EXPLAINER: What are the different types of cryptocurrencies?

The simple separation between Bitcoin and altcoins no longer works to accurately capture an economy that has become so much more complex and versatile compared to ten years ago.

Now, when we talk about crypto, we use a wide variety of terms — digital assets, security tokens, exchange tokens, coins, currencies, utility tokens, and so forth. It can be quite daunting, especially if you’re just getting started.

But it’s important to remember that the goal of labeling various cryptocurrencies and organizing them conceptually, is not to arrive at some fixed universe of meaning. This space is undergoing constant change and innovation, and the way we assess digital assets or their underlying technologies depends on our needs — if you’re looking to invest in crypto, your typology will differ from that of a technologist or regulator.

Combining several typologies, this post hopes to help you think a bit more about the different types of cryptocurrencies from an investor’s perspective.

Object-based & Claim-based

Recently, the International Monetary Fund (IMF) presented a useful overview of the different types of money. While its typology branches off into multiple levels, what’s most relevant for us is the distinction it makes between object-based and claim-based money.

• Object-based money refers to money that has ‘intrinsic value’, directly subject to the forces of supply and demand. Such money can be issued by the Central Bank in the form of cash or even a digital currency, or it could come from the public in the form of cryptocurrencies such as Bitcoin.
• Claim-based money is best compared to a token which is linked to something of value. For example, a cheque issued by the bank, WeChat money or other types of e-money issued by private companies, but also blockchain-based stablecoins, such as TrueUSD.

This distinction between object-based and claim-based money is useful, but from an investor’s point of view, there are further elements that need to be considered within these two categories.

Object-based cryptocurrencies

These coins derive their value from their overall utility, attachment to certain principles (such as privacy), the promise they hold for the future, or from the blockchain platform they are part of. Although there will be overlap, we can distinguish between:

Transactional currencies
These assets are primarily built to be used for payments or remittances. Although theoretically all coins could be used for payments, these types of coins have enjoyed easier adoption in the payment space. Examples include Bitcoin (BTC), Litecoin (LTC), and Bitcoin Cash (BCH).

Privacy coins
These digital assets are designed to allow for a high degree of privacy. When a transaction takes place, only the sender and receiver can know the number of coins transacted. Also, the balance in a privacy coin wallet is not known to anyone but its custodian. Examples include ZCash (ZEC), Monero (XMR), and PIVX (PIVX).

Blockchain currencies
These assets are integral to blockchain platforms that take the functionality of blockchain technology beyond payments and enable users to create their own digital assets (i.e. utility tokens), digital applications (dApps), and so forth. The value of these currencies is greatly influenced by the actual usage of the blockchains they are part of. Examples include Ether (ETH), Ethereum Classic (ETC), EOS (EOS), NEO (NEO), and Tron (TRX).

Utility tokens
Utility tokens are digital tokens specifically used as part of a blockchain-based product or service. Most of these tokens are ERC20 tokens, meaning they are built on top of the Ethereum blockchain, but other types such as TRC10 and TRC20 have emerged as well. Examples include Golem (GNT), Basic Attention Token (BAT), Civic (CVC), and 0x (ZRX).

Claim-based cryptocurrencies

Whereas the former types of crypto assets derive their value directly from the forces of supply and demand, claim-based cryptocurrencies — or stablecoins — are pegged to the value of another, usually highly liquid asset. These stablecoins can be backed by those assets, in the form of reserves, or by other assets/ mechanisms to ensure the peg is held intact. We can distinguish between four types of stablecoins:

Fiat collateralized stablecoins
These stablecoins are pegged to the value of fiat currencies such as the US dollar or the Euro. Usually, this type of stablecoin is issued by a central entity who needs to make sure that for every stablecoin it issues, there is enough money to back it up. An example of this type of stablecoin is Tether (USDT).

Crypto collateralized stablecoins
These coins, although pegged to an asset such as the US dollar or even gold, are collateralized by another cryptocurrency, held in a smart contract. They are generally over-collateralized so that even if the value of the cryptocurrency used to back the stablecoin fluctuates, it does not compromise the peg. Examples of these include BitUSD, BitEUR, and stable.PHP.

Algorithmically stabilized stablecoins
This type of stablecoin is still in its experimental phase. Its value is managed by controlling the supply: whenever the coin’s value rises above its pre-programmed peg, the supply is increased; and whenever it falls below the set parameters, the supply is decreased.

Asset-backed stablecoins
These stablecoins are backed by actual assets. The goal here can be to achieve stability, for example by backing these stablecoins up with bonds, or actual gold; or as a way to transfer ownership — for example, through the securitization of a building or a Stradivarius violin.

The way investors relate to object-based crypto is different from how they relate to claim-based stablecoins. The former obviously provides an avenue to grow wealth or to hedge against unfavorable market conditions. The latter provides a way out of the volatility of crypto — stablecoins can be used to park your money for a while, or as a means of payment.

Originally published at https://academy.aax.com on September 5, 2019.