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What Are The Different Types Of Cryptocurrency?

| 28th September 2021

This information is not meant to provide investment or financial advice as Howlader & Co are not investment professionals. The digital currency market may experience a high degree of volatility. Clients should be aware of the risks associated with cryptoassets and consult with an investment and/or legal professional before any investment is made. Howlader & Co cannot guarantee future financial performance.

There are many different types of cryptocurrency – the first and most famous is Bitcoin, but there are thousands of others.

Bitcoin was created in 2008 by the pseudonymous Satoshi Nakamoto and it is also known as digital gold (more on this later).

It reached its highest ever value earlier this year – nearly $65,000 – but cryptocurrencies are very volatile and prone to significant risk of price changes.

Other types of cryptocurrency include digital cash, software platforms and tokens, ‘stablecoins’, and ‘memecoins’.

In this guide, we’ll explain the different types of cryptocurrency and run through some of the biggest cryptocurrencies by market capitalisation.

Decrypting cryptocurrency

Cryptocurrencies are typically created by software developers and are decentralised, meaning that there is no central bank or administrator acting as a third party.

They are mined by coders with high-performance computers, while an open source blockchain – a public ledger – records the transactions, which are verified through cryptography.

Trading in types of cryptocurrency means betting on their price movements, rather than receiving traditional shares.

Other options for investors include ‘staking’, which is similar to receiving dividends but much more variable.

Crypto derivatives, such as options and futures, are currently banned by the Financial Conduct Authority (FCA) in the UK.

There are two broad types of cryptocurrency – coins and tokens. Coins include Bitcoin and ‘altcoins’, which are non-Bitcoin cryptocurrencies.

Tokens can serve a wide range of functions. Non-fungible tokens, or NFTs, are among the most well known, with one piece of digital art selling for $69.3m earlier this year. Read our blog for more information about NFTs and NFT taxes in the UK.

Cryptocurrencies may also ‘fork’ which can result in the creation of new ones. For example, Bitcoin Cash is the end result of a fork in 2017 from the original Bitcoin.

Biggest cryptocurrencies by market capitalisation

Market capitalisation is the most common way to rank different types of cryptocurrency, serving as an indication of investor appeal.

At the time of writing, according to crypto price-tracking database CoinMarketCap, the top ten are:

  1. Bitcoin: The highest value cryptocurrency. There are nearly 19 million Bitcoins in circulation and counting, with the total set to be capped at 21 million.
  2. Ethereum: Ethereum is a widely-used software platform with its own cryptocurrency, Ether, created in 2013.
  3. Cardano: Created in 2015; also a cryptocurrency software platform and the largest to use a proof-of-stake blockchain, perceived to be greener and more sustainable.
  4. Binance Coin: A cryptocurrency exchange created in 2017. Please note that currently the FCA does not permit the Binance Group to conduct any UK regulated activity.
  5. Tether: A stablecoin beginning in 2014 – this means its value is perceived to be more consistent than other types of cryptocurrency as it is tied to that of the US dollar.
  6. Ripple / XRP: An exchange released in 2012 with fast transactions and its own cryptocurrency, XRP.
  7. Solana: Released in 2019; also a cryptocurrency exchange, claiming to support 50,000 transactions per second (tps) – in comparison, Bitcoin processes up to 7 tps.
  8. Polkadot: Began selling in 2017; uses a multichain network to process transactions on more than one chain in parallel.
  9. Dogecoin: The most famous of the memecoins, released in 2013. Named after the Shiba Inu dog internet meme Doge and made popular via Elon Musk’s Twitter account.
  10. USD Coin: Launched in 2018; similar to Tether, this is a stablecoin pegged to the US dollar, intended for digital payments. Visa has settled transactions using it.

Other popular cryptocurrencies with a high market capitalisation include Uniswap, Terra, Chainlink, Litecoin and Stellar.

Namecoin was the second known cryptocurrency, the result of a fork from Bitcoin in 2011.

Main types of cryptocurrency

As mentioned earlier, they can be coins or tokens, but there are more specific ways to describe the different types of cryptocurrency. These are:

●  Digital gold: This is any cryptocurrency which you are more likely to store, rather than spend, in the hope its value will increase. Similar to real gold, there is a limited supply of it. Bitcoin is the main example of digital gold cryptocurrency, while Litecoin is also popular.

●  Software platforms / tokens: Cryptocurrency software platforms are typically networks with their own native currency. The platforms allow developers to create their own programs on the network, including NFTs. Ethereum is the main cryptocurrency software platform, followed by Cardano.

●  Digital cash: This is internet money, intended to be used for transactions rather than investment. The original Bitcoin was considered too volatile for regular transactions, so Bitcoin Cash was created after a software fork. It offers faster processing speeds and lower transaction fees (but remaining volatile). Ripple’s XRP is also digital cash.

●  Stablecoins: Also known as digital fiats, their prices are linked to that of a real currency, but they exist on a blockchain. Their value remains stable, so investors in other cryptocurrencies can digitally transfer their funds to a stablecoin when they hope to sell high, wait, then buy low. Tether and USD Coin (USDC) are both worth US $1.00 exactly.

●  Memecoins and miscellaneous: There are thousands of cryptocurrencies, but many of them have little value, no unique selling point and odd names. Occasionally, one may gain high publicity and therefore rise in value – Dogecoin is the most famous example.

Since cryptocurrencies are decentralised, their market is always open.

Investors should note that some exchanges will offer insurance, but others may not.

Conclusion: what are the different types of cryptocurrency?

To answer the question “what are the different types of cryptocurrency?”, the main two types of cryptocurrency are coins and tokens. More specifically though, there are several different types of cryptocurrency – digital gold, digital cash, software platforms, stablecoins, and memecoins.

Investors should also bear in mind UK tax and accounting for cryptocurrencies, the subject of one of our recent blogs.

We recommend that any investor with crypto assets looks to work with an experienced accountant who understands all the latest regulatory guidance.

Our team of expert bitcoin and crypto accountants UK can support you with any questions you may have about the different types of cryptocurrency and their tax or accounting requirements. Please don’t hesitate to get in touch with us.

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