As of July 2021, the cryptocurrency market hosts nearly 6,000 digital currencies which all differ to some extent. Fortunately, cryptos are commonly divided into a few general subgroups that help make things a little clearer.
Coins and Tokens
A good way to start is to differentiate cryptocurrencies based on their underlying technology. Although the terms “coin” and “token” are often used interchangeably, they refer to two different concepts in the cryptocurrency ecosystem.
Coins refer to digital currencies that are built on a standalone independent blockchain network and thus are the native currency of that blockchain. The most famous example is Bitcoin (BTC), the first successful cryptocurrency ever created and the world’s largest cryptocurrency by market capitalization.
It is worth mentioning that a cryptocurrency does not have to contain the word “coin” in its name to be a coin. For example, some popular coins include Binance Coin (BNB) and Litecoin (LTC), but also Ethereum (ETH), Cardano (ADA) and Polkadot (DOT).
In contrast, tokens differ from coins since they are built on an existing blockchain, thus benefiting from its technology, rather than having their own blockchain. KGO for example is a token because it is built on Binance Smart Chain, just like other popular tokens such as Chainlink (LINK) and Uniswap (UNI) which are powered by the Ethereum blockchain.
Bitcoin and Altcoins
Another way to differentiate between cryptocurrency is to use a Bitcoin-centered approach and divide the cryptocurrency ecosystem in two camps: Bitcoin and the rest.
As such, an altcoin is an “alternative coin”, or any digital currency launched after Bitcoin, and thus refers to any crypto that is not BTC. This categorization is often used in market analysis as Bitcoin, the most popular cryptocurrency, moves the market and highly impacts the performance of other cryptos.
It is worth noting that nowadays, a growing number of people tend to withdraw Ethereum from the altcoin category because it is the world’s biggest blockchain platform, and because it tends to behave differently from other altcoins in respect to BTC. According to that view, it would be more correct for the crypto ecosystem to be referred to as “Bitcoin, Ethereum and Altcoins”.
Stablecoins and Pegged Cryptocurrencies
Among the existing coins and tokens, some of them are called “stablecoins” because this type of cryptocurrency is designed to maintain a stable market price. In other words, they are resistant to market volatility and do not experience significant price changes.
The fixed value of stablecoins is ensured by the fact that they are pegged to the price of another asset, such as the US dollar. The most popular stablecoins – Binance USD (BUSD), Tether (USDT) and USD Coin (USDC) — are all pegged to the US Dollar at 1:1. It means that 1 BUSD, 1 USDT or 1 USDC are worth $1 at all times.
Alternatively, some stablecoins are tied to the price of commodities like gold and silver for the same reason exposed above. By being pegged to real-world assets, these stablecoins avoid the high price swings very common in cryptocurrency markets.
Finally, not all pegged tokens are stablecoins as they can be pegged to more volatile assets. For example, they can be pegged to another digital asset, such as Bitcoin or Ethereum to allow these assets to be traded outside their native blockchains, or financial securities, such as stocks and bonds, which would create what is called a “security token”.
Keep learning from our "Starting With Crypto" beginners guide with the fourth article: The History Of Cryptocurrency
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