The Capital
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The Capital

An in-depth classification of cryptocurrencies

By Alpha Roc on The Capital

Photo by Launchpresso on Unsplash

Categories and Sub-categories of cryptocurrencies

According to Coinmarketcap, there are more than 5,000 cryptocurrencies in the market, all of which are categorized into various categories and subcategories such as coins, tokens, stable coins, or CBDCs. This week’s article aims to provide an overview of these corresponding categories.

In general, cryptocurrencies can be classified into one of the basic categories such as bitcoin, altcoin, or token.

Bitcoin — the first-ever cryptocurrency

Bitcoin (BTC) is probably the most common name in the cryptocurrency market. BTC could be subject to the laws of traditional monetary policies due to the underlying blockchain technology which is deemed to be the perfect answer to the existing issues faced in the finance industry.

Despite numerous other cryptocurrencies, BTC is still the most valuable crypto asset on the market. The decentralized, electronic peer-to-peer system enables the participants to transfer funds without the involvement of an intermediary such as a bank.

Since its introduction in 2009, Bitcoin has never failed, and investors always had access to the network. However, during the crypto rally in 2017, it became clear that the scalability of the Bitcoin Blockchain is the bottleneck of the ecosystem. Despite the drawback, which followed the all-time highs of 2017, BTC is experiencing an increasing acceptance as a viable payment method. The possibilities for investing in BTC have also improved over the years. For example, investors can even buy bitcoin via PayPal.

Over time, it appears that BTC may have established itself as a digital alternative to physical gold. That assumption might be based on the implemented maximum supply of 21 million BTC. Because of that, the leading cryptocurrency is a rare commodity, which has its own intrinsic value. However, the impact on the financial markets in the wake of the coronavirus pandemic showed that BTC is also subject to the natural laws of the financial markets.

Altcoins are next to Bitcoin

The publication of the Bitcoin Whitepaper in 2008 wasn’t just for Bitcoin. Instead, it paved the way for a whole new industry. The underlying program for BTC was published as open-source code. Since then, many developers have relied on it to develop their own blockchain ecosystems, and the Bitcoin code formed the foundation for numerous new cryptocurrencies, or alternative coins, that followed.

Those alternative cryptocurrencies are referred to as altcoins. Many of these altcoins serve as a decentralized means of payment. There are numerous altcoins available, all of which boast of completely different applications. Therefore, a vast majority of altcoins apply to a specific use case.

Ether (ETH), is by far the best-known altcoin and the native currency of the Ethereum blockchain, and for a good reason. The Ethereum blockchain is capable of being a fully programmable blockchain. Using the object-oriented programming language Solidity, developers can develop distributed applications (dApps) or smart contracts.

The automation of entire business transactions using Smart Contracts is considered one of the most important use cases of blockchains. Such an intelligent contract basically sets up simple IF-THEN rules and automatically executes transactions on the corresponding blockchain.

Every altcoin has its own network with a corresponding distributed ledger technology (DLT). The blockchain technology remains the most important DLT by far. And although all Coins are based on a DLT, the program codes of the individual projects differ greatly. This is also the reason why all altcoins have specific properties.

Tokens are the most common cryptocurrencies

The third and most common type of cryptocurrency is the token. Many newcomers use the terms token and coin synonymously. However, a differentiation must be made here. In direct comparison to bitcoin and altcoins, a token cannot function independently. Rather, a token is based on the network of another cryptocurrency and is therefore in a relationship of dependency.

Consequently, a token does not have its own distributed ledger or blockchain technology. The blockchain of an already existing cryptocurrency is always decisive.

In comparison with coins in general, it is noticeable that there are simply more tokens than coins. The reasons for this circumstance may be the fact that the technical requirements for a token are much lower. A token simply does not need its own blockchain. The trend towards tokenization also shows that the potential of cryptographic currencies also works for institutional use cases. The potential of smart contracts makes it possible for other assets such as real estate, stocks, commodities, or bonds to be represented by tokens. In the future, tokens may become even more relevant and revolutionize illiquid asset classes.

Photo by Austin Distel on Unsplash

Subcategories of cryptocurrencies

The types presented above allow the categorization of each cryptocurrency. However, they can be further broken down into more detailed procedures and subtypes.

Classical subtypes are:

1) Stablecoins

2) Exchange Tokens

3) Privacy coins

4) Central Bank Digital Currency (CBDC)

Stablecoins

Stablecoins, as the name implies, represent cryptocurrencies of stable value. Stablecoins must be backed by security or reserve. If the reserve is sufficiently large, a typical, volatile cryptocurrency gains an intrinsic value to that of the corresponding currency. Examples of stablecoins include USDT and Facebook’s Libra.

Important note for traders regarding stablecoins is that such coins are less volatile due to their price stability. As such, an investor would not experience high returns out of margin trades. However, stablecoins are perfectly suitable for regular transactions.

Exchange Tokens

Another subtype of cryptocurrencies is Exchange Tokens. These are cryptocurrencies created by a crypto exchange or trading platform. Exchange Token enables users to access the services of the specific marketplace or reduce transaction fees when buying cryptos. Well-known Exchange Tokens includes Huobi Token, Binance Coin, and KuCoin shares.

Privacy Coins

Privacy Coins also represent a subtype of cryptocurrencies.

Privacy Coins enable anonymous and private transactions. As such, there is no public information about the participating parties saved in the blockchain. The most important privacy coins right now are Monero, Dash, and ZCash.

Central Bank Digital Currencies (CBDC)

The last and latest subtype of cryptocurrencies is the Central Bank Digital Currencies (CBDC). As the name suggests, CBDCs are cryptocurrencies created or at least supported by a central bank. Currently, there are numerous projects researching the potential viability of CBDCs.

The People’s Bank of China may legalize the world’s first authorized CBDC with a use case — the digital Yuan — with other countries following suit. Europe has announced that there will be a digital euro. In the long term, it seems realistic that numerous central banks may publish their corresponding digital currencies.

Conclusion

There are numerous ways to categorize cryptocurrencies. The easiest way is probably to categorize them by using the terms Bitcoin, altcoin, or Token. Especially exciting is the fact that almost all tokens are based on four central blockchains. The most important altcoin by far is Ethereum. After all, many tokens are based on this blockchain.

It is also possible to categorize the tokens by their subtype. Stablecoins and exchange coins are the most important ones. Privacy Coins may be used by a solid user base, but there are only a few new projects in this scene. The CBDCs will most likely gain relevance as early as the first one is released. Nevertheless, as new use cases are explored with the progression of technology, new methods and categories of cryptocurrency classifications may arise.

find out more @ https://www.alpharoc.tech

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