Types of Cryptocurrency

Since Bitcoin launched in 2009, the digital currency market has ballooned. The market has grown and evolved at such a rapid pace that investors can now choose from well over 1,500 cryptocurrencies when building their portfolios.

Despite the explosion of competition, Bitcoin remains the market leader to the point that all non-Bitcoin cryptocurrencies are collectively referred to as “altcoins.” New altcoins are constantly emerging, even as some older forms fall out of use. This expansion and diversification among altcoins have opened up an array of new opportunities for investors of all kinds.

In addition to simply buying and selling cryptocurrency, digital-currency users now have the option to select different types or categories of cryptocurrencies deliberately engineered to meet specific personal and financial needs, goals and priorities. Savvy investors can mix and match various types of cryptocurrencies to build a powerful digital currency portfolio that aligns with their personal values and ambitions. While cryptocurrencies can fall into an increasing number of specialized categories, investors do not need to know all of them to get started building a diversified cryptocurrency wallet.

Digital Currency

Cryptocurrencies designed to serve as analogs for standard, government-issued currencies still dominate the digital currency market. Like the fiat currencies they are modeled after, Bitcoin and altcoins in this category serve primarily to allow users to accumulate wealth and to trade that wealth for goods and services. Big-name altcoins in this category include Namecoin, Litecoin, Dogecoin and Dash.

Tremendous diversity exists within the digital currency category, with each individual currency boasting its own strengths and weaknesses. Two of the primary factors for investors to look at when deciding which ones are right for them are coins’ inflation potential and privacy levels.

  • Inflation vs. Deflation. Inflationary cryptocurrencies, such as Dogecoin, set no limit on the number of coins that may ultimately enter circulation. This will eventually allow for a large number of coins with relatively low individual values. Deflationary cryptocurrencies like Bitcoin set hard limits on the number of coins that can ever go into use, theoretically keeping the value of each digital coin higher and more stable. Both types of digital currency have value in different applications. The smaller values available through Dogecoin, for example, have become a popular way for social media users to thank other users for sharing or promoting content.
  • Anonymity vs. Transparency. Individuals using cryptocurrency for investment strategies and who place a high value on privacy can opt to do business using cryptocurrencies such as Monero. Monero transactions are functionally impossible to trace and the balance of a user’s digital “wallet” cannot be viewed by anyone else. On the other end of the spectrum, Ripple and other full-transparency altcoins are designed to serve users who prefer to have their finances readily visible for personal or business reasons.

Social and Business Interfaces

Some forms of cryptocurrency serve primarily to facilitate specific types of business transactions. These transactions are diverse and may be formal or informal. In many cases, they are part of larger business-related social experiments, as well. For example:

  • Smart Contracts. The cryptocurrency Ethereum provides a private and secure platform that investors can use to set up Smart Contracts. Smart Contracts automatically execute programmed transactions, making it possible for individuals or businesses to maximize their investments or automate financial tasks without interference or human follow-up. Ethereum and other cryptocurrencies can also help businesses move significant amounts of money between countries and sanction currencies without the transaction fees and other expenses that would be incurred through more traditional venues.
  • Crowd-Funding. Cofound.it and other crowd-funding cryptocurrencies allow like-minded users to collaborate on projects without the overhead, expenses and legal intricacies typically associated with traditional investment tools. Crowd-funding altcoins can be used to support personal or business projects, and often follow many of the same practices as traditional Angel Investing arrangements or initial stock offerings. For example, coins or tokens may be “sold” to investors in exchange for a specified value, to be redeemed when the project is completed.
  • Social Change. Whole bodies of digital currencies have been developed to help players in particular industries revolutionize and economize the way value is exchanged. AudioCoin and Musicoin, for example, aim to help musicians and the people who enjoy their music connect in cost-effective ways that cut through the usual layers of middlemen and intermediaries. Ultimately, developers hope to create new systems in which music lovers get more music more cost-effectively and musicians get a bigger share of the total income their work creates. Other currencies are targeting similar challenges in advertising and other industries with the goal of circumventing traditional channels in ways that promote and create more value.
  • Gambling. An entire suite of specialized digital currencies had been designed for the gambling industry. Casino, Prospectors Gold and other specialty gambling cryptocurrencies allow users to place bets on election outcomes, sports games and almost anything else. Bets can be pre-programmed and set up to automatically execute upon the conclusion of the event in questions.

Finance

Some cryptocurrencies function less like electronic currency and more like the digital equivalent of financial market products and tools. This type of cryptocurrency is increasing in interest to investors and businesses. The structure and returns on these digital finance tools vary widely, providing corporations and individuals with extensive opportunity to balance risk and opportunity in ratios they are comfortable with. Examples of cryptocurrencies in this category include Elixir, Janus and Melon.

Decentralized Data Processing and Storage

Cryptocurrencies have begun to play a key role in helping large-scale studies and projects efficiently and cost-effectively harness decentralized computing power and data storage. Universities, researchers and other professionals embedded in data-intensive projects or industries often lack access to the computing and data storage capacities they need to effectively work and store their results.

Cryptocurrencies like Filecoin, Elastic and Curecoin create an interface through which individuals, organizations and businesses with data storage capacity and computing power they are not utilizing can “rent” that space to other parties who need it. Filecoin, for example, uses a standard blockchain base system common to digital currencies to create a window through which parties with data can store their information in spare space on another user’s “cloud” and then retrieve it at will. It pairs this exchange with an integrated cryptocurrency system that allows users to pay for the borrowed storage space or to receive payment for space and computing power they “loaned” out.

Not surprisingly, such systems have the potential to create enormous social and economic efficiencies. Researchers, non-profits and businesses can gain access to massive computer and data storage resources on an as-needed basis for a fraction of what it would cost to permanently upgrade their own facilities or equipment to the minimum required level. At the same time, users who are not making full use of their resources are afforded an opportunity to earn income on formerly “wasted” assets.

Future Growth

As more users adopt cryptocurrencies, the market is expected to continue adapting and evolving. Already, users and developers have begun to experiment with currencies targets toward new and different industries and markets with the goal of improving or changing the ways business is currently done. Recent experiments include currencies targeted toward content management (Authorship), medical services (Bowhead, Sequence), notary services (Factom) and property management (REX).

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