A Guide to Cryptocurrency Types: Understanding Bitcoin, Altcoins, Coins, Tokens, and NFTs
Digital assets are categorized into Bitcoin and altcoins. Understand the difference between native coins and flexible tokens, including governance, utility, and non-fungible tokens (NFTs).
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The realm of digital currencies has expanded dramatically since 2009, following the release of the first Bitcoin mining reward. While you’ve surely heard of cryptocurrencies like Bitcoin and Ethereum, it’s vital to understand that the term “digital currency” encompasses more than just crypto.
Digital vs. Decentralized Currencies
It’s easy to assume all digital currencies are cryptocurrencies, but this isn't the case. For instance, many central banks worldwide are busy developing their own specific versions of digital money, generally known as central bank digital currencies (CBDCs). These CBDCs are essentially digital representations of fiat money. They are formally issued and recognized as legal tender by a central government. However, a key difference is that CBDCs typically do not rely on a distributed ledger, such as a blockchain, to maintain a record of transactions, meaning they generally miss out on the fundamental benefits associated with true cryptocurrencies.
The Dominant Split: Bitcoin and Its Alternatives
When analyzing the entire cryptocurrency ecosystem at its most basic level, assets are broadly categorized into two groups: Bitcoin and altcoins. This simple division (Bitcoin and not-Bitcoin) exists because of the profound market dominance that Bitcoin holds, representing a significant portion of the total crypto market capitalization.
Consequently, every other type of cryptocurrency is lumped together under the banner of altcoins. The name itself is a combination of "alternative" and "coin". As of mid-2022, there were thousands of altcoins in existence, with each one designed to address a particular market or serve a unique function.
Coins and Tokens: Understanding Native Assets
A common point of confusion arises because the terms "coin" and "token" are often used interchangeably. At a glance, they appear similar: both are traded on exchanges, both exist on blockchains, and both can be transferred between crypto wallets.
However, the defining difference lies in their relationship to the underlying blockchain:
- Coins are the native asset of a specific blockchain network. Examples include BNB on the BNB chain, Ether on the Ethereum network, and Bitcoin on the Bitcoin network.
- Tokens are built on top of existing blockchains. For instance, while the Ethereum network features only one native coin (Ether), it hosts numerous tokens created using standards like the popular ERC20 token standard.
The Versatility of Tokens
Tokens are considerably more versatile than standard cryptocurrencies. They can certainly be used like standard crypto assets, but their flexibility allows them to perform diverse roles, such as functioning as loyalty points or acting as digital receipts that signify a stake in a company.
Due to this wide range of applications, tokens are classified based on their purpose. These functions include:
- Transactional tokens: These serve as a unit of account and are utilized for exchanging goods and services.
- Utility tokens: These are used exclusively as a form of payment within a specific digital ecosystem.
- Governance tokens: These tokens empower holders with the ability to vote on matters related to a protocol's governance.
Other specialized forms, such as liquidity provider tokens, security tokens, and equity tokens, also exist. Given the pace of innovation within the crypto industry, it is highly likely that new categories of tokens will continue to emerge in the future.
Interchangeability: Fungibility and NFTs
When dealing with digital assets, the concept of fungibility is crucial.
Assets that are fungible are identical and completely interchangeable with one another, making them effective mediums for commercial transactions. Examples of fungible coins include Bitcoin and Ether. When creating these assets, it is possible to mint millions of identical units.
In contrast, you can mint a select number of assets with unique properties, leading to Non-Fungible Tokens (NFTs). NFTs are cryptographic assets maintained on a blockchain, each featuring unique metadata and identification codes that set it apart from every other token. Because these items possess unique properties and cannot be mutually swapped, they are deemed non-interchangeable, marking the key distinction between NFTs and other fungible coins and tokens.
For anyone looking to navigate this complex space, a practical starting point is to first become familiar with the major cryptocurrencies, focusing on those with the largest market capitalization, before gradually exploring the less mainstream altcoins.
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Conclusion
Since the first Bitcoin mining reward in 2009, the world of cryptocurrencies has expanded significantly, necessitating clear classification. While cryptocurrencies are a form of digital currency, not all digital currencies—such as central bank digital currencies (CBDCs)—are cryptocurrencies, as CBDCs are digital fiat money typically issued by a central government that does not use a distributed ledger like a blockchain. All cryptocurrencies are broadly divided into two main categories: Bitcoin and all others, which are referred to as altcoins, due to Bitcoin's significant market capitalization. Further distinction is made between coins, which are the native assets of a blockchain (e.g., Ether), and tokens, which are more flexible assets built on top of existing blockchains using standards like ERC20. Tokens can be categorized based on their function, including transactional tokens, governance tokens, and utility tokens, and they can be either fungible or possess unique properties. Cryptographic assets with unique identification codes and metadata that are non-interchangeable are called Non-Fungible Tokens (NFTs), distinguishing them from standard fungible coins and tokens.
