Crypto
Bybit Learn
Bybit Learn
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Jul 19, 2022

What Are The Different Types of Cryptocurrency and Tokens?

All hail to this brave new crypto world! You may or may not have heard of Ethereum, but surely you know something about Bitcoin. But, what if I tell you that there are many other types of cryptocurrency out there? Ranging from web3 tokens, ICO tokens, ERC20-tokensDeFi tokens to stablecoins, you’ll be surprised what this dynamite crypto space has to offer.

With the altcoin season on the bull and Bitcoin prices continue to surge, especially when Elon Musk changes his Twitter bio to #bitcoin. The crypto market like a colossus and the industry will continue to blossom into something even more substantial. 

So, if you’re curious about what’s next after Bitcoin, read on as we dissect the different types of cryptocurrency. Perhaps, you’ll also find some insights to diversify your investment portfolio.

Coin litecoin bitcoin closeup beautiful background concept digital cryptocurrency payment system

What Is Cryptocurrency?

Just like the type of fiat currency (your usual dollar bill), cryptocurrency is decentralized, relying only on the peer-to-peer community computer network made up of users’ machines or “nodes.” That means it is independent and not governed by a central bank or monetary authority. Also known as virtual currency or digital currency, cryptocurrency is often recognized as a medium of exchange for transactional purposes. 

In contrast to U.S. dollars, cryptocurrency ownership is usually recorded on a blockchain that uses a few vital components. In the case of Bitcoin, it’s a ledger distributed across every node in the network, encrypted transactions, timestamp server, Proof-of-Work consensus, and the network of running nodes itself. 

Sounds too complicated? 

Such a setup extends the capability of cryptocurrency beyond just regular money, as you’ll see in the case of crypto tokens. But more importantly, being the first currency built differently, Bitcoin started a big decentralization trend where governments and traditional banks no longer have a say in your privacy.

The Difference Between Coins and Tokens

There are three types of cryptocurrency out there. That includes bitcoin, altcoins, and tokens. 

Bitcoin

In 2008, an anonymous developer known as Satoshi Nakamoto published a whitepaper describing the first electronic cash independent of governments or banks— Bitcoin (BTC). Unlike traditional online payment, it promises a lower transaction fee, and it’s completely decentralized. 

There are no physical bitcoins, but only the balances kept on a decentralized public ledger system, known as a blockchain. These balances of Bitcoin tokens are subsequently kept using public and private keys to decrypt the encryption. To put it in simpler understanding, the public key is like your bank account number for you to send or receive bitcoin. In comparison, the private key is a secret key for you to authorize a bitcoin transmission.

As a cryptocurrency, Bitcoin is accepted as a means of payment for products sold or services provided that works just like fiat currency. Although it’s decentralized, the most intriguing part of bitcoin is its competitive exchange rate against the dollar attracting potential investors and traders. Despite it not being legally tendered, Bitcoin remains a popular type of cryptocurrency and has inspired many creators to launch their cryptocurrencies, collectively referred to as altcoins. 

Altcoins

In the beginning, Bitcoin was the only cryptocurrency, but later, other projects started to emerge. Hence, the born of altcoins. Have you heard of Ethereum, LitecoinRipple, Bitcoin Cash, or Monero? All of them and many others were born out of their native platforms, native blockchains, and all of them were slightly different from the Bitcoin blockchain.

These newly-built coins like Fantom were mostly developed for the single-purpose use case, to serve as a digital currency that somehow could be better than Bitcoin – at least according to the developers of these projects.

To put it simply, they were made to compete with Bitcoin by changing the rules to appeal to different users. And although some of them do challenge Bitcoin after all these years, ironically, the good old 10-year-old grandpa still heavily dominates the market. Simultaneously, all the other types of crypto coins are popularly styled now as altcoins or alternative coins.

Tokens

Now, crypto tokens are normally developed to kickstart the crypto-related ecosystem. You know, it almost works like bonus miles. You can’t buy a loaf of bread for accumulated miles, but you can buy a plane ticket, and the more miles you have, the better it is for the airline’s ecosystem. The same approach works with crypto tokens!

No worries, you’ll find some practical examples later in the article. For now, just understand that crypto tokens don’t necessarily have their native blockchains and can be easily developed on top of other platforms. Compared to crypto coins that play a currency’s role, tokens often serve a particular function like voting for changes or rewarding people for participating in the network.

The Types of Crypto Tokens

Based on which functions crypto tokens serve, they can be segregated into several categories:

ERC-20 Tokens

One significant difference between ERC20 tokens and all the other token types is that ERC20 tokens are created on top of the Ethereum blockchain. 

