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What Are The 4 Different Types Of Cryptocurrency? With Examples

02/16/2023 16:47:41 +0000
Anyone who is familiar with cryptocurrency knows about Bitcoin and other popular online assets, however, there are actually many different types of cryptocurrency that are important to know if you want to get started in crypto.
 
There are plenty of subcategories, too, such as NFTS and altcoins, but you need to know the basics before diving into this volatile market.
 

In this article, we'll explain the different types of cryptocurrency, including examples and how each type is used.

By the end of this article, you should have a better understanding of the four main types of cryptocurrency.

The Main Types Of Cryptocurrency
There are thousands of cryptocurrencies available to buy and sell, and while they all work as online currency, there are differences between the various types.
 

There are four main types of cryptocurrencies: payment cryptocurrencies, utility tokens, central bank digital currencies, and stablecoins.

Below, we'll go through each in more detail.

1. Payment Cryptocurrency
Payment cryptocurrency is the first major type of cryptocurrency.
 
The first successful cryptocurrency used for digital payments was Bitcoin, which is possibly the most well-known cryptocurrency.
 

A payment cryptocurrency serves as a means of payment as well as a peer-to-peer electronic cash to facilitate transactions, as the name suggests.

Generally speaking, this form of cryptocurrency has a specialized blockchain that exclusively supports that purpose because it is intended to be a general-purpose currency.

This means that these blockchains cannot support the operation of smart contracts or decentralized applications (Dapps).

Additionally, these payment cryptocurrencies frequently include a cap on the total quantity of digital coins that may ever be produced, which naturally deflates them.

The value of the digital currency is anticipated to increase as the amount of these digital currencies that can be mined decreases.

Cryptocurrencies that are used as payment methods include Bitcoin, Litecoin, Monero, Dogecoin, and Bitcoin Cash.

2. Utility Tokens
Utility tokens are the second most popular type of cryptocurrency.
 
Any digital asset that runs on top of another blockchain is a token.
 
The idea of allowing other crypto assets to leverage its blockchain was originally introduced by the Ethereum network.
 

Tokens, like Ether on the Ethereum network, are not subject to caps, which is a significant distinction between them and payment cryptocurrencies.

Because more and more of these tokens are produced, the value of this digital asset should be expected to decline, just like the value of a fiat currency in a nation that is perpetually running its money printing press.

As a result, these cryptocurrencies are inflationary.

A use case, often known as a specific purpose or function on the blockchain, is served by a utility token.

To write something to the Ethereum blockchain, for instance, transaction fees must be paid.

Ether can also be used to create and buy Dapps on the network.

3. Central Bank Digital Currencies (CBDC)
The central banks of several nations have released digital currency, which is a type of cryptocurrency.
 
CBDCs are issued by central banks in the form of tokens or electronic records linked to the currency and pegged to the national currency of the country or region issuing the CBDC.
 
These are based on the same blockchain technology as cryptocurrencies, which should improve payment efficiency and possibly cut transaction costs.
 

Since central banks are the ones that issue this digital money, they retain complete control and regulation over the CBDC.

For many countries, the adoption of a CBDC into the financial system and monetary policy is still in its early stages; however, it might spread over time.

Many central banks throughout the world are currently developing their use of CBDCs, but many of them are built on the same ideas and technologies as cryptocurrencies like Bitcoin.

The currency is similar to other well-known cryptocurrencies in that it is issued in token form or with electronic records to show ownership.

The advantages of decentralization, pseudonymity, and absence of censorship are forfeited by CBDC holders, however, as these cryptocurrencies are effectively controlled, monitored, and regulated by the government that issues them.

The "paper trail" of transactions that CBDCs keep for the government allows it to levy taxes and other forms of economic rent.

On the plus side, it can be fairly anticipated that CBDCs will hold their value over time or, at the very least, mirror the pegged physical currency in a stable political and inflationary context.

4. Stablecoins
Stablecoins are intended to act as a store of value due to the volatility that is present in many digital assets.
 
Despite being based on a blockchain, they retain their value since they can be converted into one or more fiat currencies.
 
Stablecoins are therefore truly anchored to a real currency, most frequently the US dollar or the Euro.
 

To ensure the value of the cryptocurrency, the business that oversees the peg is obliged to have reserves.

Investors may utilize stablecoins as a means of savings or as a medium of exchange that enables regular value transfers free from price fluctuations are drawn in by this stability.

The most well-known stablecoin is Tether's USDT, which ranks behind Bitcoin and Ether as the third-largest cryptocurrency by market capitalization.

Since the USDT is linked to the US dollar, its value should remain constant at one USD.

This is accomplished by backing each USDT with reserve assets in the form of cash or cash equivalents equal to one USD.

Holders can exchange their fiat currency for USDT or directly redeem their USDT with Tether Limited for $1, less any fees Tether levies.

Tether also makes money by lending money to businesses.

However, there is no control or regulation of stablecoins by the government.

Another well-known stablecoin, TerraUSD, and its twin coin, Luna, both fell apart in May 2022. Only 11 cents remained of TerraUSD's $1 value.

The issue with TerraUSD was that it was backed by its own currency, Luna, as opposed to investing reserves in cash or other safe assets.

Luna's value dropped from over $80 to a tiny fraction of a cent during its meltdown in May.

TerraUSD's peg to the dollar was broken as holders of stablecoins rushed to redeem them.

Once again, the lesson is to exercise caution before purchasing any stablecoins by reading the whitepaper and becoming familiar with how the stablecoin manages its reserves.

Final Thoughts
The main takeaway from this article is that there are indeed four main types of cryptocurrencies, and they each serve a different purpose.
 
It's easy to lump them all together into one category, but it's important to know the specifics of each type of currency to effectively use it.
 
With this guide, you should have a better understanding of the different types so you can begin to dip your toe into the world of crypto.
About the Host
Sophie Howard is the founder of Aspiring Entrepreneurs, a community designed to help people develop the skills and confidence to build a business and a life that serves them. Sophie began online in 2013 with an Amazon firm, which she sold for more than $1 million in 2015.

Sophie has lectured on stages all around the world, encouraging and teaching other ambitious entrepreneurs. She has established instructional programs educating thousands of students how to sell online, in addition to releasing over 1000 products.

Sophie has also written a book titled "Aspiring Entrepreneurs: A Guide to Finding Your Best Path to Financial Freedom."
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