All About the Different Types of Cryptocurrencies
The term “cryptocurrency” covers a wide breadth of digital currencies. But at the most basic level, the different types of cryptocurrencies can be broken down into two categories. First, there’s Bitcoin. And then there’s everything else. Every other coin can be referred to as an altcoin. But it can get much more granular than that.
Once upon a time, all cryptocurrencies were simply seen as competing forms of digital money. But as the crypto market has matured, it’s now obvious that’s no longer the case. Today, we can classify the various types of cryptocurrencies based on their intended (or applied) use.
That being said, there is continued debate over whether there really are different types of cryptocurrencies. But from our vantage point, it’s pretty clear that there are. And knowing the differences can help investors build a more diversified crypto portfolio. That way, when one area of the crypto market falls, holdings in others areas of the market can keep your entire portfolio from tanking.
How to Diversify With Different Types of Cryptocurrencies
Just like the stock market has different sectors, so too does the crypto market. While most stocks fall into one of 11 sectors, most types of cryptocurrencies can be put into one of five main categories…
- Media & Entertainment
Not to complicate matters, but some cryptos can fall into multiple categories. But that’ll all make sense shortly. And with that, let’s jump into explaining the differences between types of cryptocurrencies…
Anyone who’s traded crypto on a decentralized exchange – like PancakeSwap or AirSwap – should be familiar with financial cryptocurrencies. Most decentralized exchanges offer peer-to-peer crypto trading. Using these exchanges is like selling a piece of real estate directly to a buyer without using an agent. And these decentralized exchanges don’t typically allow fiat currency to be traded for crypto. That’s where these types of cryptocurrencies come into play.
One of the more popular financial cryptocurrencies is BNB (AKA the Binance Coin). It was (naturally) designed to be used on the Binance exchange. Folks would buy BNB and then trade that BNB for other cryptos on the exchange. But BNB’s use has reached far beyond just Binance at this point. These days, it is one of the most popular tokens used on decentralized exchanges. In fact, before it branched out to more established exchanges, trading BNB was the only way to gain access to SafeMoon crypto. Other popular examples of this type of cryptocurrency include Auger (REP), Balancer (BAL) and, of course, Bitcoin (BTC).
While the idea of an infrastructure crypto might be a head-scratcher at first, you’re most likely already familiar with these types of cryptocurrencies… even if it’s only due to name recognition. The second-biggest crypto based on market cap (Ethereum) is technically an infrastructure crypto.
What makes these cryptos unique is that they are usually used to pay the owners of the computers that are relied on to run programs on a shared blockchain network. This is why Ethereum became the preferred network for hosting NFTs… and why it became the crypto of choice to buy them. But the important thing to know is that blockchain networks that provide unique uses usually require their own infrastructure cryptocurrency.
Popular examples of this type of cryptocurrency include Cardano (ADA), Polkadot (DOT) and Kusama (KSM).
Media & Entertainment Cryptocurrencies
This is one of the small types of cryptocurrencies. However, it could very well become a focus for startup coins in the future due to the huge potential – and somewhat limited competition. Contrary to what you may assume, Ethereum isn’t technically a media or entertainment crypto – even though it fits the bill in some ways.
These types of cryptocurrencies are made to reward users for content, game or social media creation. They can also be used for certain network-based gambling applications. This type of crypto is also starting to be used to power augmented and virtual reality applications.
The most popular example of this is Basic Attention Token (BAT). However, other examples include Theta (THETA), Flow (FLOW), Alien Worlds (TLM) and Sport and Leisure (SNL).
As we mentioned at the top, not all cryptos are competing as a form of digital money. But that’s exactly what these types of cryptocurrencies set out to do. Of course, the granddaddy of ‘em all – Bitcoin – falls into this category. And everyone’s favorite meme-based crypto, Dogecoin, fits the bill too… in its own goofy way.
But the real nature of payment-focused cryptos is that they are taking what Bitcoin did well and trying to improve upon it in one of two ways. Some are explicitly trying to compete with fiat currency. This is the case for stablecoins, which are usually backed by some sort of underlying asset. Others are trying to speed up the transfer, scalability recording or security of transactions. Stablecoin of this type include TrueUSD (TUSD), USD Coin (USDC) and Tether (USDT). And payment-focused cryptos trying to improve on what Bitcoin started include Dash (DASH), Litecoin (LTC), Monero (XMR) and the relatively new Telcoin (TEL).
This is probably the most complicated type of cryptocurrency for folks who are just getting started to understand. But here’s an important detail to start with. Blockchain technology is slowly but surely being applied to real-world applications. The healthcare industry is a primary example of this. The ability to safely store patient records on a blockchain network offers many benefits to the current model employed by hospitals. And these types of cryptocurrencies offer the ability to provide digital identities to users that can be linked to that individual’s record.
It’s pretty heady stuff, but in its essence, these cryptos offer a way to access personal or sensitive business data stored on the blockchain. Filecoin (FIL), Chainlink (LINK) and Storj (STORJ) are all examples of this type of cryptocurrency.
The Bottom Line on the Different Types of Cryptocurrencies
As we saw during the crypto crash of 2018, the entire market is capable of bottoming out at the same time. Even the recent crypto crash left few coins unscathed. However, as crypto continues to mature, diversifying one’s crypto portfolio is a way to stave off some level of volatility.
But just like a major stock market crash can decimate every sector simultaneously, a diversified short-term crypto investor can still get wiped out by the wrong headline. After all, this is an extremely headline-driven market. But long-term, diversified crypto investors have a lot less to worry about.
There will always be downs in the markets. But so too will there be a lot of ups. If you’d like to learn about the latest crypto market movers with lots of potential upside, we suggest signing up for Manward Financial Digest. In it, crypto expert Andy Snyder offers sensible investing advice that can be applied to both the crypto markets and the stock market.
About Matthew Makowski
Matthew Makowski is a senior research analyst and writer at Investment U. He has been studying and writing about the markets for 20 years. Equally comfortable identifying value stocks as he is discounts in the crypto markets, Matthew began mining Bitcoin in 2011 and has since honed his focus on the cryptocurrency markets as a whole. He is a graduate of Rutgers University and lives in Colorado with his dog, Dorito.