Telegram’s ICO in 2018 was one of the biggest ever, making over $1.7 billion.
How are they different?
- Timing: Presales usually happen before the main ICO, typically weeks or months in advance. ICOs happen after the presale phase, as the main public token sale event.
- Token price: Presales offer tokens at a significantly discounted rate, often 30-50% lower than the ICO price. ICOs sell tokens at a higher price compared to the presale.
- Target audience: Presales usually target larger investors, private investors, or early backers. ICOs are open to the general public and have a wider audience.
- Token supply: Presales typically offer limited tokens, usually 5-15% of the total supply. ICOs offer a larger portion of the total token supply.
- Risk level: Presales carry a much higher risk as the project is often still in early development stages. ICOs are lower risk since the platform or protocol is closer to launch.
- Minimum investment: Presales often have higher minimum investment requirements, whereas ICOs typically have lower minimum investment thresholds.
- Purpose: Presales are often used to raise initial funds for project development and to cover ICO launch expenses. ICOs aim to raise the bulk of funds for the project and distribute tokens more widely.
- Smart contracts: Presales and ICOs often use separate smart contracts to manage token distribution.
Conclusion
Cryptocurrencies have come a long way. Today, crypto has diverse functionalities and is increasingly being integrated into various industries and transactions. Understanding the different cryptocurrencies, their purpose, and use cases provides valuable insight for those considering adoption or investment.
Read Also: Bitcoin Hits ATH of $103,399 Amid Pro-Crypto SEC Leadership News
Disclaimer: The information provided on AlexaBlockchain is for informational purposes only and does not constitute financial advice. Cryptocurrency investments, including but not limited to ICOs, IDOs, presales, and other token offerings, carry significant risk. You are solely responsible for conducting thorough research (DYOR) and exercising due diligence before making any financial commitments. It is strongly recommended that you seek professional financial advice before making investment decisions. Read complete disclaimer here.
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