The world of cryptocurrency is a fascinating one. It’s purpose is to function as a medium of exchange, but the arena of virtual currencies has become crowded in recent years. With so many types and tokens out there, it can be tough for beginners to make sense of the ecosystem.
In this article, we will discuss the various types of cryptocurrency available today, which ones are most common and why there are so many cryptocurrencies in general.
What are cryptocurrencies?
A cryptocurrency is a piece of digital data that can be transferred from one person or entity to another. Cryptocurrencies use cryptography for security, making them hard to counterfeit. They all operate on some sort of blockchain system and are the first decentralized form of currency.
The most well-known category would be Bitcoin, but there are hundreds more in existence.
Bitcoin, the first decentralized cryptocurrency, was created by the pseudonymous person Satoshi Nakamoto. The coin is mined through a process called “mining,” which consists of solving complex mathematical equations with powerful computing equipment in order to create new Bitcoins and validate transactions on the blockchain.
The blockchain is the world’s most popular public ledger for digital transactions. It relies on cryptography to ensure that it cannot be altered or destroyed even if an individual wanted to do so, which prevents fraud and censorship of data
How many classes of cryptocurrency are there?
There are several classes of cryptocurrency:
- Tokens, which are sold by the company that is launching them in order to fund a project. They can be bought and traded on digital token exchanges if they’re successful enough.
- Crypto collectibles such as CryptoKitties or Beanie Babies derivatives with unique attributes, which are sold by their creators and traded on digital collectible exchanges.
- Cryptocurrencies that can be mined, like Bitcoin or Ethereum. These require resources in the form of time and computing power to earn them for free.
- Currency coins that are created as an attempt to replace fiat money such as USD or Euros with a decentralized digital currency.
- Virtual tokens that are created to power a specific service or be used as an investment, like stocks in the stock market.
- Digital currencies that can be purchased for use on websites and apps such as Amazon Coins or Google Play Store credits
Types of cryptocurrencies
There are many types of cryptocurrencies in use today. The first and most well-known is Bitcoin, which was created as a peer to peer electronic cash system that would allow people to send money without the need for any third party like a bank or credit card company.
Bitcoin has been around since 2009 and there are now hundreds of other types of cryptocurrencies that have been created to power specific services or be used as an investment, like stocks in the stock market.
The different types of cryptocurrencies are what allow the system to work and why there is such a diverse population in terms of how people use digital currencies.
The most common type of cryptocurrencies are typically called coins or tokens, but these can be subdivided into many more categories like privacy coins (zcash) and storage coins (sia).
Cryptocurrencies can also be classified into three different categories: utility, investment and currency. The function of each category is to serve a specific purpose for the crypto-economy on top of simply being designed as a medium of exchange. Utility coins are typically designed with features that make them more efficient than other blockchain technology in some way. These can be coins with features like faster processing, more secure transactions or lower transaction fees. In contrast to that, investment and currency tokens are created for a specific use case such as crowdfunding an idea (ICO) or being pegged to the value of another commodity like gold (bitcoin).
Cryptocurrencies can generally be categorized into these main groups:
- Cryptocurrencies that are backed by another form of fiat currency, such as a U.S. dollar. Fiat currencies can be seen as more stable than cryptocurrencies backed only by other virtual currencies because they have no intrinsic value themselves and will not suffer from inflation like many cryptos do over time. Bitcoin and Litecoin are examples of this type. They have been widely adopted for use in online transactions because they are decentralized and difficult to regulate.
- Cryptocurrency tokens that are built on a centralized platform or protocol, such as the Ethereum blockchain. They can be either used for utility (i.e., paying for transactions) or securities purposes, but they have some level of dependence upon the underlying system from which they were created in order to function.
- Cryptocurrencies that are based on a physical, tangible asset. This can include gold or diamonds as well as other precious metals and commodities. They have the potential to be more stable than virtual currencies because they are not easily manipulated by speculative traders (i.e., they do not change in value with every market fluctuation).
- Cryptocurrencies that have a physical component to them, such as gold or silver coins. This form of cryptocurrency is considered more secure than those that do not because they can be protected from virtual attacks with greater ease and require less processing power for transactions (i.e., mining).
- Altcoins or alternative coins: these types of cryptocurrencies are often traded on alternative exchanges that operate in a different manner than the more well-known ones.
Why are there so many types of cryptocurrency?
There are different types of cryptocurrency because they were designed to serve a specific purpose. For example, some can be used as an alternative store of value such as gold and silver coins while other cryptocurrencies may be better suited for peer-to-peer transactions or smart contracts.
The various types of cryptocurrency and why there are so many will not only help those who are new to virtual currencies make sense of the diverse ecosystem but also answer questions about digital currency and what it is designed for. The different types of cryptocurrency are what allow the system to work and why there is such a diverse population.
It is important to understand the various different types of cryptocurrencies so that a person can choose what might work best for them. It also helps answer questions about digital currency and why there are so many. The different types of cryptocurrency allow the system to function, which in turn allows such a diverse population.
The role of miners in cryptocurrency
Mining is an essential part of cryptocurrency. It takes the input from a user, applies it to all of the transactions that have occurred within the network and then determines what should happen with any fresh currency entering or leaving the system. Mining will also process some important changes such as adding blocks to a blockchain, changing its difficulty level (which regulates how hard it is to generate a new block) or changing how transactions are validated.
Why are cryptocurrencies so popular?
Cryptocurrencies are popular because they give power to the people. The industries that once had a stranglehold on certain aspects of life are now being challenged by this new technology and cryptocurrency, in particular, has been embraced for its potential to be used as an economic safe haven.
Crypto enthusiasts also like cryptocurrencies because they offer an alternative to traditional banking solutions: chargebacks and interest rates.
Cryptocurrencies can also be used to avoid the complicated and often onerous process of exchanging currencies. Even for someone who is very good at math, calculating exchange rates between multiple currencies is a daunting task. With cryptocurrencies, people are able to send coins from their wallet in one country directly into another person’s digital wallet elsewhere without paying a high conversion fee.
Cryptocurrency is also a way for people to safely invest their money without relying on another person’s promise or company, such as with stocks and bonds. This can be especially appealing in countries that have seen rapid economic growth but are lacking some of the protections afforded by developed nations: cryptocurrencies like bitcoin are decentralized so there is no central bank to take a cut of transactions.
A cryptocurrency wallet can be an app or program that allows you to store, send and receive coins with others. Wallets are categorized as either hot wallets (online) or cold storage (offline). Some investors like the idea of having one type of currency versus being diversified across multiple types of currencies.
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