How are Different Cryptocurrencies From Each Other?
In other words? Not all cryptocurrencies are created equal, and as an investor, it pays to know which cryptocurrencies are worth investing in.
How are cryptocurrencies unique from each other? And how do you decide what currency is worth it? Here’s what savvy investors should know.
The Basics: What is Cryptocurrency?
First, it helps to understand the basic facts that all cryptocurrencies have in common.
All cryptocurrencies are the same basic technology: a digital, encrypted, and decentralized currency which is not managed by any central bank, nor does it have any physical counterpart. Instead, all cryptocurrencies are issued, managed, and recorded on blockchain, a shared, immutable ledger distributed among a network of computer nodes that records and verifies transactions. Every transaction, or “block,” is linked together on a chain of all previous cryptocurrency transactions which are visible to any computer node with access to the chain.
You can use cryptocurrency to buy goods and services, at least in theory. However, the use of cryptocurrency is not widely accepted yet as an alternative currency (as opposed to, say, the U.S. dollar) and because of this, most investors treat cryptocurrency as an asset like precious metals or stocks.
Types of Cryptocurrencies
While there are thousands of cryptocurrencies out there, ranging from the big hitters (Bitcoin) to the ridiculous (Dogecoin, also known as the first meme coin), cryptocurrencies can be grouped into four basic categories:
- Crypto coins
Each one has a slightly different function and design, which is part of what makes each cryptocurrency unique. Crypto coins and tokens are types of assets, while altcoins and stablecoins are distinct subsets of cryptocurrencies.
Crypto Coins and Tokens
Most crypto is classified as either crypto coins or tokens. And while the terms are often used interchangeably, they function quite differently.
Crypto coins are the basic unit of value for every cryptocurrency. As the name implies, they’re designed as a form of currency and exist on the blockchain as currency. All cryptocurrencies use some sort of coin as an individual unit of value, sort of like the U.S. dollar.
Tokens are not currency at all, though they can represent units of value. Instead, tokens are a form of programmable asset specifically used to create and execute smart contracts. When a token represents a unit of value, it can stand in to represent physical or digital assets, including cryptocurrency, though it is not a unit of currency in its own right. Basically, if you own a token representing an asset, you own a blockchain-verified smart contract connected to the asset in question.
Most of the time, when people deal with cryptocurrencies, they’re dealing with coins, not tokens. People generally prefer to work with coins since they’re easier to understand, though tokens can facilitate ownership transfer of coins from one party to another.
Altcoins, a.k.a. alternative coins are a bit quirky in that they’re named for what they’re not.
First, there was bitcoin, the first cryptocurrency ever to be created. Then, other cryptocurrencies came after it. Broadly speaking, an altcoin is any coin that isn’t bitcoin.
However, this does not mean that altcoins are interchangeable with each other. Quite the opposite. Altcoins are all built on the same basic framework as bitcoin and share some of bitcoin’s basic characteristics, and altcoins can all be traded like bitcoin, but each one is distinct. For example, one major altcoin, Ethereum, is minable, but altcoins like Stellar are not.
Within altcoins are a subset of cryptocurrencies called stablecoins. While most cryptocurrencies are characterized by wide fluctuations in value, stablecoins are designed to remain steady.
Unlike other cryptocurrencies, stablecoins are pegged to an asset, such as the U.S. dollar or the euro. And because a stablecoin tracks the pegged asset, its value stays stable relative to the pegged asset. Of course, some stablecoins aren’t pegged to a hard asset and instead maintain stable value by technical means, such as destroying some of the currency supply to generate scarcity. Those are known as algorithmic stablecoins.
Stablecoins are attractive to investors who want cryptocurrency to function like a real currency. Because most cryptocurrencies are not pegged to anything, their value is basically driven by whatever investors and speculators think it should be. That means wild price fluctuations, which can be good for returns if you’re on the right side of the buy-sell equation but not ideal if you want to buy anything with cryptocurrency.
This also makes stablecoins much easier to work with when negotiating values in a contract, since the prices are pegged to a reliable reserve currency.
How are Cryptocurrencies Unique?
So, how are cryptocurrencies unique, beyond those four classifications?
Most of the time, it comes down to the platform they trade on and the unique features of said platform. Ethereum, for example, is the second most popular cryptocurrency on the market right now because of its effective smart contract functionality. Tether, a stablecoin, is frequently used as a medium when transitioning from one cryptocurrency to another so that investors don’t have to cash out to fiat currency.
There are also differences in the scalability, privacy, and functionality of each cryptocurrency, which is part of why the top ten cryptocurrencies by market cap dominate the market. It’s relatively easy to create new cryptocurrencies—the source code of one cryptocurrency can easily be used to craft another. However, cryptocurrency systems periodically encounter forks (divergences in source code) that change the rules governing the currency. The top ten cryptocurrencies are the reigning champions of scalability, privacy, and functionality.
More Smart Alternative Investments to Build Your Financial Future
How are cryptocurrencies unique? In short, like any other investment, it all comes down to the details. But those details can make or break the quality of an investment.
That’s why here at Masterworks, we make it easy to identify key details of an investment. We do the legwork for you (with some help from our expert research partners at Citi Bank and Bank of America) and then we make it possible to purchase shares in securitized multi-million-dollar artwork with all the information you need to make an informed decision. Ready to get started? Fill out your membership application today to learn more.