4 Main Types of Cryptocurrency and Their Uses

With its decentralized nature and advanced encryption techniques, cryptocurrency became an alternative to traditional currency 15 years ago. However, with over 23,000 cryptocurrencies now available, it can be difficult to tell the difference. Here are the four main types of cryptocurrency, their unique features, and their use cases.

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1. Payment Cryptocurrencies

These are digital or virtual currencies designed primarily to function as a medium of exchange. They enable users to make transactions directly, without the need for intermediaries like banks. Examples include Bitcoin, which was the first and is the most well-known payment cryptocurrency and others like Litecoin and Ripple (XRP).

When most people hear “cryptocurrency,” they think of Bitcoin, and rightly so. Bitcoin wasn’t just the first cryptocurrency; it’s the grandfather of them all. It paved the way for the digital money movement. What is its primary purpose? To serve as a digital alternative to traditional currencies. No banks, no physical coins, just pure, decentralized digital cash.

Ethereum launched later in 2014, bringing something new to the industry: smart contracts. Think of these as self-executing contracts with the terms written directly into code. These smart contracts gave us an innovative way to not just make payments but also execute agreements on the Internet.

2. Stablecoins

Stablecoins are a type of cryptocurrency that are pegged to a stable asset, like fiat currency (e.g., USD, EUR) or gold, to maintain a consistent value. This pegging reduces the price volatility typically associated with cryptocurrencies.

Examples of stablecoins include Tether (USDT), which is pegged to the US dollar, and USD Coin (USDC).

Stablecoins are important because most cryptocurrencies are volatile by nature (their value can swing wildly in a matter of hours). With ‘stable’ assets, investors and businesses have a type of cryptocurrency ideal for everyday transactions and a safe bet during volatile market conditions.

3. Utility Tokens

Utility tokens are cryptocurrencies that are used to provide access to a specific product or service within a blockchain network. They are not designed as investments; instead, they offer users the ability to use certain functionalities of a project’s ecosystem.

For instance, Ether (ETH), the cryptocurrency of the Ethereum network, is used to pay for transactions and services within the Ethereum platform and is also used by investors to earn cryptocurrency rewards by staking ETH to validate transactions.

Binance Coin (BNB) is another excellent example of a utility token. Initially created to pay for discounted trading fees on the Binance exchange, its utility has expanded. Now, it’s used in token sales, payments for transaction fees on Binance’s chain and even to pay for goods and services.

4. Central Bank Digital Currencies (CBDCs)

CBDCs are digital currencies issued and regulated by a country’s central bank. They represent the digital form of a nation’s fiat currency. The aim is to combine the benefits of digital currencies, like ease of transactions and security, with the regulated, trusted and stable framework of traditional government-issued currencies.

Examples of development include the Digital Yuan by China, the Digital Euro by the European Union and the Sand Dollar by the Bahamas.

Frequently Asked Questions

1. What is the difference between payment cryptocurrencies and utility tokens?

The difference is in their primary use cases. Payment cryptocurrencies are used as digital money for transactions (similar to traditional fiat currencies), while utility tokens serve as access keys to services or features within a specific blockchain network or platform.

2. How do stablecoins maintain their stability?

Stablecoins are pegged to stable assets like fiat currencies or gold, which helps them maintain a consistent value, unlike other cryptocurrencies that may experience significant price fluctuations.

3. Are utility tokens considered a form of investment?

Yes, but their primary purpose is to provide access to specific services or features within a blockchain network.

4. How can CBDCs change the current financial system?

CBDCs could streamline monetary policies, enhance financial inclusion and reduce transaction costs and times.

5. Can cryptocurrencies be used for everyday purchases?

Yes, especially stablecoins, as their value is more consistent. Payments in cryptocurrencies are also accepted by many merchants and service providers.

6. Are cryptocurrencies legal and regulated?

The legality and regulation of cryptocurrencies vary by country. Some countries, such as Canada, El Salvador and Australia, have legalized cryptocurrency, while others, such as Moroco, China and Ghana, have imposed restrictions or outright bans on cryptocurrencies.