Types of Cryptocurrency and Understanding the Difference

Cryptocurrency has taken the media by storm. Bitcoin now dominates and grabs most of the attention. As the first real form of the digital currency back in 2009, it remains the oldest active form of cryptocurrency. Many have come since, and now there are several hundred recognized cryptocurrencies minned online. However, while these forms of digital money share some similarities, understanding the differences is not only what sets it apart, but helps investors educate themselves on when to put money into digital currency, when to take it out, and which on the cryptocurrency list of 2018 has the best opportunity to last.

2018 Recognized Cryptocurrencies

Before looking at and understanding what makes these cryptos different from one another, it is important to point out the current and most common occupants on the cryptocurrency list of 2018. Some of these currencies may no longer be active by the end of the year. These kinds of currencies come and go. Often the founders and reason behind the currency creation plays a big role in overall survival.

Beyond Bitcoin, other active and prominent forms of currency include Litecoin, Namecoin, and SwiftCoin (all active since 2011). According to Investopedia (December 2017), creation date doesn’t always mean the currency is the most valuable. The most valuable options, as Investopedia points out, start with Litecoin (LTC), followed by Ethereum (ETH), Zcash (ZEC), Dash (also known as Darkcoin) and Ripple (XRP).

There are many ways to rank top performing cryptos. While Investopedia has its own method, when simply looking at the greatest percentage return, Salmon Study (2018) released the following information:

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Market Value

Market value can prove difficult to truly evaluate. Of the over 700 cryptos (Investopedia, 2017), some only have a few dozen coins in circulation (a few only have one or two). So it’s impossible to identify a true circulating market cap value for these. Instead, it’s necessary to look at the volume of the currency and the value per one unit.

According to Coin Market Cap, on February 14 2018, Bitcoin had a total volume value of over $5.9 billion, with an individual unit price of $8,650. Litecoin, the currency recommended by Investopedia, has just under $500 million in volume value with a current price of $158 per unit. Of the other recommended currencies, Zcash has an individual unit value of $447, Dash sits at $598, Ethereum is valued at $845 and Ripple has a value of $1.02 (it has one of the largest circulating supplies, so it’s easier to buy into currently). These numbers are all subject to change and likely will have different values compared to others on the virtual currency list when checking on a later date. However, this should provide some idea of currency value and volume.

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Terms to Understand

Investing in one of the options offered on the virtual currency list brings with it new terminology to learn. These terms often do not appear in other forms of investment, Forex trading or currency exchange, so these terms are generally unique in the world of cryptocurrency.

Some cryptos are referred to as a hot wallet, while others are a cold wallet. This means the currency is connected to the Internet. Generally, according to Hobo With a Laptop (2018), a hot wallet is seen as less secure because the wallet remains constantly connected to the Internet, which in turn can bring up some privacy and security issues. On the other hand, though, hot wallets are generally more user-friendly and easier to move into. Many investors who have been in the crypto game for a while moving the money into what is known as a cold wallet. This means the money is in "cold storage," and stored offline. This boosts safety, although the money must be withdrawn and transferred to a hot wallet in order to use. This is better designed for those who are interested in investing in a cryptocurrency and not for using.

In some instances, the term multisig wallet is used. Short for multisignature wallet, this identifying information is used when multiple parties are needed to sign off on a transaction. This works in a similar way to a shared bank account, where both (or all) parties on the bank account must sign off on transactions. Generally, a multisig wallet is only required when working with large businesses and varying members of the board of directors are needed, in order to help prevent fraud. In other cases, a wallet is a “multi-currency” wallet. Some wallets only allow for a single currency. However, other wallets allow for the storage of varying currencies. This is helpful when attempting to convert one crypto to another.

Understanding these different terms will help when identifying the right investment options and while looking over a cryptocurrency list price, as some websites will not only include the cryptocurrency list price, but other wallet attributes as well.

Coin Vs. Token

When looking over a top cryptocurrency list, the digital currencies are often identified as either a coin or a token. The two works may seem interchangeable, but that is far from the truth. This small identifier can offer up far more insights into what it is and what it does over nearly any other initial terminology.

According to Discover Coin Square (2017), a crypto referred to as a “coin” has its own blockchain network, governance structure and operates independently of other financial institutions. Bitcoin and Litecoin are two examples of a coin.

On the other hand, a token is a crypto that relies on the blockchain of another network or cryptocurrency. In a way, it leaches onto the platform of another digital currency while using its own platform. For example, Ethereum is its on coin network. However, TenX, BAT, and OmiseGo are three tokens that work off of the Ethereum network.

Understanding whether a currency is a token or coin is important. Outside digital currency entities do not affect the cryptocurrency Ethereum (for example). However, if the cryptocurrency Ethereum were to falter and fail, the attached tokens would run into substantial problems as well, even if there’s nothing wrong with the token itself.

