Let's stop looking at prices and charts and take the opportunity to invest a little bit of our time in learning about those cryptocurrencies that we are investing our money in. In this article, I want to talk about the different types of cryptocurrencies.
Source: Designed by myself using XMind
Why Should You Care?
First, because you should "Never invest in a business you cannot understand", Warren Buffett. I believe that understanding the different types of cryptos can help you decide which ones have a better chance of surviving and thriving.
Second, Most Altcoins are Shitcoins
At the time of writing this article, there are 1,564 cryptocurrencies listed on coinmarketcap.com. I think we can all agree that most of them will perish eventually. Bittrex is delisting about 80 coins this month. I am sure many more will follow. Unfortunately, most altcoins have very little to offer. They have ridden the hype and the hype is over. Only solid projects shall survive and thrive.
Therefore, if you are planning to invest in cryptos, you better pick those projects that are likely to stay. To do that, we need to understand the different types of tokens because that would help us study them and determine the characteristics they need to succeed. I am giving a brief introduction here to the different types, and I am planning to examine each type in more details in future posts.
Not All Cryptocurrencies Are Actually Currencies
This is the first thing you need to understand about cryptocurrencies. Not all of them are actually currencies. In fact, currencies are only on kind of tokens, as you will see very soon.
You may ask: Then, why do we call them that? It's simple. Bitcoin is a cryptocurrency and the whole class of assets got named after it. IMO, we should call them a more general name like crypto assets or crypto tokens. This is very important because it means that not all cryptos should be like Bitcoin to succeed. The required set of attributes is different for each type of crypto assets.
Let's Cut To The Chase!
I have surveyed many cryptos projects, and I think we can classify them into seven major types. Of course, under each type, there are many sub-categories. The major types I have found are:
Those are intended to be digital money. They are similar to your fiat money (like USD and EURO) but with many extra features. Some of them target specific markets and some have special powers like privacy. Of course, Bitcoin is the prominent example of this type. Some other examples include:
- Bitcoin Cash, Gold, et al.
Initially, the blockchain technology was created for Bitcoin. However, once people started to realize the benefits of the blockchain technology, they started to think of many other uses for it. Unfortunately, they faced a problem: building a blockchain can be very difficult, and that was a deal breaker for many projects.
The purpose of cryptocurrency platforms is to make the blockchain technology available to whoever needs it. They allow you to create your own crypto token on top of the platform without needing to tackle the challenges of building your own blockchain. Most of these platforms provide additional features like smart contracts.
The most obvious example for such projects is Ethereum. Other examples include:
Tokens of this type are connected to physical real-world assets. Each token might represent a gram of gold or silver, a barrel of oil, a fiat currency, real estate or even a work of art. For example, each USDT represents one U.S. Dollar. An interesting example was the published recently by @wavesplatform, where an entrepreneur tokenized himself!
Source: designed by myself :)
The term "asset tokenization" refers to the process of creating a digital token to represent some physical asset. This type of assets is becoming very popular because it is much easier and cheaper to trade a digital token than to trade the physical asset. Some examples of such tokens:
- Power Ledger
To Be Continued...
There are four more types to go, but this has become too long already. So. I will stop here and continue in part 2, God willing.
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