At its launch in 2009, Bitcoin did not have any competition in the newly minted digital currency world. By 2011, however, new types of cryptocurrency appeared as competitors launched their platforms and currencies based on the blockchain technology that bitcoin was built upon. As a result, cryptocurrencies were suddenly being created in an unprecedented manner.
Today, you can buy and track a thousand different cryptocurrencies on your crypto portfolio free. While each provides a new feature or function, they are founded on similar principles that bitcoin was established on:
- There is no central authority issuing, regulating, or backing cryptocurrencies like a bank.
- The distributed ledger (blockchain) is used to create them with peer-to-peer authentication.
- Cryptography is a computer code that encrypts and secures cryptographic currencies such as Bitcoin.
- Users manage their cryptocurrency assets through digital wallets, commonly known as blockchain wallets, which allow them to trade their coins.
As of September 2021, around 6,500 to over 10,000 different cryptocurrencies can be traded, with a total market capitalization of almost $2 trillion.
The different types of cryptocurrency generally fall into one of two following categories:
- Coins: These can include Bitcoin and altcoins (non-Bitcoin cryptocurrencies).
- Tokens are programmable assets that live within the blockchain of a given platform.
One can use words like crypto, coins, and tokens interchangeably. However, it is essential to understand their difference to help us gain a basic understanding of cryptocurrency.
In addition to being forms of cryptocurrency, coins and tokens also perform other functions. Coins get developed on their blockchain, intended as a form of currency. For example, ether (ETH) runs on the Ethereum blockchain. Generally, a blockchain-based cryptocurrency that is not bitcoin is an altcoin.
Tokens are also built on an existing blockchain but aren’t a currency but rather programmable assets that allow for the creation and execution of unique intelligent contracts. One can use such contracts to establish ownership outside of the blockchain network. You can send and receive tokens representing value units, including electricity, money, points, coins, digital assets, etc.
For example, the BAT (Basic Attention Token) is built on the buy Ethereum platform and digital advertising. “Altcoin” originated as a shorthand for “an alternative to bitcoin.” In general, altcoins aim to improve on bitcoin in some way. Altcoins include Ethereum, Litecoin, Namecoin, Peercoin, and USD Coin.
Several cryptocurrencies, including Bitcoin, have a limited supply, creating demand and reinforcing the perceived value. For example, one can mine a fixed number of Bitcoins, 21 million, as decided by the creator of Bitcoin.
While most altcoins share some of the same characteristics as Bitcoin, each has its unique characteristics. For example, some altcoins use a separate process to produce and validate blocks of transactions. In addition, some might provide new features, like smart contracts, or an advantage like lower price volatility.
Initial Coin Offerings, or ICOs, are stock offerings where tokens are created and offered to buyers. They are characterized as:
- Value tokens like bitcoins.
- Security tokens, similar to stocks.
- Utility tokens which are designated for specific uses
As with American dollars, tokens represent value, but they aren’t necessarily valuable. As with paper dollars, their value may not be $1. However, tokens can be used in other transactions.
Tokens differ from coins in their construction within the blockchain of existing coins like Bitcoin or Ethereum.