Bitcoin may be the most popular form of digital currency but it’s far from the only one.
In fact, about 1,500 other cryptocurrencies have emerged since the creation of bitcoin in 2009. And they fall into buckets like stable coins and tokens.
Coupled with the lack of clear regulations or oversight and how new the space is, it’s enough to leave any crypto newcomer completely confused.
Crypto is valued by investors because it’s not regulated by any central figure. It’s also exchanged pseudonymously, which allows for greater privacy.
While it was originally used for illicit transactions, it’s gained wider adoption. Even companies like Overstock and Starbucks have started experimenting with how to let customers use it to shop.
Investing in crypto is still risky and volatile – let’s recall bitcoin’s infamous rise in value to $20,000 late last year and its current price of under $5,000.
Because of this, knowing the core differences is worth your time.
Coins vs. Tokens
First, you’ll want to know the difference between coins and tokens. Coins are essentially virtual cash used for many types of transactions. They’re bought and sold over numerous different crypto exchanges, including Coinbase, bitbuy.ca and Binance. The first recorded bitcoin transaction was for two pizzas.
Tokens represent assets or anything that has value ascribed to it. For example, tokens can be used to represent things like the ownership of a piece of art or the number of rewards points a customer has in a company’s loyalty program. They both have value and rely on blockchain technology, a digital ledger of transactions that can’t be erased. But a coin is virtual money and a token is not.
Bitcoin and Alt Coins
Bitcoin was the original form of cryptocurrency – and it’s the coin others are compared to.
“Bitcoin is the mother crypto,” said Marshall Hayner, founder of Metal Pay, an app that’s much like Venmo for crypto.
Not surprisingly, its emergence sparked the rise of copycats, including alternative coins like litecoin, XRP and ether.
Ether is used to power its own unique blockchain called Ethereum – one of the biggest creators of smart contracts. These contracts use cryptographic code to verify and trigger transactions when certain conditions are met. For example, a smart contract could be set to pay out a certain amount of crypto at 1:00 p.m. on a specific day.
Another bitcoin alternative is XRP, which was built to make it easier for banks and payment processors to make cross-border payments. It’s one of the most popular cryptocurrencies.
There are also obscure alternatives, like dogecoin, which was created as a joke based on a viral meme of a Shiba Inu. The dog’s face is displayed on the front of the virtual coin. The currency is commonly used on social media to tip users who post interesting things.
Dogecoin has helped many people learn about and dabble in trading cryptocurrencies because its community tends to not take itself too seriously and is very friendly to new investors.
Stable coins are pegged to actual currencies like the US dollar, the euro or the British pound. That means that one dollar or pound gets you one crypto coin. These coins are designed to mimic actual currencies and tend to be less volatile than other cryptocurrencies.
Tether was one of the first stable coins.
“The idea behind tether is you give a dollar and you get one tether,” Hayner said.
But there’s still risk, according to Ryan Taylor, CEO of the cryptocurrency Dash. Their value can erode over time similar to fiat currencies like the US dollar.
Other recent stable coins are more transparent. For example, TrueUSD complies with some standard financial regulations and uses escrow accounts.
Utility tokens represent a certain service or good on a specific platform – kind of like a gift card to a specific store. They aren’t really investments but they have value.
Hayner likens them to casino chips: When you go to a casino, you exchange your dollars for chips and then can use those chips to play games. The chips serve a function because they allow you to do something and hold value but you have to exchange them to get actual cash.
Taylor said he was skeptical of most utility tokens because they aren’t the best way to interact with users. They require additional steps that make them more complicated to use and that could turn some people off.
However, he noted that they do make it possible to transact in extremely small quantities.
Security tokens are still relatively new. Their value is derived from real-world assets, which could include commodities like gold or oil, shares of a company or interest in a fund. These tokens are meant to be investments and because they’re considered securities and subject to federal security regulations.
Some fans of security tokens argue they would ensure greater accountability for companies because shares would be public and couldn’t be over-issued.
Both Hayner and Taylor say these tokens are still a ways off from showing up in people’s portfolios because of uncertainty around how they’d be regulated.
And according to Stephen Innes, head of trading in Asia Pacific for online trading platform Oanda, security tokens still don’t provide enough of a “consistent metric off which to base an underlying investment strategy.”
Security tokens, which would be regulated, also go against the very core of what crypto was meant to be – a deregulated currency. But regulations would be a draw for investors.
Non-fungible tokens have a unique value or use. They can store value but no two tokens are the same.
For example, in the video game CryptoKitties, users can use ether to buy digital cats. The digital kitties can be traded and bred, but each has its own unique non-fungible token that can’t be replicated – kind of like a digital fingerprint.
Future of money?
Digital currency is becoming more mainstream as companies like Starbucks and Goldman Sachs experiment with how to engage with it.
It’s unclear whether crypto will be the future of money, but it’s volatility isn’t helping its case for wider adoption. As values continue to drop and rebound, investors continue to show caution.
“There’s a lack of adoption on Wall Street,” Innes said. “The big banks that most people are doing business with are reticent to get involved, which I think is telling.”