After its first boom in 2011, Bitcoin, which was created in 2009, was the first real use case for blockchain technology. As competitors embraced this emerging technology, new types of cryptocurrencies began to appear. So if you have been keeping up with crypto news lately, you must have come across different types of these digital assets that have a variety of use cases.
Although many people use the terms crypto, coins, and tokens interchangeably, understanding how they differ is essential to understanding the basics of cryptocurrencies.
coin against token
Before we go deeper, let’s clarify the definition of coin and token. Although used synonymously, a coin is a digital asset that is native to its blockchain network, while a token is an asset that is foreign to the blockchain it was built on. For example, BTC is the native currency of the Bitcoin blockchain and so is ETH of the Ethereum blockchain; however, DOGE is a token that was created on the Ethereum blockchain. As you may know, Ethereum is one of the most popular blockchains to create tokens that are known as ERC-20 tokens.
What are the types of cryptocurrencies?
- Store of Value Tokens (Digital Currency/Token)
In general, coins (as well as precious metals) are valuable because they can be used as a store of value and as a medium of exchange. The term “store of value” is used to characterize the ability of any asset to avoid depreciation over a long period of time. As a result, to be considered a store of wealth, an asset’s value must be stable or increasing over time. Like the fiat we keep in our pockets, a digital currency is money but in digital form and serves as a means of payment because it is a unit of account, a store of value, and a means of transfer or exchange.
Bitcoin is considered an excellent store of value currency due to its scarcity (limited supply) and is often referred to as “digital gold”. For other examples of cryptocurrencies that can be seen as a good store of value, click on here.
- utility tokens
Although they have the same value as storage of value tokens, utility tokens are coins that offer their owner access or the right to use a product or service within their ecosystem. Utility tokens are typically developed by tech startups that aim to offer a new digital product or service. Typically, the startup sells utility tokens during the initial coin offering (ICO). Investors can buy these tokens and use them to make payments on the platform of the issuing company.
So we can say that utility tokens are currencies that offer value to investors in a different way than digital currencies. Crypto exchange tokens are considered to be utility tokens, for example, BNB can be used on the Binance Exchange ecosystem for discounted trading fees.
- stable coins
Stablecoins are cryptocurrencies that are pegged to fiat money or exchange-traded commodities. Being a huge network between the traditional financial system and the crypto market, stablecoins are always favorable for new traders as they are a good stable investment that keeps them safe from the volatility of the markets. The most famous stablecoins are Tether (USDT), Paxos (PAX), Gemini (GUSD), TrueUSD (TUSD), and USDC.
- security tokens
Security tokens are a digital representation of an investment product or a tradable foreign asset, such as stocks, precious metals, or ETFs. Issued by FinTech firms in a process called STO (Security Token Offering), like ICO utility tokens, these tokens are registered with the respective financial market authority.
The remarkable thing about security tokens is that they can represent fractional ownership of a real asset. Example: SiaFunds – Tokens used to share revenue on the Sia network; a fee of 3.9% of each transaction related to storage in Sia is distributed to holders of Siafunds. Sia’s core team currently owns approximately 85% of all Sia funds.
- privacy coins
Some digital assets are designed for privacy to keep the identity of the sender and receiver hidden. Unlike public blockchains like Bitcoin, which display transaction amounts and wallet address balances for each transaction, the number of coins transferred in the transaction only appears to the sender and receiver. Examples of privacy coins are ZCash (ZEC), Monero (XMR), and PIVX (PIVX).