When Bitcoin was first introduced in 2009, it gained a narrow user base, mainly consisting of technology enthusiasts and developers who recognized Bitcoin’s potential. Fast forward to 15 years later, and cryptocurrencies have evolved significantly from a niche interest to a recognized asset class with a financial market of its own.
Since then, the crypto market has experienced both successes and challenges. We’ve witnessed a proliferation of new cryptocurrencies, each serving a unique purpose and high-profile crashes. Despite this obstacle, the crypto market remains profitable.
How Cryptocurrencies Are Categorized
New crypto projects are always emerging and cryptocurrencies are categorized based on their purpose, functionality, and underlying technology. Kane Pepi from 99 Bitcoins explains how the best upcoming ICO (Initial Coin Offerings) is a great way for investors to get in early on a project. He also said that thousands of ICOs are launched every month, suggesting that there are always new coins to categorize.
Understanding these categories will help you understand the diverse nature of cryptocurrencies and their different roles in the blockchain, helping you make an informed decision. It will also help you understand that different cryptocurrencies can fall into more than one category, reflecting their multifaceted nature.
Goal Based
This category of cryptocurrencies is defined by their intended use:
- Medium of exchange: This is when cryptocurrencies are designed for everyday use, such as Bitcoin and Litecoin.
- Store of value: These tokens aim to preserve wealth over time, like Bitcoin and Ethereum.
- Utility tokens: These cryptocurrencies provide access to specific services or platforms. For example, Filecoin is used for decentralized storage, and Basic Attention Token is used for digital advertising.
Function Based
This particular classification focuses more on what cryptocurrency allows the user to do:
- Smart contract platforms: Cryptocurrencies like Ethereum and Solana support the creation and execution of smart contracts.
- DeFi tokens: Tokens such as Uniswap and Aave are used in decentralized financial applications.
- Management tokens: Tokens like Curve DAO allow holders to participate in decision-making processes.
Technology Based
This particular token is based on their underlying technology:
- Proof-of-work (POW): Tokens like Bitcoin and Dogecoin use mining to validate transactions.
- Proof-of-stake (POS): These tokens, such as Cardano and Tezos validate transactions based on the amount of cryptocurrency held.
- Direct Acyclic Graphs: These tokens use a different structure than traditional blockchains. Examples are IOTA and Nano.
Based on Regulatory Status
This particular classification can be controversial because tokens are based on the regulatory status or treatment of cryptocurrencies rather than the concept itself.
- Securities: Countries like the USA, Canada, and Singapore have classified cryptocurrencies as securities. This means that the token is seen as an investment contract and investors expect profits from the efforts of others.
- Goods: Crypto considered as commodities are viewed more like raw materials or commodities. These tokens are often seen as a store of value or a medium of exchange. Japan and the United Kingdom treat crypto as property, similar to commodities.
- Legal Tender: Cryptocurrencies recognized as legal tender are officially accepted as a valid form of payment. El Salvador was the first country to adopt Bitcoin as legal tender in 2021.
The Different Types of Cryptocurrencies
Payment of Cryptocurrencies
These digital assets are mainly used for transactions and as a store value. Bitcoin and Litecoin are examples of cryptocurrencies that aim to offer a decentralized medium of exchange. These cryptocurrencies are the most widely used in many industries.
Platform Coins
Platform coins are native to blockchain networks that support smart contracts and decentralized applications (dApps). Ethereum and Binance Coin fall into this category. They enable transactions and computational processes on their respective networks. For example, in many DeFi applications, Ethereum is used as collateral for loans or to create stablecoins.
Stablecoins
Stablecoins are cryptocurrencies designed to maintain a stable value, usually pegged to a fiat currency or commodity. Tether is widely used and aims to provide stability in the volatile crypto market.
Utility Tokens
These tokens have specific use cases within blockchain platforms and applications. Basic Attention Token and Filecoin are examples. They often provide access to specific services or products within their ecosystem.
