- What the top types of cryptocurrency are
- How many types of cryptocurrency are there
- The differences between them
- And the pros and cons of each
Table of Contents
What Is a Cryptocurrency?The prefix crypto- stands for “cryptography,” which is a technology that keeps information safe and hidden from attackers. You may have heard of cryptography in history class — it was used to send and receive secret messages by the Allied Forces in World War II. In present day, computer technicians put cryptography to use in many different ways. One of those ways is cryptocurrency!
The Three Main Types of CryptocurrencyThe blockchain brings together the three main types of cryptocurrency. Bitcoin was the first blockchain (skip to the Bitcoin section for more information on how it started and what it does).
A Bit of HistoryIn 2008, the idea of Bitcoin was revealed. Someone named Satoshi Nakamoto published the whitepaper online. However, it was later revealed that Satoshi Nakamoto was not this person’s real name. Even today, no one knows the real name of the creator of Bitcoin! At the time, nobody knew that Bitcoin would become what it is today. Nobody knew that it would be the start of a huge technological movement… but it was. It was the beginning of cryptocurrencies — the beginning of a new era. You probably know what happened next. Several years passed in which the primary use of Bitcoin was to trade goods and services on the dark web. Ever heard of Silk Road? Yeah, that’s what I’m talking about. In 2013-14, Bitcoin grew a lot. Then, it slowed down a bit. But in 2017, the market for Bitcoin went up, up and further up. This time, it went a lot further. In December 2017, Bitcoin reached a price of $20,000 per Bitcoin. So, anyone holding 50 Bitcoins or more became a millionaire. In January 2015, 50 Bitcoins would have cost you just $10,000. That’s a profit of $990,000! Crazy, right?!
What It IsIt is a digital currency that you can send to other people. This may be as a gift, for services or for a product. You get the idea — it’s just like the money we use in our bank accounts (USD, EUR etc.). But it’s digital; it isn’t physical.
How It WorksWhen someone sends Bitcoin, the transaction is verified and then stored on the blockchain (the shared database). The information on the blockchain is encrypted — everyone can see it but only the owner of each Bitcoin can decrypt it. Each owner of Bitcoin is given a ‘private key’, and this private key is how they decrypt their Bitcoin. But, if the banks don’t verify/process the transactions, then who does? Remember when I told you that blockchains are run by lots of different people and companies instead of one single company/person? Well, the people and companies that run the blockchain do it using computer power. They run special software on a computer that process transactions on the blockchain. Quick tip: The computers used to run the software are called ‘nodes’.Blockchain Explained guide.)
AltcoinsNext, we have altcoins. Right now, there are more than a thousand altcoins in existence! But don’t let that number scare you — the majority of altcoins are just alternate versions of Bitcoin with minor changes. That’s how they got the name ‘altcoins’. It’s important to understand, though, that not all altcoins are just alternate versions of Bitcoin. There are some that are very, very different to Bitcoin and have very different goals/purposes. Some altcoins use different algorithms to Bitcoin. For example, Factom is an altcoin that uses PoS (Proof of Stake). In PoS, there are no miners. Instead, there are stakers. Stakers are people that verify transactions for rewards, just like miners. But instead of racing to verify a block before anyone else does, they are selected one by one to take their turn. This uses much less electricity because their aren’t thousands of miners using their electricity to try and verify the same block. Instead, there is just one ‘staker’ per block.
Tokens (for dApps)The third main type of cryptocurrency is a token — the same kind we’ve just been talking about! Out of the three main types of cryptocurrency, these are the ones I find most interesting. Compared to the other two main types of cryptocurrency, they are completely unique in the fact that they do not have their own blockchain.
The Top CryptocurrenciesSo, we’ve now covered the different types of cryptocurrency.
BitcoinAs we’ve already covered Bitcoin, I won’t repeat myself. So, I’ll skip the Bitcoin description and jump straight into the pros and cons of Bitcoin. Pros
- There will only ever be 21 million Bitcoins. Most of these Bitcoins already have been mined by users. There are currently around 17 million Bitcoins, so there are around 4 million left to be mined. This low limit for Bitcoin is good for the price — if a lot of people want Bitcoin but there aren’t many Bitcoins available, the people that want Bitcoin will pay more for it. That would make the price go up!
- Bitcoin is easier to liquidate than rival cryptocurrency types. This means it is easier to convert Bitcoin into cash. That’s right — because Bitcoin is so popular, it is easier to exchange your Bitcoin for fiat currency like USD and EUR. Also, Bitcoin is on almost every crypto exchange on the internet. This means the trading volume is super high! In fact, it’s the highest of all cryptocurrencies.
