What types of cryptocurrencies exist?

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There are so many cryptocurrencies out there, it can be hard to tell them apart. That's why we want to help you by making our brief overview with the types of crypto you can invest in from your Vivid account.

Keep in mind that there isn’t a single universal categorisation for the crypto economy. Virtually every exchange and investor makes their own. It's a new and constantly moving ecosystem and no classification is perfect. But as a crypto investor, having a classification of some kind is important. 

We’ll focus on the types that exist based on what they are intended to be used for –some currencies fit it into more than one category. 

Just a quick clarification to start:

Crypto Coins vs. Tokens

Although the two words are often used indistinctly, technically they are different. 

Coins are currencies used for digital payments. They are built on a blockchain, which means they are native to this technology. Their creation requires extensive work and expertise. New currencies are generated through mining

Tokens are tradable assets that usually work on a pre-existing blockchain, meaning that they are foreign to the blockchain they live on. They are simpler to create than coins, and tend to have more diverse uses. Instead of mining, tokens are mostly distributed through ICOs (Initial Coin Offerings), similar to the sale of shares when a company goes public. They are usually fungible, meaning that they are interchangeable with each other because they have the same value, except for NFT or non-fungible tokens, which each have a unique value.

Store Of Value

Let's get started with the most basic category. Like any traditional currency, there are assets whose main function is to retain value or purchasing power over time so that they can be retrieved or exchanged at a later date.

Both coins and tokens can be considered stores of value, but the most representative asset is undoubtedly Bitcoin, which seems to be on its way to becoming a kind of cryptographic gold. As only a limited number of coins can be mined, it is more likely to maintain its value over time. In addition to Bitcoin, there are a number of similar currencies in this category with greater speed and scalability, such as Litecoin and Bitcoin Cash.

Medium of Exchange

By mediums of exchange, we mean assets you can use to acquire goods and services, like fiat currencies. Just, unlike the money we manage every day, they are decentralized, partially anonymous and process transactions without an intermediary. 

Coins and tokens are used to create, transfer, register and secure transactions in the blockchain. Of course, in order to be able to make purchases, the merchant must allow payments with the specific cryptocurrency you own. The most commonly used are Bitcoin, Ether, Dogecoin, Bitcoin Cash and Litecoin.

Exchange tokens

These types of assets are native to cryptocurrency exchanges. The platforms usually offer their users tokens as rewards or incentives. This way, they serve several purposes: they encourage activity among traders (and thus increase the exchange's liquidity because more assets are available) and support the governance of the community (governance tokens give voting rights or privileges). In addition, there are often discounts on trading fees when paying with these tokens or if a user has a certain amount in their wallet. 

Most exchange tokens are initially distributed through an Initial Exchange Offering (IEO), which is a type of Initial Coin Offering (ICO), or an airdrop, where the crypto-exchange sends tokens to its community for free or in exchange for some specific action. These tokens sometimes only work on the exchange on which they have been created. To transfer them you have to check if the destination wallet is compatible.

In the Vivid app you can invest in the price of FTX Token, from the FTX Exchange, which enables merchants to use crypto; UNI token, the governance token of the Uniswap protocol, a decentralized cryptocurrency exchange (DEX), and Solana's SOL token running on its own blockchain.

Decentralised Finance (DeFi) 

Decentralized finance or DeFi allows financial products traditionally offered by banks or financial institutions to be available on a public or peer-to-peer decentralized blockchain network. In this way, two people can for example lend and borrow money with merely software as an intermediary, instead of a company or financial institution. This can be done using different types of technology and protocols, including smart contracts, which automate the terms agreed between the parties. 

The downside of this technology is that much of it is still being built, and the industry is not very regulated right now. 

There are multiple examples of DeFi tokens in Vivid's catalogue. Chainlink provides real-world information to the blockchain to execute smart contracts, Aave and Compound are decentralised lending and borrowing platforms, Basic Attention Token offers a mechanism to connect and reward internet users, advertisers and publishers, and Maker is a governance token that allows holders to vote on changes to MakerDAO, a protocol that issues loans without intermediaries.

Smart Contract Platforms

This category includes a lot of cryptos that use smart contract protocols for a huge variety of purposes. We won't go into detail about smart contracts because we’ve already explained it, but essentially they work like a computer program that executes orders when certain conditions are met. 

Smart contracts play an essential role in the functioning of decentralised applications or dApps. DApps are programs that run on the blockchain and, unlike traditional apps that are controlled by a single organisation or authority, they are managed by a network of computers (remember BitTorrent?). This way the developer cannot make changes or control the app unilaterally.

Some of the crypto using these platforms are Ethereum, EOS, NEM, Algorand, Chainlink, Cardano, VeChain, Zilliqa, Solana, and Stellar.

There are many other types of cryptocurrencies such as stablecoins, memecoins, Internet of Things (IOT) coins, oracle, security tokens and utility tokens, which we may talk about another day. For now, you already know the main cryptocurrency families that will be part of your wallet.