Meme Coins
Meme coins often start out as jokes but can gain significant value due to community support and social media trends. Dogecoin and Shiba Inu are well-known meme coins. Their value is largely driven by community sentiment and viral marketing.
Privacy coins
Privacy coins focus on providing enhanced anonymity for transactions. Monero (XMR) and Zcash (ZEC) are examples. They use various cryptographic techniques to hide transaction details.
Non-Fungible Tokens (NFTs)
NFTs are unique digital assets in blockchain networks. They are used to tokenize items such as digital art, collectibles, and virtual real estate. Each NFT has a unique value and cannot be exchanged on a like-for-like basis. NFTs are used in gaming as in-game assets, in sports like the NBA’s Top Shot that allow fans to buy, sell, and trade officially licensed “Moments.” Fashion brands like Gucci and Nike use NFTs for exclusive collections, and financially, NFTs can be used as collateral for loans.
Security Tokens
Security tokens are digital ownership of real-world assets, similar to traditional securities. They are usually subject to federal securities regulations and may be shares in a company or other assets.
DeFi Tokens
DeFi (Decentralized Finance) tokens are used in applications that aim to recreate traditional financial systems using blockchain technology. Aave and Compound are examples of cryptocurrencies that facilitate lending, borrowing, and other financial services.
Management Tokens
Governance tokens provide voting rights to decentralized autonomous organizations (DAOs) and blockchain projects. Stakeholders will participate in decision-making processes about the future of the project.
The Difference between ICOs and Presales
A crypto presale, also known as a pre-ICO, is an early token sale event that occurs before the main Initial Coin Offering (ICO). Tokens are usually sold at a discounted price to early investors. They often have lower fundraising targets compared to the main ICO. Presales can help projects get initial funding and build community interest.
An ICO, on the other hand, is a fundraising method used by cryptocurrency startups to raise capital. They are quite similar to Initial Public Offerings (IPOs) in traditional finance. Investors receive tokens in exchange for established cryptocurrencies such as Bitcoin or Ethereum. ICOs can be a source of capital for startups, often bypassing traditional regulations.
Telegram’s 2018 ICO was one of the largest ever, raising over $1.7 billion.
How are they different?
- Timing: Presales usually happen before the main ICO, usually weeks or months in advance. ICOs happen after the presale phase, as the main token sale event to the public.
- Token price: Presales offer tokens at a significantly discounted rate, often 30-50% lower than the ICO price. ICOs sell tokens at a higher price compared to the presale.
- Target audience: Presales typically target larger investors, private investors, or early backers. ICOs are open to the general public and have a wider audience.
- Token supply: Presales usually offer limited tokens, typically 5-15% of the total supply. ICOs offer a larger share of the total token supply.
- Risk level: Presales carry a higher risk because the project is often in the early stages of development. ICOs are lower risk because the platform or protocol is about to launch.
- Minimum investment: Presales usually have higher minimum investment requirements, whereas ICOs usually have lower minimum investment limits.
- Purpose: Presales are often used to raise initial funds for project development and to cover ICO launch costs. ICOs aim to raise the bulk of funds for the project and distribute the tokens more widely.
- Smart contracts: Presales and ICOs often use separate smart contracts to manage token distribution.
Conclusion
Cryptocurrencies have come a long way. Today, crypto has diverse functions and is increasingly integrated into various industries and transactions. Understanding the different cryptocurrencies, their purpose, and use cases provides valuable insight for those considering adoption or investment.
Also Read: Bitcoin Hits ATH of $103,399 Amid Pro-Crypto SEC Leadership News
Disclaimer: The information provided on AlexaBlockchain is for informational purposes only and does not constitute financial advice. Cryptocurrency investments, including but not limited to ICOs, IDOs, presales, and other token offerings, involve substantial risk. You are solely responsible for conducting thorough research (DYOR) and performing due diligence before making any financial commitments. It is strongly recommended that you seek professional financial advice before making investment decisions. Read the full disclaimer here.
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