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Saying that you want to invest in cryptocurrency is about as specific as saying that you want to get into professional sports. In what way? What sport? What do you mean by getting involved?
The thing is that there are so many different types of cryptocurrencies, each abiding by a different set of rules and each controlled by a different set of external factors.
Now, you canât decide what type to go with without first understanding what youâre against. Here are the top seven cryptocurrency categories that should always be on your radar to give you some idea of what you're dealing with.
1. Stablecoins
The first type of currency you should get to know is stablecoins. These are the coins whose value is tied to another (less volatile) asset to give this currency higher stability. For crypto investors, stablecoins provide a great diversification opportunity, while you can use them for any other purpose. You can use them to make payments, conduct cross-border transactions, and more.
Generally speaking, there are four sub-categories of stablecoins. These rely on the asset that the stablecoin in question is backed by.
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Fiat-collateralized stablecoins: Backed by fiat currencies like USD, GBP, or EUR.
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Crypto-collateralized stablecoins: Backed by other, bigger crypto like BTC.
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Commodity-collateralized stablecoins: Backed by a commodity like gold or silver.
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Algorithmic stablecoins: Backed by smart contracts. This trend is relatively new, so these stablecoins are the most controversial.
When deciding whether to invest in a stablecoin, you should research the underlying asset (the one providing collateral). After all, this is where their value comes from and a factor that will affect its change.
While they are more stable than other crypto, theyâre still not 100% reliable. One reason for this is various regulatory changes always linger in the air.
2. Utility cryptocurrency
Utility cryptocurrencies are assets designed to have a specific use. For instance, you may need a token to access a specific service or get a vote in a digital community.
The best thing about utility coins is that their value depends on the usefulness of the underlying service. As the demand for it increases, so does the coin's value. In theory, this means that you could predict which currencies will grow based on the pragmatism of the service or the perceived demand that you see in it.
For instance, AI coins are recently undergoing a huge boom because of increased interest in AI and AI-powered technology. People might need an AI token to use a certain AI platform, and since they may need it for work, they wonât have a choice.
This means you can critically and logically assess future value trends, but this is all bud given. For instance, ten years ago, everyone probably expected VR to be more widespread than it is. When AR games first appeared (Pokemon Go), no one would have believed the trend would be so short. So, no matter how promising technology looks, donât go all in.
3. Meme coins
If youâve ever been on any meme side, you couldnât have missed Dogecoin. This was a Reddit/9Gag trend that has picked up some serious traction. One of its biggest moments occurred right after one of the Reddit communities forced a meteoric rise in GameStopâs stock price.
While Dogecoin didnât get as many spotlights and didnât go as high, it has opened the door for other meme coins to enter the scene.
Still, what are meme coins?
Although these digital assets were made for humor, they now serve a certain utility. For instance, one can use them for memes, branding, and social media presence. While they are volatile, thereâs a lot of room for early adoption and high profit (through high risks)
Most importantly, new meme coins are being made as we speak. This means there are plenty of opportunities for those who believe they can recognize the token with the highest growth potential. All you need to do is go through the list of new meme coins and hope youâll get a chance for early adoption.
4. DeFi tokens
DeFi tokens are not different from other cryptos, except that they heavily rely on underlying decentralized finance (DeFi) protocols. While other coins (Bitcoin, for instance) serve other purposes (other than decentralized finance), this is not the case with DeFi tokens. Some might say theyâre a utility coin with narrow expertise and focus.
Further subcategories of DeFi tokens are:
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Governance tokens
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Staking tokens
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Lending and borrowing tokens
In other words, DeFi has a purpose, which heavily revolves around establishing systems and protocols that will improve the concept of decentralized finance in the future. The problem is that this is a fast-evolving landscape, making it quite volatile. The landscape shifts with every new change, and itâs often hard to keep track of everything happening.
Lending and borrowing tokens may yet be able to decentralize this massive part of our financial system. Hopefully, this will eliminate fees, cut out the middleman, and revolutionize the credit industry.
5. NFTs
Imagine buying a diamond from a credible retailer. With the diamond, you would receive a certificate of authenticity, which will also serve as proof of ownership. WellâŠ
NFTs (non-fungible tokens) are like proof of digital asset ownership. Now, this is where things get extra interesting. You see, itâs not just that you can own a design, a piece of content, etc. Through NFTs, you can own any digital asset. You can get an NFT for a sword or a polearm in an online video game and âownâ the asset that way.
This crypto might work because thereâs no denying that intellectual property is a force to be reckoned with in a digital world. While copyright laws are doing their best, the system has many gaps and flaws. By tying the ownership to NFT and enforcing it through blockchain technology, we may finally be on the verge of resolving that problem for good.
Now, with the unveiling of the new AI NFT generator, this whole concept may gain a new perspective.
6. Security coins
Speaking of tokens that represent the ownership of an underlying financial asset, itâs impossible to skip security coins. In a way, this may make them sound similar to the NFTs, but theyâre completely different concepts.
The differences, however, are clear from the very first sentence. For instance, security coins have nothing to do with IP; theyâre in charge of securing financial assets.
Most importantly (even etymologically), security coins are fungible. You canât exchange NFTs for other NFTs because they donât have a pre-set value; even comparing them is hard. On the other hand, security coins function like any other crypto tokens.
Then, thereâs the matter of regulations. While NFTs work the way they work, it is yet unknown how (or if) they will be regulated. With security coins, things are much more straightforward. Since their job is ensuring transparency (and reducing volatility) in various financial markets (not just crypto), their regulation is a priority.
7. Exchange coins
Exchange coins also have a pretty narrow function. The thing is that they depend on the platform theyâre on, which means that they rely on its utility and its performance.
The exchange platform in question does its best to incentivize the use of this token. For instance, if you pay for extra features on the platform, you might get a sizable discount using exchange coins.
If the exchange has loyalty programs, these exchange coins are the most likely form of reward. This creates and supports token economics since it encourages the circulation of these exchange coins in the system.
Their biggest bottleneck, however, is that they only exist (or have value) in this limited ecosystem. Since their utility is limited (or non-existent) outside of it, they donât have too much appeal to the users.
Understanding different categories of cryptocurrencies will help you understand the world of crypto as a whole
The biggest problem in defining specific tokens is that itâs not always clear-cut where they belong. Is an AI coin also a utility coin? Sure. However, an AI coin is also its own separate thing. While each cryptocurrency can simultaneously belong to more than one, itâs worth being extra careful and researching. Looking at an investment from all angles is always a smart move.
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Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.