What Types Of Cryptocurrencies Are There and What Are The Differences?

Currently, there are more than 21,000 cryptocurrencies on the market, but only a select few take up most of this market cap.

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With this huge selection of tokens to choose from you might think that there is a lot of diversification among them, but to some extent, you will be mistaken. Despite there being different types of cryptocurrencies, most of these tokens share similar characteristics, but there are also some differences, which make them stand out from each other.

Different cryptocurrencies have been created for different reasons. This gives these tokens different usages and purposes, so when dealing with these tokens. But exactly what are the differences between these cryptocurrencies?

Utility Tokens

Utility tokens are one of the most common cryptocurrencies on the market. These are tokens that are used for completing specific tasks. For example, Ethereum is a utility token for completing different tasks on the Ethereum blockchain, such as paying gas fees. The price of these utility tokens greatly depends on the success and popularity of the project or network it is associated with, as more people use the network, more people use this token, thus increasing its value. This is why Ethereum is the second largest cryptocurrency in the world, only beaten by Bitcoin, as it is the largest utility token in the world.

Security tokens

The second type of cryptocurrency is security tokens, also known as governance tokens. These cryptocurrencies are somewhat like stocks of the blockchain ecosystem and give users different ownership rights. Most of the security tokens are associated with DAOs, or other similar projects where no single entity stands at the top and everything is decentralized. When you own a governance token of a certain blockchain, network, or project, you own part of that blockchain. For example, let’s imagine that there are 100 security tokens of one blockchain, and we own 10 of them. What this means is that our share in this blockchain is 10% and we are given voting rights in accordance with this share. Each security token will give you a voting right on the blockchain it is associated with. Meaning that if there is voting about changing or implementingsomething to the blockchain, people who hold the governance token will receive these voting rights, and the value of their vote will depend on the number of tokens they own.

Stablecoins

Another very common type of cryptocurrency is stablecoins. Stablecoins are versions of fiat currencies but on the blockchain. As the name might suggest these are the stable cryptocurrencies that always maintain their value; most commonly 1 crypto equals 1 USD and they are like forex of crypto. Most of these stablecoins are pegged to the USD and maintain their value by having an equivalent amount of USD in reserves as the number of tokens in circulation. These are probably the most common currencies when it comes to making purchases using crypto as well as trading with them since most crypto trading pairs have stablecoins as quota currencies. The beauty of these tokens is that they can operate on different blockchains simultaneously without the need of wrapping them. For example, USDT, which has its original Tether network, can make transactions on Ethereum, EOS, Bitcoin, and other blockchains as well.

Meme Tokens

While meme tokens can fall into both utility and security categories, they are more commonly referred to as just meme tokens. As the name suggests these are cryptocurrencies that have been created as a joke to poke fun at something or someone and most of these tokens don’t hold any significant value. The exception to this is Doge and Shiba Inu, as these meme tokens have somehow managed to break stereotypes and become part of the top 20 most valuable cryptocurrencies on the market.

Since meme tokens are created to make fun of something, if that something is trending at that moment and the token gets slightly popular, people start to buy these meme tokens, increasing their value significantly. But once the price reaches a certain point, people start selling to make profits, quickly making these tokens practically worthless again. These tokens are commonly used for pump and dump schemes.

Wrapped Tokens

Wrapped tokens are sort of clone tokens that share the same characteristics and value as the original ones but they operate on a different blockchain than the original one. These wrapped tokens usually are named “wrapped” followed by the name of the crypto that has been warped. So if you want to make transactions on the Binance chain but want to, or need to, use Ethereum, you can wrap your Ethereum into Wrapped Ethereum, also known as WETH, and make transactions this way. This is ineffective but still the only way to make huge-scale cross-blockchain connections and avoid using some unoptimized third-party services. Wrapped tokens share the exact same value as the original ones, and they can also be considered a form of stablecoin (sort of), but instead of being pegged to USD, they are pegged to cryptocurrencies.

Which of these tokens is the best type to use or trade with?

When looking at these tokens and thinking about which is the best, the answer to this question will depend on what you need them for. If you are someone who just wants to trade with cryptocurrencies and prefers to do it with large cryptos, then using utility tokens is the best option, as almost every major cryptocurrency is a utility token.

While if you are interested in blockchain technology and want to have a say on what happens to different blockchains and networks, the governance tokens are the way to go. Stablecoins are mostly beneficial for businesses and people who make purchases using crypto. But, it is generally advised to not be stuck on only one crypt, as each token has its own uses. Since these tokens share quite a lot of similarities, the diversification of your assets is pretty hard and the only way to do so is to deal with multiple types of cryptocurrencies.

FAQs on different types of cryptocurrencies

What is the most common type of cryptocurrency?

The most common type of cryptocurrency is utility tokens. Most blockchains and networks will need some sort of token in order to complete certain tasks on the blockchain, therefore, the utility tokens are the most needed and created cryptocurrencies. Cryptocurrencies such as Ethereum, Solana, and BNB are all utility tokens capable of completing different tasks.

Is Bitcoin a utility token?

No, Bitcoin is not a utility token. In fact, Bitcoin is a coin rather than a token. Bitcoin is more of a payment token than a utility token, and giving it a specific type name is not correct. Since Bitcoin is the first cryptocurrency that has ever been created, it was not defined to exactly what purpose it had other than challenging the traditional banking system and fiat currencies.

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