The truth is, ERC20 is not even a token but more of a token standard. Say a company decides to launch a dApp, a decentralized app, on the Ethereum platform. For their token to work, they need to produce it in agreement with the ERC20 standard that defines a set of rules.

Hence the tokens below can all be considered ERC20 as long as they are launched on the Ethereum platform. Below we will explore different categories of tokens, and some tokens can be in more than one category as well.

Exchange Tokens 

One way for a crypto trading platform to differentiate itself from its competitors is the variety of currency pairs and trading types, such as OTC, margin trading or futures trading, and, indeed, native exchange tokens. 

These tokens are value-adding because users can use them to pay fees, buy and sell other cryptocurrencies or power certain operations such as community voting for new coin listings.

Arguably, the best known and most liquid of all exchange tokens is the BNB token for the Binance exchange. Still, there are, of course, also other exchange tokens, such as Huobi Token (HT), KuCoin Shares (KCS), Bibox Token (BIX), etc.

DeFi Tokens 

DeFi tokens were all the hype during the summer of 2020, known as DeFi summer. DeFi stands for Decentralized Finance and refer to decentralized applications involving finance, such as trading, lending and borrowing, derivatives, synthetics, insurance, and more.

DeFi TVL has risen from $1B in 2020 to over $100B in 2022 amid Bitcoin’s bull market. So, does that mean it’s a potential channel to disrupt the crypto niche? If yes, how so?

Believe it or not, the crypto niche is still centralized. Take Binance for an example; it still belongs to a group of people that contradicts Satoshi’s vision.

What defines DeFi is its aim to steer away from the traditional crypto platforms. The DeFi projects aim to enable users to borrow and lend within a peer-to-peer network, leverage the loans, and “farm” tokens for simply being active.  

Those “farmed” tokens or tokens produced on top of those platforms are DeFi tokens that include but are not limited to Chainlink (LINK), Uniswap (UNI), Aave (AAVE), Dai (DAI), and more. 

Governance Tokens

Governance tokens are used for the purpose of making decisions that will dictate or govern a protocol's future. Token holders have voting power, and thus a say in decisions about new feature proposals and changes to the project's governance system.

There are more and more decentralized protocols that boast on-chain governance that allows governance token holders to influence a decision through the in-place voting systems. As Dapps are on the rise, governance plays an essential part to create a synergy where stakeholders and developers can shape the future of a protocol together through the most transparent discussion and debate.

For example, AAVE token gives its community holders the ability to vote on key changes to the AAVE protocol. That means, if you hold AAVE, you have a say to favour or vote against the proposed changes or an upcoming proposal.

Real World Asset Tokens 

Also known as a security token, this type of token could be the next big thing in crypto as soon as regulators worldwide decide how to regulate it. Real World Asset tokens are responsible for real world asset going through “tokenization” – the process that helps turn real-world assets, such as real estate, into digital tokens.

Say, as an investment, you want to purchase a fraction of an apartment in New York, but not a whole apartment because it’s too expensive. You can do so by buying digital assets that can be easily divided. 

Security tokens have been a buzzword for quite some time now, but it takes a good deal of proper regulation and standardization to put them to use. Hence, we haven’t heard much of them.  

For example, PAXG token, or Pax Gold, is an asset-backed token where one token represents one fine troy ounce of a London Good Delivery gold bar, stored in professional vault facilities. Anyone who owns PAXG has ownership rights to that gold under the custody of Paxos Trust Company, making it a real-world asset token.

ICO Tokens 

Approximately three years ago, ICO (Initial Coin Offering) made its appearance, and it took off. Crypto projects, sometimes of questionable provenance, were looking to raise money, and for that, often created a new coin as a way to fundraise. To put it in simpler terms, an ICO is a source of capital for startup companies.

Any interested investors can buy into the offering and receive a new crypto token issued by the company as an exchange. Through the fundraising campaign, companies will accumulate enough funds to keep the development process. Whereas these tokens would typically be exchanged for BTC and ETH. Mainly because they are easier to exchange for other currencies, and the market liquidity is usually higher.

Today, ICO has dwindled into thin air as the market is changing.

Web3 Tokens

Web3 tokens aim to decentralize our current internet infrastructure so that it is owned by the people instead of relying on existing centralized Web2 giants. Web3 tokens will aim to bring a fairer internet standard to everyone. 

Did you know that there are more than 700,000 miles of submarine cables in use today? Google has 63,605 miles and 8.5% of all cables to its name; Facebook – 57,079; Amazon – 18,987; Microsoft – 4,014. These top companies control a significant amount of the submarine cables which make up an important infrastructure of our internet.

