There was a time when only Bitcoin was the only cryptocurrency and we knew nothing about the existence of any other digital currency. But with time things have changed in the world of cryptocurrency. Today you can see countless number of digital currency in the market. Cryptocurrency market has grown exponentially beyond our expectations.
Today, we will try to explain three major types of cryptocurrencies: Bitcoin, Altcoins, and tokens. We have been hearing and reading about these terms but most of us don’t understand them. We will explain to you all about them and hope, that you will have a good understanding about the following as we come to an end of this article:
- Types of cryptocurrencies
- The top amongst them
- The differences amongst them
- And merits/demerits of each
But before that, let’s take quick recap of what cryptocurrency is and then proceed with the explanation about three major types of Cryptocurrency.
So, what are we waiting for let’s get started.
What Is Cryptocurrency?
Cryptocurrency is a digital currency created with technology to remove the need of middle man, protect transactions and identity of sender or receiver. The prefix in cryptocurrency, crypto- means “cryptography,” a technology, used to protect and hide information from attackers. The transactions made in cryptocurrency will be managed on the Blockchain (a common database).
Now, let’s understand about the three main types of Cryptocurrencies and what they are:
3 Important Kinds of Cryptocurrency
Blockchain brings all three-important cryptocurrencies together. Bitcoin cryptocurrency was the primary digital currency based Blockchain. Subsequently after Bitcoin many new cryptocurrencies came into existence and they are known as Altcoins. This means any currency besides Bitcoin is an altcoin like NEO, Litecoin, Cardano and others. Lastly, we will explain tokens/dApps this includes WePower, Civic (CVC), and BitDegree (BDG).
This was a brief about what we are going read further in detail. So, let’s get going.
We all know about Bitcoin but for those who have no idea about it, let’s read further. Bitcoin is the first cryptocurrency, revealed in 2008 by an unknown identity Satoshi Nakamoto.
During its initial years nobody thought of it like they do now. Bitcoin in real sense brought a major change and marked beginning of a new period.
To define we can say, it is a decentralized digital currency that can be used to make transactions without the bank. This makes it stand apart from physical currency. Using Bitcoin individuals can even make direct transactions without the bank known as peer-to-peer network. All this is possible because of Blockchain, introduced by Bitcoin. Besides, individuals no longer need to reveal their identity to make payments as there is no third party involved.
How does a Transaction take Place on Bitcoin?
When a Bitcoin transaction is made it gets verified and stored on Blockchain. The information is saved in an encrypted form that everyone can see but only the Bitcoin owner can decrypt. This is done by using a ‘private key’, that is given to the each Bitcoin owner.
But, who verifies the transaction as there is no man-in-middle like banks?
Remember, we discussed Blockchain is different, it is a decentralized system. Well the individuals that are part of Blockchain verify it using computer power. A special software is used by them to process transaction on Blockchain.
Tip: Computers that run the software are called ‘nodes’.
To run this software lot of computer power is needed, but from where do they get it? Welcome to mining.
For each transaction verified by nodes they get Bitcoin as reward. This way new Bitcoins are created. In Bitcoin mining, nodes mine new Bitcoin and are considered as miners.
Each fresh block of transaction is verified by PoW (Proof of Work) algorithm. Here, the foremost miner who validates block is given a new coin as a reward.
Next, we’ll talk about Altcoins. At present, more than a thousand Altcoins exist and most of them are like Bitcoin just a modified version. This is the reason they are called ‘Altcoins’.
But not all Altcoins use the same algorithm or have same purpose or goal. Altcoin like Factom uses different algorithm and PoS (Proof of Stake) instead of PoW (Proof of Work). Here no one is called miner they are called stakers.
Like miners, stakers verify transaction for a reward. But here unlike miners each staker gets a chance to verify transaction. Due to this electricity consumption is decreased as there is only one staker per block.
This clearly states, not all Altcoins are similar to Bitcoin. Ethereum and NEO are examples of different Altcoin.
Unlike Bitcoin they are not used as digital currency, they are designed as a platform on which apps based on Blockchain can be designed. Ethereum introduced a new technology known as smart contracts that made this possible. Smart Contracts are capable of executing transactions when required, they eradicate the need of third parties as Blockchain does but smart contracts can be used in many other things also like sale of a house, sale of electricity, or other things. When smart contracts are created, conditions are written on them. When you need to put real things on smart contracts, tokens are used to represent that thing. This is the best thing about Ethereum, NEO and other Altcoins.
3. Tokens (for dApps)
While discussing Altcoins we used a term Tokens, but what are they and how are they used? Tokens are third main type of cryptocurrency. They are totally unique, meaning they don’t have their own Blockchain, but still are used on (decentralized applications) dApps.
