Types of Cryptocurrency

Cryptocurrencies are best known for their ability to serve as substitutes for or alternatives to fiat currencies.

 

Many consumers are unaware of digital currencies’ vast potential as vehicles for data management, fraud-proof voting, business contracting and social change. As users experiment, innovate and find new ways to apply blockchain technology, the number and types of cryptocurrencies available continue to expand.

Currently, users can choose from more than 1,500 cryptocurrencies. Bitcoin is universally considered the market leader. Other cryptocurrencies have strong followings, as well. Consumers may select currencies based on their primary purpose, key characteristics or accessibility and price. Before buying into the cryptocurrency market for the first time, or expanding one’s holdings, it is helpful for consumers to develop an idea of what types of digital currencies are available to them and their relative strengths and weaknesses.

Currency

Some cryptocurrencies serve specifically as decentralized digital currencies. Their primary purpose and function is to offer consumers a uniform, non-fiat currency they can use to buy, sell and trade. Cryptocurrencies used in this role offer consumers a variety of attractive benefits. These include:

  • Privacy.
  • Lack of governmental regulation and/or taxation.
  • Low-cost transactions, particularly for large sums or across fiat currencies and borders.

Generally speaking, most consumers can not yet expect to go into any business establishment and pay directly in cryptocurrency. While that option is becoming increasingly more common, an intermediary step is required in most cases. Debit cards, exchanges, bank accounts and ATMs specific to cryptocurrencies have been implemented to ease the transition between cryptocurrencies and fiat currencies in paying for the necessities of everyday life.

Digital currencies are subject to other drawbacks, as well. The same lack of centralized authority that many users count as a benefit can, in some circumstances, be considered a disadvantage. For example, if users lose their private keys, then they lose all access to any digital funds in those accounts. Without a centralized authority to reset passwords or otherwise override the system’s innate security, accounts can be rendered permanently inaccessible and users are left without recourse. Digital currencies are also occasionally vulnerable to hacking and other theft.

Bitcoin is universally considered the foundational fiat-alternative digital currency. Other big names in this category include:

  • Litecoin: Created as a direct competitor to Bitcoin, Litecoin specializes in the speedy processing of small transactions. Litecoin can be mined with far less processing power than is required for Bitcoin mining, and its maximum token cap is set four times high than Bitcoin’s.
  • Ripple: Like Litecoin, Ripple specializes in high-speed transactions, particularly transactions that involve exchanges from one fiat currency to another. (e.g. One user turns American dollars into Ripple tokens and pays them to another user who converts them into Euros.)
  • Dogecoin: Unlike Bitcoin, Litecoin and Ripple, Dogecoin is an intentionally inflationary fiat alternative cryptocurrency. There is no limit on the number of Dogecoins that can be mined. As a result, individual Dogecoins are generally worth less than other individual cryptocurrency tokens. This has led to them filling a distinct niche in the market whenever consumers want to make very small transactions, such as tipping one another for minor services.

Data Management

Blockchain technology’s innate encryption functions allow users to track and retrieve data in ways that were not previously possible. They also create the ability to store data in decentralized networks while accurately tracking what was stored where and for how long. This capacity is rapidly changing how large amounts of data are stored and processed. Being able to store data is often part of cryptocurrency investment strategies.

Imagine, for example, that you have 500 crates of books that you need for an event. Until that event, you need to store them somewhere but you do not have room in your house. You could put an addition on your house in which to store them or purchase a storage unit, but either of these would be extremely costly. Plus, you would have to maintain the addition after you built it, even when you no longer needed it for the books. Alternatively, you could break the books into smaller groupings of crates and store them in extra space in your friends’ and family’s garages, storage units or homes. Not only would that be significantly cheaper, taking advantage of wasted space your friends and family are not using would be extremely efficient

Blockchain data management works on essentially the same principle. Researchers, academic institutions, businesses and others who need large amounts of processing or storage space use dedicated cryptocurrencies to break up and distribute data to individuals, businesses and other suppliers who have spare “cloud” or network space. The system carefully tracks who stores how much data and for how long before the data is retrieved by its owner. Suppliers are then paid for the use of their space or processing power in cryptocurrency tokens. They can exchange those tokens for other cryptocurrencies or fiat currencies or trade them with other users for goods and services.

Filecoin is one of the biggest cryptocurrencies dedicated to decentralized data management, storage and retrieval. Other cryptocurrencies in this category include Gridcoin, Golem and Mysterium.

 

Investment Tools

Some cryptocurrencies are designed to serve as financial tools rather than general currency substitutes. Populous is an excellent example. Populous was created as a venue through which businesses can engage in invoice financing. Invoice financing is when a business “sells” invoices to third parties at a discount in order to get immediate access to the cash that invoice represents.

For example, Company A sells $3,000 worth of product to Company B on account. The invoice for that $3,000 may not be processed and paid for weeks or months, depending on the contract terms. If Company A needs or wants that money sooner, then it may sell Company B’s invoice to a third party, say Banker C, for $2,500 using a cryptocurrency like Populous. When Company B pays its invoice, the full $3,000 goes to Banker C, who therefore makes $500 on what is essentially a short-term loan.

Cryptocurrencies make this type of transaction uniquely viable because they may be traded globally free of charge or with only minor fees. Global invoice financing using fiat currencies, by contrast, can carry so may transaction and exchange charges that it becomes unprofitable. The security and anonymity of cryptocurrency transactions add an additional layer of attractiveness to global invoice financing that does not have otherwise.

Specialized Applications

Many cryptocurrencies have been developed to meet specific needs in particular industries or to facilitate certain kinds of transactions. CasinoCoin, HunterCoin, LottoCoin, LuckChain and a number of other cryptocurrencies, for instance, are designed intentionally for gambling. The cryptocurrencies Opus, Linx and Musicoin were created to explore alternative structures and methodologies for paying for value and connecting producers directly to consumers in the music industry. Specialized cryptocurrencies also exist for Smart Contracting, social networking, the medical industry, crowdfunding and advertising.

 

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