Web3 tokens are tokens developed on top of those crypto platforms that aim to stop this trend. And they reward users of their platforms with Web3 crypto tokens for contributing to the development of the other trend.

For example, with the decentralized project Filecoin, the network’s users store other users’ data for the reward in Filecoin tokens. Similarly, Arweave provides an inexpensive on-chain storage solution that allows users to archive information on websites forever.

The ThreeFold token is awarded to participants who authorized their node in the ThreeFold ecosystem which stands for the Internet free of global corporations. 

Utility Tokens

Utility tokens refer to an asset integrated with a blockchain that allows users to purchase a good or service in the future. Unlike security tokens, utility tokens are not a direct investment but rather sustain the platform’s economy through the service provided. 

For example, Binance Coin (BNB) is a utility token boast on its payment method for the fees related to trading on its exchange. When you use this utility token, you can receive discounts when paying for the trading fees, using it for travel expenses, gift cards, and more. Ultimately, the utility coin is to boost the development and the ecosystem of the platform.

Do note that utility tokens are generally more versatile. That means they’re flexible to be integrated for many purposes, and can function as other type of tokens as well. A common example is that utility tokens are also governance tokens.

Non-fungible Tokens

Non-fungible tokens (NFTs) are digital certificate of ownership to a unique asset on the blockchain. It is popularly used to represent a work of art, but can also be used to represent a wide variety of assets, from photos, videos, audios, collectibles, real estate, virtual worlds, memes, GIFs, digital content like posts and tweets, fashion, music, paintings, drawing, academia, political items, film, memes, sports, games, or basically any digital file of value on the blockchain.

The first NFT was created in 2015 on the Ethereum blockchain. The digital signature is created such that it cannot be exchanged for another. They allow the holder to own an original item of a limited supply, originality, or edition. Because of their perceived high value, the issues may be limited edition or impossible to reproduce.

Best NFTs are those where only one person or a few can own an original. It helps artists, creators, and collectors, mainly, to sell their items. They can be bought and sold in NFT marketplaces like OpenSea, Rarible, Foundation, and Decentraland. The application includes popularity, monetizing wares, for royalty payment such that artists will receive a percentage of sales whenever the art is sold to a new user, partial ownership of land and expensive assets, auctioneering to raise capital and money such as Charmin and Taco Bell auctioneering of themed NFTs, creating unique moment memory or preserving histories, for market motives like trading, and celebrity issuing. We can differentiate them from Initial Exchange Offering tokens, which are normal Initial Coin Offering tokens offered through a crypto exchange promotion.

Examples of NFTs: Bored Ape Yacht Club (BAYC), Blockchain Gaming Assets, Metaverse Land, Twitter Founder Jack Dorsey’s first tweets NFT, Beeple's The First 5000 Days, and crypto kitties.

Stablecoins

Stablecoins, as the name suggests, are tokens of a stable value almost all the time. The most popular stablecoins are pegged to the dollar, such as USDC and BUSD, and they are often backed by a stable or fairly stable asset like fiat currency or short-term US Treasury bills.

There are also other less popular stablecoins such as euro stable coins, gold-backed coins, and other precious metals, oil, and commodity-backed tokens.

Stable tokens help the world to rid of volatility in assets or even other digital currencies. They are backed on a defined ratio and the asset backing them must be kept in reserves as per the defined ratio.

We have those backed by fiat, crypto, commodity, but there are also algorithmic stablecoins which use software and rules to maintain the stable peg with fiat or another asset, but most have failed so far.

Examples of stablecoins:

Asset-backed: Tether, TUSD, Gemi Dollar, USDC, BUSD, and Paxos.

Commodity backed: Tether Gold (XAUT), and DigixGlobal (DGX), also serve as stablecoins backed by gold.

Algorithmic-backed: stable: Ampleforth (AMPL), USD Terra (UST), Empty Set Dollar (ESD), Frax (FRAX).

Privacy tokens

As the name suggests, privacy coins are cryptocurrencies used for privacy applications because their code encourages better privacy than would Bitcoin and mainstream crypto.

There are many reasons one would need better privacy in crypto transactions – first as a right to privacy, security investigations, and highly sensitive transactions, although they are also used for crime and scams.

These cryptocurrencies incorporate different methods of ensuring transaction privacy, e.g. coin mixing, anonymity techniques like CoinJoin, and offline transactions. This is in addition to techniques employed in mainstream crypto e.g. lack of tying real-world names with crypto addresses and blockchain encryption.

