The Types of Cryptocurrencies
If you are new to crypto, it’s probably quite an overwhelming space, with thousands of coins and tokens in the market, flashy news, and jargons here and there.
I was not an exception to this. I struggled quite a lot, but still decided to push through because so many smart and successful people were talking about it, so as controversial as it was (and probably still is), and despite not having a tech or financial background, I decided to embrace it, forcing myself to at least understand the basics.
One of the things that I found super useful was going through the full Crypto Startup School material that a16z had very nicely made public online. They are among the biggest crypto advocates VCs, and their material covers from the basic concepts of blockchain, cryptography, smart contracts and consensus mechanisms, to how to build a crypto company, crypto-economics, protocols, as well as the legal and security aspects. Super interesting!
My first dollar invested in crypto was done after consuming this material, and no, I did not buy Bitcoin, because the concept of ‘digital money’ or ‘digital gold’ was too abstract to me, I couldn’t wrap my head around it, so the first coin I invested in was ETH (Ethereum) because I could easier understand its value proposition and what it does. And only with time, I started to grow my portfolio beyond.
This is a very exciting but also noisy space. Therefore, I decided to share here how I categorize the cryptocurrencies and companies into different types based on their functionality, or in other words, what they do.
Now, there is no one universally accepted categorization of cryptocurrencies, so bear in mind that this is how I personally visualize it. It works for me, of course, and I find it pretty straightforward, so hopefully, this can help you easier navigate the crypto world as well!
Digital Currency
These are cryptocurrencies that were created to represent digital money. The easiest way of understanding it is to think about it as any currency (USD, SGD, EUR, etc), but instead of holding it as banknotes in your wallet, it’s digital, built in the protocols on a blockchain.
People will typically use it today as a store value or asset class, and its valuation is tied up to scarcity, or the simple rule of supply and demand. Yes, you got it, the most popular example of this type of crypto is the origin of all: Bitcoin (BTC). Another well-known example is Litecoin (LTC), which was created as a ‘lite version of Bitcoin’.
Stablecoins
This class of cryptocurrencies was created with the purpose of tackling the price volatility typically associated with the likes of Bitcoin. In order to offer a certain stability, stablecoins are pegged to a collateral reserve asset, such as US Dollars (or other fiat currencies), gold, or other precious metals, etc. This way, this type of cryptocurrency aims to offer the best of both worlds: the speed and agility of a digital currency, as well as the price stability of a fiat currency.
The most common stablecoin examples are USDT, USDC, DAI, PAX, TUSD.
“Stock-like cryptocurrencies”
Ok, not the best name, I know. But I didn’t want to use the terms utility and security coins/tokens, so as to avoid getting into the technicalities and explaining the differences, since it’s not the purpose of this article, and it’s also not required at this point. Therefore, I decided to use a name that reflects exactly how I think about this class of cryptocurrencies. Not a cool name, but it works, so why not?
I call them “stock-like” because I find it works the same way as the stock market. Think of it as the digital version of investing in stocks, and as a consequence, investing in the companies behind them and what they do.
These crypto companies play an important role in creating the ecosystem to enable and support the growth and scalability of the crypto space, and I’m particularly excited about them because you can see the replication of existing industries, into a digital one.
Let me further explain by outlining some of the most important functionalities or industries that are being covered:
Blockchain Infrastructure: these are the core companies that are building the open-source blockchain platforms that host other decentralized projects, hence allowing developers to code and build on top of it. The most important in this space is of course Ethereum (ETH). Other relevant examples are Polkadot (DOT), Cardano (ADA), NEO (NEO), Cosmos (ATOM).
Just to give you a better sense of the magnitude and importance of these companies, most of the most well-known and trendy projects in the space, such as DEFI, NFT, do not own their own blockchains, but are developed on Ethereum, Cardano, etc. Based on Coindesk data, there are currently over 3,000 decentralized apps running on Ethereum blockchain alone.
Oracles: blockchain networks operate within their environment, so in order for all these projects to be valuable in the real world, they need access to secure off-chain resources, data, and all sorts of information such as crypto prices, news, stock market, etc. Oracles help bridge these two worlds, and the leader in this space is Chainlink (LINK), but there are other companies working on this very critical solution, like Band Protocol (BAND), DIA (DIA), Nest Protocol (NEST).
Exchange Platforms: as its name suggests, these are exchange platforms that enable the buying and selling of cryptocurrencies. If you are investing or consider investing in crypto, you for sure are familiar with some of the biggest names, like Coinbase, Binance (BNB), crypto.com (CRO), Gemini, etc.
Payment: once we get out of the core infrastructure needed for the crypto space building and functioning, finance is, of course, the industry to disrupt. Actually, the entire crypto world was created due to inefficiencies of the existing financial system to begin with. Ripple (XRP) and Stellar (XLM) are the major players here as cross-border payment systems enablers, aiming to complete the transactions in a faster, cheaper and safer way, without the middlemen in the existing financial system.
Lending & Borrowing platforms: this is essentially where a lot of the Defi (decentralized finance) hype started, but despite the speculation, what these companies are looking to do is to enable access to capital for those who need it, just like how a bank would work. The other side of the transaction would be those who would like to put their tokens to work in exchange for a return. Famous examples of these are Compound (COMP), Maker Dao (DAI), Aave (AAVE), to name a few.
NFT (Non Fungible Token): this kind of tokens are unique, one of a kind, indivisible, that are used to represent both digital or real world rare assets, providing records of ownership and authenticity. This is quickly gaining popularity in niche spaces like art, collectibles, gaming. It’s even being used to enable access to fractional ownership of high value assets like real estate. Few well-known players here are Enjin (ENJ), Rarible (RARI), Yinsure (YIN).
Others: There are really a lot of other interesting projects being built as I write this article. Some of the other industries that are being disrupted are Social Media, Entertainment, Creators, etc. But I think this article is already covering the most important ones that you should know when getting into crypto.
Like I said before, I do believe that by taking a look at what these companies do, in which industries they operate and how they disrupt the traditional way, is an easier and friendlier way of understanding this fast-moving and exciting space!
It’s just at an initial stage, so plenty of new initiatives and innovations coming up! I believe in doing research, build your own thoughts and judgment around things, and then make decisions accordingly, so if you are interested in crypto, I do strongly encourage you to invest some time in this!