Crypto coins, more commonly, cryptocurrencies are a form of virtual or digital currency that use blockchain and cryptography for secure financial transactions. They are most famously known for their decentralization wherein they operate independently of a central authority such as a government or financial institution and allow transactions to be done electronically. Some popular examples include Bitcoin, Ethereum and Litecoin.
How do they differ from tokens?
Crypto coins are native currencies that operate independently of any other platform due to the existence of their own blockchain where they are used primarily as a means of exchange. Examples include Bitcoin, Litecoin, Monero etc. On the other hand, tokens are digital assets that are built over existing blockchain platforms and are often used to represent a particular asset or utility. That is, they represent a specific purpose or use within a particular blockchain ecosystem. They can further be classified as security or utility tokens. Examples include Tether, Shiba Inu and Binance Coin. Interested in learning more about crypto tokens? Check out our article covering everything you need to know about crypto tokens.
Types of cryptocurrencies
Despite the proliferation of cryptocurrencies, there are some big players that stand out among the rest, each with their own unique features and use cases. With Bitcoin being the progenitor, several alternatives have sprung into the market.
Introduced in 2009 by Satoshi Nakamoto, Bitcoin’s objective was to be a form of currency that can not be controlled by any central entity, allow transparency and prevent fraud.
The Ethereum blockchain differs from Bitcoin in its ability to run smart contracts which are designed to facilitate, verify and enforce performance as per an agreed contract. Contrary to Bitcoin which was designed primarily as a digital currency, Ethereum was designed, in 2015, to be a more general-purpose blockchain platform allowing a wide range of applications including decentralized finance (DeFi) platforms, non-fungible tokens (NFTs) and prediction markets. It uses Ether as its native cryptocurrency, used to pay for transaction fees and computational services on the Ethereum network, a transactional token which has the second-largest market capitalization after bitcoin, but without a maximum limit. It was meant to facilitate more than just finance.
USDT is an asset-backed stablecoin whose value is pegged to the US dollar. Tether is built on top of various blockchains like Ethereum, Solana, Tron and others. It is designed to provide stability in an otherwise volatile crypto market. Introduced in 2014, it facilitates fast and low-cost transactions with the added stability of traditional currency or as they say “facilitates the use of fiat currencies in a digital manner”.
Binance Coin (BNB)
This Binance ecosystem native cryptocurrency, launched in 2017, was created as a means of payment for transaction fees including trading and listing fees at a discounted rate. It was originally issued on the Ethereum blockchain but now has its own blockchain called the BNB chain. It is also designed as a utility token for a variety of applications within the Binance ecosystem. It is issued by the Binance decentralized exchange (DEX) aiming to offer decentralized finance (DeFi) services. In comparison to the above cryptocurrencies, BNB ranks fifth in terms of market capitalization as of May, 2022.
USD Coin (USDC)
This is also a stablecoin like Tether, which is particularly pegged to the US dollar making it a “digital dollar”. Founded in 2018 by CIRCLE and Coinbase, and built on top of the Ethereum blockchain, it is an open-source project providing stability and reliability to digital currency in its objective of widespread adoption for everyday transactions globally. Unlike binance coin, it chose to remain over the Ethereum network due to its ability to deploy smart contracts and strong developer support. Hence, it is a smart contract-based fiat-backed stablecoin allowing financial interoperability.
Are there different types of cryptocurrency trading?
There are several trading patterns and styles depending on the trader’s objectives. A variety of them deal with the length of time for which you hold onto a cryptocurrency. For beginners, investing is the easiest to understand and is generally considered the safest option due to its longer term. However, the crypto market itself is very volatile and does not guarantee any long term returns identical to banking style investing. On the other side of the spectrum, scalping is a technique where traders open and close a trade in seconds or minutes to make multiple smaller profits throughout the day. Similarly, other strategies include day trading, position trading, swing trading, algorithmic trading and arbitrage. However, these styles are fixed to the term “trading” which is done on a cryptocurrency exchange. This is generally very complex and requires familiarity with trading strategies, technical analysis and other fundamental knowledge.
Other than trading, there are several other ways to invest in cryptocurrency such as:
Buying and holding: As the name suggests, simply buy and hold the asset and wait for it to appreciate in value.
