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What Are the Different Types of Cryptocurrency?

Find out about the different types of cryptocurrency and the investment strategy for each.

Ever since the creation of Litecoin, Bitcoin was no longer the world’s only cryptocurrency. Lots of other alternative coins, also known as ‘altcoins’, followed after Litecoin. Currently, there are over 6,000 altcoins. It is quite likely that more of them are being created right now, even as you read these words.

So, what are the most widespread types of cryptocurrencies right now? Read on to find out about the different kinds of cryptocurrency and how investing in these can help you to diversify your crypto investments.

All types of cryptocurrency and how they work

How Many Types of Cryptocurrency Are There?

The most widespread types of cryptocurrencies are as follows:

  • Regular altcoins
  • Stablecoins
  • Tokens

Accordingly, they all have different roles in the cryptocurrency ecosystem, and we’ll cover these roles in greater detail below.

What Are Altcoins?

Altcoins mean any cryptocurrency other than Bitcoin. Bitcoin was the only cryptocurrency at the dawn of the crypto industry, so ‘bitcoin’ and ‘cryptocurrency’ started out meaning the same thing. 

When Litecoin was created, it became clear that the word ‘cryptocurrency’ no longer represented the same thing as ‘bitcoin,’ so Litecoin was soon dubbed an altcoin, which is a shorthand for ‘alternative coin.’

Since then, an innumerable crowd of altcoins has arrived. They have different types, different mechanics, and different consensus algorithms. They have very little in common except being a form of cryptocurrency. Still, the name remains. Bitcoin still acts as the supreme driver of demand for cryptocurrency in general, and when its price rallies once again, the prices of altcoins follow it. This effect is known as the ‘altcoin season.’  

Technologically, regular altcoins work on the same principles as Bitcoin: they exist on a blockchain and use a consensus algorithm to make everything work. 

Regular altcoins that work on a classic fork system are independent cryptocurrencies, i.e. they can be seen as rivals to Bitcoin. Some of them indeed offer more flexibility and options than the first cryptocurrency. Others are at the foundation of infrastructural ecosystems that allow for creating smart contracts and decentralised autonomous organisations (aka DAOs).

Regular altcoins are not backed by any store of value; like Bitcoin, their value is determined by how the cryptocurrency works and how it came about, as well as the community’s demand for the coin versus the supply mechanism.  

What Are Stablecoins?

Stablecoins have a different role: they are designed to always maintain the same price, usually in USD, and they are backed by an equal amount of fiat currency or other stores of value. Stablecoins such as USDT and USDC act as fiat proxies to eliminate the need for users to withdraw their digital funds in between trades unless they are planning to cash out. 

Stablecoins are are usually used for the following purposes:

  1. Locking in profits on cryptocurrency exchanges without the need to withdraw actual US dollars or other currencies is most convenient if the trading process is still underway.
  2. Making cross-border remittances without the need to deal with banks. The recipient exchanges the stablecoins they received for the same amount of actual dollars minus fees.
  3. Investment in savings accounts or other lending options. Thanks to the high demand from traders and institutional players, such an investment may bring about over 5% of APY.

Investment Strategies for Stablecoins

A crypto savings account is arguably the best crypto investment strategy for those with low or moderate risk appetites. 

The savings account for crypto works on the same principles as a savings account in a traditional bank. When you create a fiat savings account, you entitle the bank to use your money for lending and get your share of the interest paid by borrowers. This is how the bank can add interest to your investment. However, APY on such investments is very low as the interest rates for credits or mortgages are not very high, although the risks here are also low.

However, you can have the best of both worlds when you entrust your crypto to a wealth management company such as Cabital. Risks are generally higher in crypto, so the interest rates are higher than in fiat saving accounts. Still, you can navigate the volatility of the crypto market by investing in stablecoins. Stablecoins also offer some of the highest APY: in most cases, it is nearly double the APY for Bitcoin or Ethereum due to the demand from traders and other borrowers. 

Cabital mitigates risks associated with crypto by enforcing its multi-level security and reliability assurance policies. Investor funds are safe with Cabital, while investors can enjoy high APYs.

What Is a Token in Cryptocurrency

Finally, numerous crypto projects issue tokens built on the foundation of a pre-existing cryptocurrency. These can represent a stake in the cryptocurrency company or to purchase a specific service. 

A token is a specific type of cryptocurrency. It is a fork of another cryptocurrency created to represent a particular project. There are different types of crypto tokens:

  1. A security token is a digital token similar in its properties to traditional securities. It is created as a means of fundraising for a project. In exchange for their investment, buyers of a security token obtain the rights for governance on the project. This type of token prevailed in 2017 but became relatively rare since the regulatory framework now applies the same rules to crypto tokens as it does to actual securities. In investment terms, therefore, a security token shall be seen and treated as an investment in a startup. Generally, they are very risky and should be avoided by those with moderate risk appetites.
  2. A utility token is not used for fundraising or governance. Instead, its purpose is similar to an in-game currency. It can be used to obtain some services on a platform that created the token. Such tokens are rarely seen as investments.
Table 1. Comparison of basic features on regular altcoins, stablecoins, and tokens
Table 1. Comparison of basic features on regular altcoins, stablecoins, and tokens

What Does It Mean When a Cryptocurrency Forks?