Decentralized apps can be built on Ethereum and NEO and use smart contracts, due to which the need to tokens arise. Tokens are used to purchase things on dApps, they can either be used to pay voting fee or discounted fee. Also, these Tokens can be sold at a price due to this fact people buy and sell them at a higher price rather than using them to buy dApp. Token transaction is verified by nodes. This means transaction fee is paid either in Ether or NEO, not in forms of tokens.
This means to make a transaction on dApp (i.e. to use a token), one needs to have the altcoin on which the dApp is built on.
Quick tip: The pronunciation of dApp is, “dee-app”.
The Popular Cryptocurrencies
Hope, by now you have understood different types of cryptocurrencies.
Now, we will discuss, their merits and demerits. So, let’s take a look!
We’ve already discussed about Bitcoin, therefore now we will only talk about its merits and demerits.
- Limited number of Bitcoins: Only 21 million Bitcoin are available throughout out of which 17 million Bitcoins are already mined this means only 4 million are left to be mined. So, the ones who want to invest in it will have to pay higher price. This also implies that Bitcoin price is expected to rise.
- Easier to change Bitcoin for money: As Bitcoins are popular they are easy to liquidate, meaning they can easily be converted into You can exchange Bitcoin for currency like USD and EUR. In addition to this, Bitcoin is available on all crypto exchange online. This means trading volume will be high.
- More acceptance of Bitcoin:Most of the online sellers now accept Bitcoin cryptocurrency. This means individuals can now buy anything using Bitcoin.
- Bitcoin is the principal cryptocurrency:Bitcoin was the primary digital currency, and hence has always had a lead over others. At present even after facing so many fluctuations it controls the market. People have a belief that Bitcoin will permanently be the largest and widely used cryptocurrency.
- Too much fluctuation in Bitcoin: Price of Bitcoin changes a lot daily. No one can bet what the price will be next day.
- Bitcoin might be substituted by a better alternate cryptocurrency: As mentioned above there are hundreds of Altcoins available in the market. Bitcoin being the oldest of all can easily be replaced as newer ones bring some advancements and enhancements.
- Bitcoin is used for crime: With time Bitcoins reputation has improved but still people have an eye of suspicion as it is used for illegal purposes. Many people have already been prosecuted for the same.
Bitcoin is a cryptocurrency while, Ethereum is a global platform that allows developers to design dApps, smart contracts and tokens, and the currency used on this platform is known as Ether (ETH).
Let’s look at the merits and demerits of Ethereum:
- Users building dApps will always need Ether: As dApps run on Ethereum Blockchain, Ether will always be required to pay for transaction fees. So, this means Ether will never go away.
- New projects will be built on Ethereum: Projects building on Ethereum will take years to develop, this means Ether will not go away anytime soon.
- Speed:Where Bitcoin transactions take up to 10 minutes to process, Ethereum processes them in few seconds.
- More Ether coins than Bitcoins: Supply of Ether coins will never stop, they will be created in a huge numbers. This is surely, not a problem but due to this Ether may lose its worth.
Ripple is a Blockchain designed for banks to make payment processing faster. It is also known as the banker’s coin, and currently many partnerships are being worked out with global banks.
- Global banks, well reputed companies trust Ripple: Mostly all the large financial organizations, have collaborated with Ripple and many more are on their way to join hands. So, as an alternate Ripple may turn out to be the best choice in the world of finance.
- Ripple isn’t decentralized. Unlike other cryptocurrency Ripple is centralized. The company behind Ripple, i.e. Ripple Labs owns most (XRP) Ripple tokens. This means if they see all their token then the price of XRP will go down.
Litecoin a fork of Bitcoin! Basically, Litecoin was part of Bitcoin’s Blockchain, but it got divided with Litecoin update. So, you can say it is similar but has diverse features. It was designed to advance upon what Bitcoin had formed and it became the first cryptocurrency to use Lightning Network.
Lightning Network used by Litecoin solves scalability issue and makes transaction faster.
- Litecoin is faster and inexpensive. Like Ethereum, Litecoin transactions are done in matter of seconds, whereas Bitcoin transactions takes up to 10 minutes.
Where, Bitcoin transactions are costly, Litecoin transactions are inexpensive and can easily be used to send small amounts. Litecoin is preferred for small payments, and due to this it is called “Lite”coin.
- Litecoin is a minor upgrade on Bitcoin: If Bitcoin improves and starts to offer cheaper and quicker transactions there will be no need of Litecoin.
Hope, after reading all this information you now have a clear idea about Bitcoin, and Altcoin, Tokens, dApps, and most common terms used in cryptocurrency.
Plus, now as you know why different currencies exist and how are they different from one another also you we have discussed their merits and demerits so that you have a clear idea about them and their future.
This all information will help you differentiate between them and know which one is better to invest. So, now that you have all the basic information. What do you think about them?