Mining: This is the process of creating new cryptocurrency by solving complex mathematical equations. However, this is also a complex task requiring specialized equipment, software and experience. It can also be very expensive.
Crypto funds or ETFs: Another way to invest in cryptocurrency is through funds or ETFs that hold a portfolio of various cryptocurrencies. Similar to traditional funds and ETFs, these provide a way to invest in a broad basket of assets, rather than picking and choosing individual coins.
Staking: Some cryptocurrencies have a feature called staking which allows users to lock their crypto assets and earn interest in return. Staking is like receiving an interest on the investment.
Crypto derivatives: These are financial contracts that derive their value from the underlying assets, which can be cryptocurrencies such as Bitcoin or Ethereum. These derivatives can take many forms, including futures, options, and swaps. Like any financial instruments, they can be used for hedging or speculation. Hedging is a way to protect oneself against the potential loss that might happen due to price fluctuations and speculation refers to buying derivatives as a way to profit from the fluctuations in the price of the underlying assets.
All in all, the cryptocurrency market is relatively new, volatile and largely unregulated. There is higher risk than traditional investing which makes it unsuitable for the uninformed. You should consider your own risk tolerance and investment goals before investing any money in cryptocurrency. A common adage in the industry is to invest only what you can afford to lose.
Where to buy all types of cryptocurrency?
Depending on which specific coin or token you are interested in purchasing, there are several ways to do so. Among them the most popular option is through cryptocurrency exchanges. These are online platforms where you can buy, sell, and trade a wide variety of cryptocurrencies using fiat currency (e.g. USD, EUR) or other cryptocurrencies. Some popular exchanges include Binance, CoinBase, Kraken and Bitfinex, among others. Each of them has a different variety of coins and incentives for new and existing investors.
However, crypto exchanges are not the only places to trade crypto. There also exist peer-to-peer marketplaces such as Paxful and LocalBitcoins that allow buying and selling crypto directly with other people. So here, Paxful acts as a centralized intermediary by holding funds in escrow until both parties have fulfilled their side of the trade. On the other hand, there also exist decentralized exchanges (DEX) such as Uniswap, which allow peer-to-peer trading directly on the blockchain without the need for a centralized intermediary. You can also mine Bitcoin using specialized computer hardware to verify transactions on the Bitcoin network and earn Bitcoins as reward. However, this is technically advanced and not suitable for everyone. Some investors also opt for over-the-counter (OTC) trading which happens outside of traditional exchange platforms. When choosing a platform and comparing different options, one must do enough research to be aware of its reputation, security, ease of use, fees, supported currencies and location restrictions.
Where to securely store your cryptocurrency?
Depending on your specific needs and comfort with technology, there are several options to do so with the most popular ones being:
- Hardware wallets: These are physical devices that securely store your private keys offline. Examples include Trezor, Ledger and Cypherock X1. They provide high-level security because they are not connected to the internet and also have a PIN as an extra security measure.
- Software wallets: These are digital wallets that can be stored on your computer or mobile device. Examples include Exodus, Electrum and Metamask. They are considered to be less secure than hardware wallets because they are connected to the internet, yet you can use software wallets with hardware wallets as well to add an extra layer of security.
- Paper wallets: These are physical copies of your private keys that are printed out on paper. This can be a secure option, as long as you take the necessary precautions to prevent the paper from being lost, stolen, or damaged.
- Air-gapped devices: This is an offline version of software and hardware wallets, where crypto is stored on a laptop/mobile phone.
For further details on how to securely store cryptocurrencies, check out our article talking about crypto security, and how to prevent loss or theft of your cryptocurrencies
Crypto coins, also known as cryptocurrencies, are a form of digital or virtual currency that uses blockchain technology and cryptography for secure financial transactions. They operate independently of central authorities and offer transaction anonymity. Bitcoin, Ethereum, and Litecoin are some of the most popular examples of crypto coins. They differ from tokens, which are digital assets built on existing blockchain platforms and are often used for specific purposes or assets within a particular ecosystem. The proliferation of different types of cryptocurrencies is due to their unique goals and use cases, such as decentralized applications, privacy, and store of value. Understanding the different types of cryptocurrencies, their features and use cases, can help individuals make informed decisions when investing in the cryptocurrency market.