Many altcoins and project tokens are ‘forks’ of some other cryptocurrencies, and you’re likely to encounter mentions of cryptocurrency forks occurring. For example, Litecoin is a fork of Bitcoin, and most tokens issued back in 2017 were forks of Ethereum.

To understand forks, one has to know the basics of blockchain theory. In simple words, a blockchain is, well, a chain of blocks. It is arranged so that the longest existing chain is considered the true one. For that to happen, all nodes on the network must agree that it is indeed the longest chain, which is dictated by the set of rules they execute. 

However, a fork occurs if some node owners decide not to update their set of rules when everyone else does or update them without everyone else agreeing to it. Some nodes believe that chain A is the longest because the new rules make it look so, while others believe it is, in fact, chain B. 

What happens next depends on the details. In some cases, both chains become independent cryptocurrencies. In others, one of the chains is abandoned. As an investor, you want to stay up to date on forks, as these can impact the value of your investments. 

There are two types of forks:

  1. Hard fork. It produces two independent blockchains due to major changes in the rules, the code, or the protocol.
  2. Soft fork. They don’t imply any radical changes and don’t require software updates. Instead, they are changes to the cryptocurrency protocols that invalidate a branch of blockchain previously considered valid.
Table 2. The basic comparison of a soft fork and a hard fork
Table 2. The basic comparison of a soft fork and a hard fork

Top 5 Most Popular Regular Altcoins

At the time of writing, the most popular altcoins are the following ones:

  • Ethereum. The mother of all tokens, the world’s second most popular cryptocurrency, and the first ecosystem to introduce the concept of smart contracts. While Bitcoin is sometimes called digital gold, Ethereum took the title of digital silver from Litecoin a few years ago.
  • Binance Coin. It’s a token created by one of the world’s biggest cryptocurrency exchanges, Binance. It entitles its owner to certain perks and rights on the exchange.
  • Solana. Solana is the native token of the eponymous blockchain that is set to rival Ethereum. It is growing in popularity thanks to its arguable technological superiority to Ethereum.
  • Cardano. It’s the token of a decentralised platform that “allows complex programmable transfers of value in a secure and scalable fashion”. Like Ethereum and Solana, it’s a smart contracts platform that seeks to add more flexibility and agility to the concept.
  • XRP. It’s the currency that runs on a digital payment platform (RippleNet), which is run by Ripple. Ripplenet sits on top of an open-source distributed ledger database called XRP Ledger. XRP was designed by Ripple as a faster, cheaper and more scalable alternative to digital assets and existing fiat payment platforms like SWIFT.

Investment Strategies for Different Kinds of Cryptocurrency

While the exact options may vary and combine to some extent, different investment strategies have proved the most appropriate for each kind of altcoin. That said, your investment strategy can include the different types of altcoins for even better results.

  • Regular altcoins can be bought with the expectation of price growth or staked in a liquidity pool to bring some yield over time in addition to holding (or, in crypto, ‘hodling’) — remember to use fundamental analysis to choose the right coins!
  • Stablecoins can be lent with a certain APY to traders or other crypto users who require them for recurring operations. The high demand underpins their higher APY compared to other cryptocurrencies and fiat deposits. For example, Cabital offers leading interest rates for deposits in USDT, one of the most popular stablecoins out there. 
  • Project tokens are an investment themselves. They are the closest thing the crypto world has to shares and stocks, but they are by far the riskiest investment option and mainly suited to investors with a high risk appetite.

How to Diversify Your Crypto Portfolio

Diversifying your portfolio is important because just like in traditional finance, investing in different currencies is considered a smarter approach in investing. Simply put: putting all the eggs in the same basket is not a very good idea. It is wise to combine different investment methods, such as maintaining an interest account for USDT and your BTC holdings with Cabital, while yield farming a regular altcoin through lending platforms or liquidity pools with DeFi, and ‘hodling’ an up and coming coin as a long-term investment.

There is no single investment recipe for all cryptocurrencies, so a strategy that works with one type of cryptocurrency can easily be inappropriate for a different one. 

With a three-layer safety assurance system combined with strategy approval by experienced traders and investors, you can sit back, relax, and enjoy a steady flow of passive income as your crypto works for you.

This article has been prepared by Cabital Fintech (LT) UAB  (the “Company”) and is general background information about some of the Company’s activities at the date of this presentation.

This article does not contain all the information that is or may be material to you and should not be considered as advice or a recommendation to you in respect of the holding, purchasing or selling of digital assets and does not take into account your particular objectives, financial situation or needs. This article has been made to you solely for information purposes. This presentation may be amended and supplemented as the Company sees fit, may not be relied upon for the purpose of entering into any transaction and should not be construed as, nor be relied on in connection with, any offer or invitation to purchase or subscribe for, underwrite or otherwise acquire, hold or dispose of any digital assets, and shall not be regarded as a recommendation in relation to any such transaction whatsoever. The contents of this presentation should not be considered to be legal, tax, investment or other advice, and you  should consult with your own counsel and advisers as to all legal, tax, regulatory, financial and related matters concerning an investment in or a disposal of such digital assets and as to their suitability for you.

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