Types of Cryptocurrency: An Overview

The first cryptocurrency, Bitcoin, was launched on January 3, 2009, after the housing bubble had burst four days earlier. Because blockchain technology is open source, other cryptocurrencies with different inputs, like altcoins, stable coins, and government tokens, began to appear. To date, there are approximately 10,000 cryptocurrencies that cover the spectrum of serious utility to fodder for internet trolls.

What Is a Cryptocurrency?

Broadly speaking, cryptocurrencies are digital money-like assets that use a cryptographic consensus system to ensure the transfer and store of value. These cryptocurrencies use computer code to define the rules for their creation, exchange, and account. Decentralization is often a key aspect of cryptocurrencies (especially Bitcoin) and ensures that the entire system can be distributed across a large geographical area.

Other Cryptocurrency Assets

As blockchain gains more and more momentum, more cryptocurrencies and tokens appear for countless different uses. These cryptocurrencies often function with a single specific use case in mind, but they generally fall into three different categories:

Altcoins

Altcoins are alternative cryptocurrencies that use bitcoin's open-source software but have different code inputs. For example, some altcoins have modified bitcoin's original code for speedier transactions; others have modified bitcoin's code for increased privacy, among other modifications. As a general rule, any cryptocurrency that is not bitcoin can be regarded as an altcoin. Some of the most popular altcoin projects are Ethereum, Dogecoin (a "memecoin"), Cardano, and Polkadot.

Ethereum is a platform and cryptocurrency that allows smart contracts and decentralized applications (DApps). Just as bitcoin contains both the system of account and the system for transferring value, Ethereum's cryptographic token holds the software that makes the decentralized applications work and stores the value. The whole raison d'etre behind Ethereum was to increase the availability of a decentralized suite of financial tools that anyone can use, regardless of geographical location.

Popularized by Elon Musk, Dogecoin is a "memecoin" based on the popular Shiba Inu meme, "doge." This coin was initially created as a joke but is now regarded as one of the more serious crypto currencies. Dogecoin parts ways with bitcoin in two significant ways. First, unlike bitcoin, which has a fixed limit of 21,000,000, there is no limit to the number of Dogecoins that the market can produce. Second, Dogecoin is also much more efficient at processing payments than Bitcoin, which leads to its desirability and functionality as a legitimate currency.

Stable Coins

So-called stable coins are tokens that are tied to the price of another asset like the US dollar, gold, or the euro. These stable coins typically rely on a central issuing institution (generally a business) that attempts to issue a one-to-one equivalent. The leading coins for USD stable coins (USDC and USDT) tend to stay very closely pegged to the dollar and rarely differ more than a few thousandths of a cent from the actual USD value. The euro-backed cryptocurrency also remains close to the true value of a euro. The companies that issue the stable coins achieve this stability by holding US dollars and euros on their balance sheet as assets and issuing their coins as liabilities. As the price or strength of the currency varies, these companies purchase or sell more of that currency.

Gold-backed "stable coins" like PAXG are not nearly as reflective of gold prices. As the value of gold changes, the issuing company must sell or purchase physical gold, which is more complex than just hitting "enter" and exchanging euros or US dollars. Additionally, gold is no longer a currency, so its value exists relative to other currencies. The variable price can also be explained by the value of gold increasing relative to one currency and decreasing relative to another. Gold's price variability adds another dimension of complexity for physical gold-backed stable coins.

Government-Issued Tokens

The original cryptocurrency (bitcoin) was intentionally designed to function successfully sans government. Its validation system is permissionless, and its decentralized nature allows it to thrive wherever there's stable electricity and internet.

However, governments are noticing the efficiency and extra levels of state security that may come with issuing their own cryptocurrencies, also known as central bank digital currencies (CBDCs). While CBDCs are largely still in feasibility- and beta-testing stages, many eastern and western governments are looking into the issuance of their own tokens. 

Many often point to China as the prime example of this next generation of fiat, but even in China, the technology only exists in a select number of cities. Cambodia has also recently launched a hybrid CBDC, which approximately half the population is now using. The mobile application, called Bakong, uses blockchain technology to allow Cambodians to transfer US dollars and Cambodian riels to each other. While the technology is still nascent, many developing countries are taking the lead toward widespread adoption. 

The Benefits and Dangers of Different Types of Cryptocurrencies

Because the technology is so new, the crypto landscape is replete with opportunities and countervailing uncertainty. Altcoins are introducing new concepts and new ways of carrying out everyday activities in mostly decentralized ways. However, the financial aspect that many of these new technologies employ is quite volatile compared to other stable sovereign currencies like the USD, CAD, and euro. For those looking to hedge against the possibility of cryptocurrency inflation, these new altcoins may be sub-optimal since all of them (except bitcoin) have a mechanism by which the supply can be inflated.

Stablecoins are the vanilla ice cream of the cryptocurrency world. While many investors are wary of volatile crypto markets, many are drawn because of the same volatility and the dream of easy profits. Stable coins protect investors from the worst market volatility but also insultate investors from potential earnings. 

Finally, CBDCs give sovereign states the ability to exercise superlative control over their currencies. Any modifications to the currency could happen with a few keystrokes, and counterfeit bills could be virtually eliminated. Citizens of countries who use CBDCs may also enjoy lower transaction costs and quicker transfer times. However, inflation could continue to  be a significant problem when the money supply can change with a few keystrokes. The citizenry of these countries may also have justifiable privacy concerns since, in theory, every transaction would be visible to the issuing institution.

Conclusion

Cryptocurrencies and tokens are a profound revolution in our day-to-day lives. In fact, much of the observable market volatility is attempting to tease out what cryptocurrencies are and what role they'll have in our world. The Wharton School is at the forefront of this discussion and is helping the world's leaders in business and finance join the crypto conversation. Our Economics of Blockchain and Digital Assets course was created to help professionals gain a comfort level with blockchain and digital assets and help their businesses thrive. To obtain more information about our course, please visit our information page.

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