There are even smart-contract privacy networks that are similar to using Ethereum but everything is privacy-enabled by default, such as Secret Network.

Examples of privacy tokens: Secret Network, Monero, Zcash, Dash, and Horizen.

Top Ranking Cryptocurrencies

So what are those the best cryptocurrencies that are worth your time and investment? Here’s what we think:

1. Bitcoin (BTC)

Five years ago, Bitcoin was merely seen as an investment for retail investors to profit from the exchange rate. This time, major institutional investors such as multimillion intelligence company - MicroStrategy, has join the market, buying over $1 billion worth of Bitcoin purchases in 2020. Elon Musk, the founder of Tesla, has also previously accepted Bitcoin as a form of payment for their electric vehicles, with plans to do so once again.

The last year has been a roller-coaster ride for the crypto market. Bitcoin’s prices have surged more than 200%, exploding to all-time highs of $69k in May of 2021, but has since dropped off by 60% due to economic inflation and tightening measures. Today, Bitcoin is trading on an average of $19,000 to $22,000.

Buy & Trade BTC on Bybit Spot/Derivatives Market

2. Ethereum (ETH)

  • All-time high$4,878.26
  • Circulating Supply: 119,734,592 ETH
  • Max Supply: No Max

Ethereum has been actively riding the bull waves alongside Bitcoin. The star of 2021 DeFi summer is slowly transitioning into the new Proof-of-Stake consensus algorithm in Ethereum 2.0. But why should you even care? 

On a global scale, the annualized carbon footprint of Bitcoin equals the carbon footprint of New Zealand, 36.95 Mt CO2. That is all because the Proof-of-Work consensus forces Ethereum to deal with the scalability issues.

Once the merge is successful, ETH will be able to host even more DeFi projects and it will be hard to imagine anyone who can challenge Ethereum’s founder, Vitalik Buterin, on his road to market dominance.

Buy & Trade BNB on Bybit Spot/Derivatives Market

3. Tether (USDT)

  • All-time high: $1.32
  • Circulating Supply: 65,876,317,670 USDT
  • Max Supply: No Max

Tether, widely known as USDT, is a stablecoin that mirrors the price of the U.S. dollar. What does it mean? It has a stable value because it’s pegged to the USD and removes the volatility from the equation. This stability is achieved via maintaining a sum of dollars in Tether’s reserves that is equal to the number of USDT in circulation, or at least that's what Tether claims because USDT is pegged not only to the U.S. dollars but to other reserves too.

According to Tether, all of their tokens are 100% backed by their reserves including traditional fiat currencies and cash with other assets and receivables from loans made by Tether to third parties.

4. USD Coin (USDC)

  • All-time high: $1.17
  • Circulating Supply: 54,800,861,821 USDC
  • Max Supply: No Max

In 2018, Circle announced the release of a fiat-backed stablecoin called USD Coin. Similar to USDT, USDC is a stablecoin pegged to the US dollar and backed by US dollars held in reserve. Their explosive growth came amidst the conditions of the coronavirus pandemic, when people started using it as a hedge against the fiat currencies. The development of the DeFi sector also helped to drive a massive amount of traffic to USDC.

The stablecoin has become one of the leading cryptocurrency assets by deposited amount on different DeFi platforms. At the time of writing, the circulating supply of USDC has exceeded 54 billion after it grew by more than 500% in 2021.

5. Binance Coin (BNB)

  • All-time high: $$690.93
  • Circulating Supply: 163,276,974 BNB
  • Max Supply: 165,116,760 BNB

Launched in 2017 through an ICO, Binance Coin is the native token of the BNB Chain ecosystem. Users that hold BNB on the Binance exchange are given a discount on trading fees. Within the last year, BNB's stellar performance gave its early investors a whopping 1,300% return, causing its popularity to rise quickly as it became one of the crypto market's favorite coins.

Despite the recent crash in the crypto markets, its performance has been quite impressive. Today, BNB leads the sixth largest token - BUSD, which happens to be the stablecoin for the BNB Chain, by a whopping $24 billion in market capitalization.

Buy & Trade BNB on Bybit Spot/Derivatives Market

Conclusion

Now you know almost everything you need to know about different types of cryptocurrency existing out there! While talking about multiple cryptocurrencies existing in the market, there are nearly 5,000 different coins out there. When cryptocurrency is more widely adopted by the mainstream, there’ll be even more altcoins and tokens. Ultimately, understanding these fundamentals will be great to help me deciphers a better choice for your future investments.