In fact, about 1,500
other cryptocurrencies have emerged since the creation of bitcoin
in 2009. And they fall into buckets like stable coins and
tokens.
Coupled with the lack of
clear regulations or oversight and how new the space is, it's
enough to leave any crypto newcomer completely confused.
Crypto is valued by investors
because it's not regulated by any central figure. It's also
exchanged pseudonymously, which allows for greater privacy.
While it was originally used for
illicit transactions, it's gained wider adoption. Even companies
like Overstock and Starbucks have started experimenting with how to
let customers use it to shop.
Investing in crypto is still
risky and volatile -- let's
recall bitcoin's infamous rise in value to $20,000 late last year
and its current price of under $5,000.
Because of this, knowing the core
differences is worth your time.
Coins vs. Tokens
First, you'll want to know the
difference between coins and tokens. Coins are essentially virtual
cash used for many types of transactions. They're bought and sold
over numerous different crypto exchanges, including Coinbase,
bitbuy.ca and Binance. The first recorded bitcoin transaction was
for two pizzas.
Tokens represent assets or anything
that has value ascribed to it. For example, tokens can be used to
represent things like the ownership of a piece of art or the number
of rewards points a customer has in a company's loyalty program.
They both have value and rely on blockchain technology, a digital
ledger of transactions that can't be erased. But a coin is virtual
money and a token is not.
Bitcoin and Alt Coins
Bitcoin was the original form of
cryptocurrency -- and it's the coin others are compared to.
"Bitcoin is the mother crypto,"
said Marshall Hayner, founder of Metal Pay, an app that's much like
Venmo for crypto.
Not surprisingly, its emergence
sparked the rise of copycats, including alternative coins like
litecoin, XRP and ether.
Ether is used to power its own
unique blockchain called Ethereum -- one of the biggest creators of
smart contracts. These contracts use cryptographic code to verify
and trigger transactions when certain conditions are met. For
example, a smart contract could be set to pay out a certain amount
of crypto at 1:00 p.m. on a specific day.
Another bitcoin alternative is XRP,
which was built to make it easier for banks and payment processors
to make cross-border payments. It's one of the most popular
cryptocurrencies.
There are also obscure
alternatives, like dogecoin, which was created as a joke based on a
viral meme of a Shiba Inu. The dog's face is displayed on the front
of the virtual coin. The currency is commonly used on social media
to tip users who post interesting things.
Dogecoin has helped many people
learn about and dabble in trading cryptocurrencies because its
community tends to not take itself too seriously and is very
friendly to new investors.
Stable Coins
Stable coins are pegged to actual
currencies like the US dollar, the euro or the British pound. That
means that one dollar or pound gets you one crypto coin. These
coins are designed to mimic actual currencies and tend to be less
volatile than other cryptocurrencies.
Tether was one of the first stable
coins.
"The idea behind tether is you give
a dollar and you get one tether," Hayner said.
But there's still risk, according
to Ryan Taylor, CEO of the cryptocurrency Dash. Their value can
erode over time similar to fiat currencies like the US
dollar.
Other recent stable coins are more
transparent. For example, TrueUSD complies with some standard
financial regulations and uses escrow accounts.
Utility Tokens
Utility tokens represent a certain
service or good on a specific platform -- kind of like a gift card
to a specific store. They aren't really investments but they have
value.
Hayner likens them to casino chips:
When you go to a casino, you exchange your dollars for chips and
then can use those chips to play games. The chips serve a function
because they allow you to do something and hold value but you have
to exchange them to get actual cash.
Taylor said he was skeptical of
most utility tokens because they aren't the best way to interact
with users. They require additional steps that make them more
complicated to use and that could turn some people off.
However, he noted that they do make
it possible to transact in extremely small quantities.
Security Tokens
Security tokens are still
relatively new. Their value is derived from real-world assets,
which could include commodities like gold or oil, shares of a
company or interest in a fund. These tokens are meant to be
investments and because they're considered securities and subject
to federal security regulations.
Some fans of security tokens argue
they would ensure greater accountability for companies because
shares would be public and couldn't be over-issued.
Both Hayner and Taylor say these
tokens are still a ways off from showing up in people's portfolios
because of uncertainty around how they'd be regulated.
And according to Stephen Innes,
head of trading in Asia Pacific for online trading platform Oanda,
security tokens still don't provide enough of a "consistent metric
off which to base an underlying investment strategy."
Security tokens, which would be
regulated, also go against the very core of what crypto was meant
to be -- a deregulated currency. But regulations would be a draw
for investors.
Non-Fungible Tokens
Non-fungible tokens have a unique
value or use. They can store value but no two tokens are the
same.
For example, in the video game
CryptoKitties, users can use ether to buy digital cats. The digital
kitties can be traded and bred, but each has its own unique
non-fungible token that can't be replicated -- kind of like a
digital fingerprint.
Future of money?
Digital currency is becoming more
mainstream as companies like Starbucks and Goldman Sachs experiment
with how to engage with it.
It's unclear whether crypto will be
the future of money, but it's volatility isn't helping its case for
wider adoption. As values continue to drop and rebound, investors
continue to show caution.
"There's a lack of adoption on Wall
Street," Innes said. "The big banks that most people are doing
business with are reticent to get involved, which I think is
telling."