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Cryptocurrency is an extremely risky and complex investment. Do not invest unless you are willing to lose all the money you invest. You are unlikely to be protected if something goes wrong.
Forbes Advisor has provided this content for educational reasons only and not to help you decide whether or not to invest in cryptocurrency. If you decide to invest in cryptocurrency or any other investment, you should always seek appropriate financial advice and only invest what you can afford to lose.
Since the debut of Bitcoin more than a decade ago, many new types of cryptocurrency have emerged. From stablecoins to non-fungible tokens (NFTs) to dog memes, there are a wide variety of cryptos available today. What they have in common is the use of the distributed ledger technology known as the blockchain.
How many cryptocurrencies are there?
CoinMarketCap reports that there are approximately 22,932 cryptocurrencies, with a total market capitalization of £855 billion ($1.1 trillion). That’s quite a crowd considering that Bitcoin only launched in 2009.
The first alternatives to the original crypto – later called altcoins – only appeared on the scene in 2011, including Litecoin (LTC) and Namecoin (NMC). It wasn’t until Ethereum (ETH) was launched that altcoins gained popularity.
Some cryptos, such as Bitcoin, are used as investment vehicles. Many buyers consider them a store of value. Others are more transactional, such as ETH. Developers can build all kinds of transactional tools, services, and communities using the more transactional blockchains.
Crypto Coins vs Crypto Tokens
There is also a distinction between coins and token. Bitcoin and altcoins like Ethereum that run on their own blockchain are considered coins. When most people think of cryptocurrency, they probably think of cryptocurrencies like Bitcoin.
Tokens are digital assets stored in the blockchain database. They are created on blockchains that already exist and typically represent an asset or provide the holder with a specific service or access to an application. A token is a digital unit that represents an asset or utility. For example, countless tokens run on the Ethereum network.
Types of crypto coins
- Value tokens. These types of tokens are an object of value such as a digital asset such as art or music in the form of an NFT
- Utility Tokens. These are tokens that help provide a service. They entitle users to perform actions on a blockchain network or decentralized application
- Security Tokens. This type of token represents ownership of an asset. Companies can use security tokens to raise capital by selling equity tokens. Since they represent ownership of a financial security, these assets are regulated by the Securities and Exchange Commission (SEC). They differ from NFTs and value tokens because they are fungible.
What are ERC-20 Tokens?
ERC-20 tokens – the name comes from the Ethereum Request for Comment 20 – run on the Ethereum network. Popular ERC-20 tokens include the meme coin Shiba Inu (SHIB) and the stablecoin DAI (DAI).
ERC-20 is the technical standard for fungible tokens created using the Ethereum blockchain. It establishes the rules that developers must follow in order for a token to work on the Ethereum platform. If you want to learn more about how cryptocurrencies are created, check out our guide to new cryptocurrencies.
The definition of an altcoin had evolved since the early days of cryptocurrency when only a handful of crypto assets existed. At the time, anything but Bitcoin was considered an altcoin.
The world of cryptocurrency is much bigger today, with a variety of coins and tokens with use cases far beyond a medium of exchange. Many of these cryptos are not necessarily Bitcoin competitors.
The leading altcoin today is Ethereum, with a market cap of £177.1 billion against Bitcoin’s £456.7 billion. Other major altcoins include Solana (SOL) and Cardano (ADA). SOL and ADA are considered Ethereum competitors.
Altcoins can have purposes other than just serving as a digital currency. While Bitcoin is intended to be a form of decentralized currency, Ethereum is a computer network that allows users to run decentralized applications on the blockchain and host smart contracts.
A stablecoin is a cryptocurrency whose value is tied to the price of another asset. If it functions correctly, a stablecoin pegged to the British pound should always be valued at £1.
One type of stablecoin is issued by a financial entity that holds collateral for each unit of stablecoin, and the other uses derivative strategies to ensure that the crypto-asset maintains the value of the underlying government currency.
Guaranteed stablecoins. Collateralised stablecoins maintain a pool of collateral to support the value of the coin. Every time someone sells their tokens, an equal amount of collateral is taken from the coin reserves. Tether (USDT), which is pegged to the US dollar, is probably the most recognizable stablecoin, although people question the reliability of its reserves.
Algorithmic stablecoins. These stablecoins use algorithms to control their supply and thus maintain their price peg. An example is TerraUSD (UST), which was originally pegged at £0.78 ($1) by creating and destroying a sister coin called Luna. Each time TerraUSD was bought or sold, a respective amount of its sister token, Luna, was created or destroyed.
This strategy worked well – until it stopped working. When panic caused people to cash in their TerraUSD in a mass exodus, TerraUSD decoupled from the £0.78 ($1) price and slid to near zero along with Luna. In defense of TerraUSD, the same panic caused Tether to drop from £0.78 ($1) per coin to £0.73 ($0.94) per coin.
Meme coins are the comedians of the crypto world. These coins are gaining popularity and traction through memes and social media. The term is also used somewhat jokingly for coins that explode on social media.
The original meme coin that started it all is Dogecoin (DOGE), which was branded around the “doge” Shiba Inu dog meme. But what started as a joke became a verifiable cult asset as users flocked to the asset. As a result, more meme coins started popping up.
Since the launch of Dogecoin, more than 200 meme coins have been created. But while it’s fun to think of, meme coins can fall just as fast as they rise. DOGE is today worth just a tenth of its all-time high of just over a year ago. But this is an important lesson for all cryptocurrency investors to keep in mind.
Although crypto assets represent an important technological, financial, economic and computer science innovation, investing in them should be considered risky.
Investors should only invest capital that they are willing to lose.