- More stores accept Bitcoin than other cryptocurrency types. You are able to buy just about any item using Bitcoin through the hundreds of online sellers which accept the cryptocurrency. This is another way you can liquidate your Bitcoin — rather than convert it back into cash, you can just spend it like you would with cash.
- Bitcoin is the biggest cryptocurrency. Bitcoin was the first crypto, and it is the biggest. It currently dominates over 40% of the market, which is huge! Many people believe that Bitcoin will always be the biggest (but you should remember that’s just an opinion and that no one actually knows what will happen).
- Bitcoin fluctuates a lot. This means the price of Bitcoin changes a lot every day. In fact, the Mt. Gox collapse actually caused Bitcoin’s price to fall 50% below what it was the day before. Some investors like fluctuations, but the people who lose money because of fluctuations, definitely do not like them.
- Bitcoin may be replaced by a better cryptocurrency. As we mentioned in the section on altcoins, there are hundreds of variations on Bitcoin in existence today. Bitcoin is almost 10 years old now. Any of these newer coins could eventually replace Bitcoin — they are newer and further advanced.
- People still use Bitcoin for crime. The reputation of Bitcoin is improving since its early days on Silk Road, but it’s still not perfect. We only hear of few people being prosecuted for using Bitcoin illegally, but there are probably a lot more people that use it illegally and don’t get caught. These include things like scams and avoiding taxes.
EthereumIn contrast to Bitcoin, Ethereum is a platform that allows people to build dApps, tokens and smart contracts. Its currency is called Ether (ETH). Earlier, we looked at how important smart contracts were and how many possibilities they unlocked for the future. Now, let’s look at the main pros and cons for Ethereum: Pros
- Users of dApps built on Ethereum will always need Ether. They need Ether to pay for transaction fees on the dApps, because the dApps run on the Ethereum blockchain. So, just like the peanut butter jelly sandwich, Ether will never go out of style!
- Many new projects are being built on Ethereum. Most of these projects will take years to develop, however, a lot of them could be huge when they are completed.
- Speed. Ethereum can process transactions in a matter of seconds, whereas Bitcoin’s transactions take upwards of 10 minutes.
- There are many more Ether coins than there are Bitcoins. Earlier, we talked about how part of Bitcoin’s value comes from the fact that there is a limited supply. This is not the case with Ethereum — there are almost 100,000,000 Ether coins at the moment and they will never stop being created. However, the rate at which they are being produced will slow down greatly, so it isn’t much of a problem in my opinion.
RippleBasically, Ripple is a blockchain that is designed to be used by banks to make their payments faster. It is known as the banker’s coin, and there are many partnerships with global banks currently being worked on. Pros
- Big, well-respected companies (like global banks) are trusting Ripple. Huge financial organizations (such as banks and governments), have partnered with Ripple. Many more are yet to partner but have plans to. So, as an alternative to fiat currency, Ripple may be the best option for you within the world of finance. Because it is working with governments, the power it has to be widespread could be the reason it succeeds.
- Unlike other cryptocurrencies, Ripple isn’t decentralized. Instead, it is centralized. The company behind Ripple (called Ripple Labs) owns most of the Ripple tokens (XRP). So, if they wanted to, they could sell all of their tokens and the price of XRP would go down a lot. This is extremely unlikely, because they wouldn’t want to sell all of their tokens. But, I have to make a point about it because it is still possible.
LitecoinLitecoin is a fork of Bitcoin! So, basically, the blockchain of Litecoin used to be a part of Bitcoin’s blockchain, but it split when the Litecoin update was offered. So, it’s very similar but it has different features to Bitcoin. It was created to improve upon what Bitcoin had created. Litecoin has been in the news a lot lately because it will be the first cryptocurrency to use the Lightning Network. The Lightning Network solves a lot of issues for cryptocurrencies, such as scalability — using the Lighting Network, Litecoin will be able to process many more transactions per second.
- Litecoin is both faster and much cheaper than Bitcoin. Litecoin transactions take seconds, like Ethereum transactions. Bitcoin transactions take upwards of 10 minutes.
Also, Bitcoin transactions can be costly, which makes them pointless for sending small amounts. As Litecoin transactions are much cheaper, Litecoin is a lot better for micropayments (small payments), which is why it is called “Lite”coin.Cons
- Litecoin is still only a slight improvement on Bitcoin. If Bitcoin can improve so that it can scale and offer cheaper & faster transactions, there might not be much need for Litecoin.