What Are the Different Types of Cryptocurrency?
Find out about the different types of cryptocurrency and the investment strategy for each.
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.
The most widespread types of cryptocurrencies are as follows:
Accordingly, they all have different roles in the cryptocurrency ecosystem, and we’ll cover these roles in greater detail below.
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.
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:
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.
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:
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:
At the time of writing, the most popular altcoins are the following ones:
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.
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.
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