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Altcoin Vs. Bitcoin Vs. Meta Coins

Bitcoin is the first truly independent and recognized form of cryptocurrency. Many new crypto coins are based on Bitcoin. These are known as an altcoin. The altcoin has its own rules for participation and independent network, so it is completely separated from Bitcoin and does not leach on like a token. Bitcoin Cash, for example, is an altcoin. It based its initial structure off the foundation of Bitcoin, but came into existence for another reason. The creators of Bitcoin Cash did not like how long it would take to process transactions as well as some of the other loopholes involved with it, so they released Bitcoin Cash. Most altcoins came about in similar manors.

On the other hand, there are currencies known as “meta-coins” (or colored coins). This kind of a currency uses a current coin’s infrastructure but offers variants on improving how the original currency functions. Think of it as a currency patch to fix perceived shortcomings. The cryptocurrency Zerocin is a “meta-coin” of Bitcoin. It offers additional features and privacy settings not found on Bitcoin. Discover Coin Square (2017) also points out these kinds of currencies are sometimes referred to as second layer cryptocurrencies, as it is built off of a current crypto’s infrastructure.

Understanding a Blockchain Database

One reason people are now turning to crypto as a means not only for investing but for purchasing, is due to what is known as a blockchain database. It is the blockchain that makes transactions extremely difficult, if not impossible, to trace. As Trading Heroes (2018) points out, there is a big difference between a traditional database and a blockchain database.

A traditional database generally exists on a single computer, or at the very least, a single location. Even the largest corporations use between three and five data server locations around the world, all while spending billions of dollars on cyber security. However, should a single server fall victim to hacking, most, if not all information, can be siphoned off by the hackers. A blockchain database corrects this issue. Files are often broken down into individual pieces of files and spread over thousands of different servers and data networks around the world. This way, if a single (or even chain of servers) are hacked, a hacker will not have all the necessary pieces to put together a single file. This helps safeguard most cryptocurrencies.

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Now, all cryptocurrencies are built off of blockchains, but that does not mean everything is exactly the same. In fact, there are many differences between individual currencies, which is why looking further into the crypto is important. This will help point out the right currency for a particular investor.

According to Trading Heroes (2018). There are a handful of specifications a potential investor needs to look into when searching for a potential crypto. Transaction processing speed is one. This is where many of the Altcoins have built off of the success of Bitcoin. Bitcoin Cash came about because the creators (who previously helped with the design of the original Bitcoin) found it too slow, so Bitcoin Cash came about to improve transaction processing speed.

Looking into the reasoning for the creation of the software currency is very important. It can help indicate whether or not the currency will remain active for the long term. When looking over a list of cryptocurrencies by market cap, most were not just created in order to invent a new currency. Most came out of a need to make specific corrections and improvements. So, the real-world need for the correction helped create the demand. Without a real-world need, there isn’t an actual reasoning for the currency to exist, other than the designers to invest in a self-produced digital currency. Real-world needs provide as much protective ground for the currency as possible. If there is a need, the currency will exist and thrive. A perspective cryptocurrency investor needs to investigate a potential crypto for this very information.

Other questions to look for when comparing cryptos and identifying which might work the best includes whether the founders have experience in building a crypto if there is an unlimited supply of the currency and what the total current supply of the currency is (Trading Heroes 2018).

Cryptocurrency Uses

A crypto is created, typically, for a specific purpose and to address a unique need, so different currencies are used for different reasons. This includes financial transactions, application platforms, private financial transactions and even specialty currencies.

A financial transaction, such as Litecoin or Bitcoin, is used internationally as a form of currency. It can be used by anyone in exchange for goods or services. In a sense, it works just like any other kind of physical currency, but without an exchange rate. This makes it a viable option for individuals and companies looking to make transactions without paying processing and transaction fees in order to exchange currencies.

An application platform is a platform designed to collect and assist with the purchase of currencies and, often times, other forms of currencies. It works in a similar way as a Forex trader, but for cryptocurrencies. It can also be seen as a mutual fund application of sorts. Of the top list of cryptocurrencies by market cap, Ethereum is the top performer in terms of these application platforms.

A private financial transaction takes advantage of other security features in order to provide a heightened level of security and to keep those performing the transactions private. When looking at the top cryptocurrency list, Dash, Zcash, and Monero are three of the largest.

Lastly, a specialty currency is a form of cryptocurrency that is used for a very specific segment. Some gaming communities use these digital currencies, as it makes it easier than dealing with banks and transferring/exchanging traditional currencies. ReddCoin and GameCredits are two of the top virtual currency list variants.

In Conclusion

There are hundreds of varying cryptocurrencies currently on the market and more are likely to come up (while others will likely fold). The more a potential user or investor knows about these currencies is important. It will help identify quality currencies while determining which currencies are right for a particular use. Before moving forward with any kind of cryptocurrency, taking all of this into consideration for each and every crypto is highly recommended.

ADDITIONAL RESOURCES:

WHAT CRYPTO CURRENCY INVESTORS NEED TO WATCH OUT FOR IN 2018

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Written by Mike Williams

I am a serial entrepreneur with more than 20 years of business experience. My goal with this blog is to pass on some of what I have learned in order to help you achieve success in business.

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