Different types of Cryptocurrency: Newbies Guide

Did you know that there are different types of cryptocurrencies? Yes, there are different types of cryptocurrency. Although all can be traded, not all can be traded on all existing crypto exchanges, and not all are designed to be traded for money.

Disclaimer:

The information provided about different types of cryptocurrencies is based on experience and research. It is for educational purposes only and should not be considered financial advice or an endorsement of specific cryptocurrencies. Cryptocurrency investments involve risks, and individuals should conduct their own research and consult with professionals before making any investment decisions. The market is dynamic, and information may change. Users are solely responsible for their actions and should exercise caution when engaging in cryptocurrency activities.

Note: I am not a crypto expert. Any expert reading this can freely give their opinion about my article. The purpose of this article is to help newbies understand crypto much better, without getting confused by technical terms mostly used by crypto enthusiasts.

I'll try to explain everything in a way that you can understand. I know that sometimes crypto is very hard to understand because most articles you see use terminology that you don't know.

Why does cryptocurrency have different classifications?

Cryptocurrencies have different classifications because they serve different purposes. The term "use" refers to the purpose for which they are created. To give you a simple example, let's use the crypto of my favorite game, Splinterlands.

As far as I know, Splinterlands has three tokens: $SPS, $DEC, and $VOUCHER.

$DEC was the initial reward and utility token of Splinterlands. You get DEC when you win battles, and at the same time, it also functions as a utility token because you can use it to rent and buy cards. Correct me if I'm wrong, but I think the classification of DEC has changed to just being a utility token.

$SPS is the governance token of Splinterlands. The more SPS you hold in-game, the stronger your vote is.

$Voucher is also a utility token of Splinterlands, and it still is because you need vouchers to purchase packs in-game.

In simple words, every token does not have the same purpose because they have different uses. Because of this, some crypto is only good to convert to money when you will not use them anymore.

Why? because of transaction fees, other games in other blockchain will cost you a lot of transaction fees just to transfer and convert your tokens.

Unless you can predict a downtrend where you can trade them first for a stable coin and buy back again when the market is already stable.

Still, you won't cash it out because you need to buy those tokens again since you still need to use them.

What are the different classifications of crypto?

Cryptocurrencies are basically classified according to their use. If they are used for voting, then they must be governance tokens. If they are used to purchase something or pay transaction fees, then they fall into the category of utility tokens.

I will try to classify them into smaller groups, removing classifications that overlap each other, like utility, exchange, and platform tokens, because I think their purpose is too similar.

Here are the different classifications of crypto and examples of cryptocurrencies that fall into each category:

Payment Tokens: These cryptocurrencies aim to function as digital currencies or mediums of exchange, similar to traditional fiat currencies. For example, Bitcoin (BTC) is the most well-known example in this category. As of today, I know that some establishments accept BTC as a form of payment. Another example is XRP, which is often used for cross-border remittances and global money transfers. I think they are also classified as currency tokens because of the fast transaction, meaning if you use it to pay, the merchant will receive it immediately.

Although most crypto can be traded for cash, and some might accept it as form of payment, that doesn't make it a Payment Token.

Not all tokens are easily transferable and not all tokens can be immediately traded to cash.
Image Source: Photo by Traxer on Unsplash

Utility Tokens: These tokens are designed to pay for specific products or services within a blockchain-based ecosystem. Their usual purpose is to serve as a form of internal currency within a decentralized application (DApp). Examples include BNB and ETH, which are used as transaction fees when transferring crypto.

Image source: Photo by Jievani Weerasinghe on Unsplash

Stablecoins: Stablecoins are cryptocurrencies that are pegged to a specific currency, usually the dollar. The purpose of these coins is to manage volatility in times when the market is unstable. Examples include the popular stablecoins Tether (USDT) and USD Coin (USDC).

Photo by DrawKit Illustrations on Unsplash

Governance Tokens: Governance tokens grant voting power to the holder, allowing them to have more votes in proposals. One example is SPS, the governance token of Splinterlands.

Asset-Backed Tokens: These tokens derive their value from real-world assets such as gold, real estate, or artwork. Their value is tied to the underlying physical assets. Not all asset-backed tokens can be traded on regular crypto exchanges, but one example that can be traded is PAXG listed on Binance.

Photo by Zlaťáky.cz on Unsplash

Security Tokens: Security tokens represent ownership or equity in a traditional asset, such as a company, real estate, or investment fund. They are subject to regulatory requirements and comply with securities laws.

These tokens cannot be found on all major crypto exchanges; they have their own platforms where they are traded. An example of a security token exchange is tZero, which provides a platform for trading various tokenized securities. The specific security tokens available for trading on tZERO can vary over time based on listings and regulatory compliance.

What if the token lacks use?

When a token lacks use or was produced with out a clear use case, it will fall under Meme Coins

Meme Coins
Meme coins, which I also call "hype coins", often lack a clear use case and derive their popularity primarily from their association with internet memes, cultural references, or online communities.

Photo by Kanchanara on Unsplash

I hope this helps in understanding the different types of cryptocurrencies!

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