- The crypto market is extremely diverse and offers variable exposure
- Bitcoin remains the most dominant cryptocurrency, but the market influence of Altcoins is growing
So you understand the basics of blockchain and the perks of crypto trading, and you’re ready to dive into the crypto jungle for yourself. The next step is to identify which digital assets you should trade and start choosing your coins among the thousands on the market; you are spoilt for choice!
However, not all cryptocurrencies are created equally and some demand specific trading strategies. In order to help you navigate the market and figure out what best suits you, we’ve compiled a guide to take you through the different types of cryptocurrencies, how to choose them, and a look at some of the most popular options right now.
Types of Cryptocurrencies: Choosing Your Coins
Bitcoin was the first viable crypto project and still dominates in terms of price and market capitalization. That means that in addition to being the most expensive crypto per unit, it also accounts for the largest share of value held on the overall market.
Since Bitcoin’s inception, the crypto space has exploded with the proliferation of alternative Altcoins. Unsurprisingly, Bitcoin’s market dominance has slipped into gradual decline as traders diversify into competing digital assets: from a 94% share of the market in 2013, Bitcoin has slipped to below 50% as of early 2022.
Broadly speaking, cryptocurrencies are split between three major categories:
- Bitcoin: The most famous, “original” cryptocurrency, founded in 2009 by an individual or group under the pseudonym ‘Satoshi Nakamoto’. Bitcoin was designed as an international peer-to-peer digital payment and pioneered the concept of blockchain finance
- Altcoins: Other currencies that have followed Bitcoin’s example for blockchain-based finance. Altcoins vary in their capabilities, applications, and underlying blockchain algorithms as each attempts to carve out a unique niche in the market.
- Tokens: Technically still Altcoins, tokens do not have their own blockchains and are instead hosted on top of an existing crypto blockchain.
So, which is a better prospect for traders: Bitcoin, Altcoins, or tokens? Due to the very different characteristics of each, the answer depends entirely on the individual trader and their interests. As always, you need to DYOR (do your own research) before choosing your coins and jumping on any bandwagons!
Why Bitcoin Dominates (For Now)
As the most well-established asset, Bitcoin dominates the market thanks to its widespread institutional support. Microsoft, Tesla, and Subway are just a few of the major international players who have used Bitcoin to integrate crypto into their businesses. Moreover, in 2021, Wall Street launched the first Bitcoin ETF, and El Salvador adopted Bitcoin as legal tender. Where plenty of smaller cryptos lack credibility or long-term prospects, Bitcoin has already marked itself as a well-recognized financial entity.
Indeed, real-world application has helped consolidate Bitcoin’s credibility and convince traders that it is a serious market contender. But long-term investors, known in the cryptoworld as hodlers (abbreviated from “Holding On for Dear Life”), also consider Bitcoin a store of value outside of conventional fiat systems and refer to it as ‘digital gold’. The overall supply of Bitcoin is capped at 21 million to prevent inflationary devaluation, so the supply and demand balance is tipped in favour of huge price growth if the crypto’s popularity prevails.
Nevertheless, Bitcoin is not flawless, and this leaves room for Altcoin creators to capitalize on its limitations. For instance, transaction times are relatively slow, and fees high; the Proof-of-Work method of consensus is energy-intensive and therefore not environmentally friendly; and the blockchain does not afford absolutely anonymity. Should a more viable, sustainable, and powerful alternative steal enough support from Bitcoin, it is possible the crypto king could be dethroned.
Types of Altcoins and Tokens
Defined simply as “Alternative Coins” to Bitcoin, there is little more that unites this vast group of cryptos. In actual fact, Altcoins and tokens fall into many different categories according to their capabilities, applications, and underlying blockchain algorithms. Some of these groups overlap, as discussed below:
- Proof-of-Work: Like Bitcoin, using cryptographic mining to process transactions and produce currency. Examples include Dogecoin and Litcoin.
- Proof-of-Stake: Transaction processing is delegated between holders who have staked (deposited) a quantity of crypto on the blockchain. This is considered more environmentally friendly and scalable than Proof-of-Work. Examples include Ethereum, Binance, and Solana.
- Pre-mined: Part of the supply of a crypto is pre-distributed before public release. Ripple is an example of a pre-mined coin.
- Stablecoins: Cryptocurrencies pinned to an underlying asset and therefore less vulnerable to typical crypto volatility. Tether (USDT) is an example of a stablecoin.
- Smart Contract and DApps: Some blockchains have been configured with programmability in mind in order to make them more flexible in their applications. This allows the blockchains to support Decentralized Apps and smart contracts, and even Web3 (the blockchain internet) for more sophisticated and versatile services. Examples include Ethereum, Solana, and Cardano.
- Privacy: Cryptocurrencies that offer totally untraceable transactions through the use of stealth addresses and ring signatures. Monero is an example of a privacy crypto.
- Utility Tokens: Used to fuel services on a blockchain, for instance by paying fees, redeeming rewards, or accessing exclusive services. Examples include OmiseGo, Chainlink, or Basic Attention Token.
- Security Tokens: Digital versions of tradeable securities, offering equity through ownership or dividend payouts to holders.
The children of internet meme culture and blockchain currencies, these cryptos are uniquely quirky. These projects attract popularity more because of online jokes and hype than their technical capabilities. Even for cryptos, they are particularly volatile.
Examples include Dogecoin and Shiba Inu. Most notably, these coins rocketed into the top 20 cryptos by market cap in 2021 thanks to Elon Musk’s Tweets about his Shiba Inu puppy.
Cryptos have now stepped into the world of gaming in the form of game tokens. To be precise, gamers earn and exchange tokens through dedicated video game platforms and can cash them out for real money. These tokens are a common feature of metaverse platforms.
Examples include Decentraland and Axie Infinity.
Pros And Cons of Trading Altcoins
Even Bitcoin purists can appreciate the diversity and opportunity that Altcoins bring to the market. Since crypto is a highly-speculative industry, it offers trading opportunities in the short and long term. Moreover, some argue that blockchain technology will shape not only our finance, but also the internet, communications, and other contractual business in years to come.
Nevertheless, the market as a whole remains immature, and there are not yet any Altcoins that rival Bitcoin in terms of value, adoption, or popularity. If trading crypto is risky, trading in Altcoins is especially risky, and traders cannot rule out the possibility of smaller digital assets failing altogether.
Pros of Trading Altcoins
- Trading Altcoins, either on their own or alongside Bitcoin, can help you enhance your market exposure within crypto ecosystem and outside of conventional financial markets.
- Plenty of Altcoins specifically address Bitcoin’s flaws and offer better cryptocurrency options.
- Thanks to growing institutional interest in Decentralized Finance, some Altcoins are beginning to challenge Bitcoin’s dominance. Dogecoin, Ethereum, Litecoin, and Cardano are just some of the Altcoins to be supported by major institutions. This only adds to their market credibility.
- High volatility in the market is typical. This makes it ideal for savvy scalpers and trend traders to make quick profits on positive or negative price action.
- Blockchain technology is constantly-evolving so there is opportunity for major movement and growth.
Cons of Trading Altcoins
- Bitcoin still dominates the market.
- Lower liquidity and a lack of investors and regulation make Altcoins highly risky for trading and liable to extreme volatility.
- It can be difficult to pick out winning altcoins from the huge array of options available. Sometimes you can have too many choices!
- There is always the risk, especially in smaller projects, of altcoins dying and causing irreversible loss.
Overall, traders interested in cryptocurrencies have no shortage of options. Spreading across Bitcoin, Altcoins, and even tokens, traders can diversify their exposure outside of the conventional financial markets. Nevertheless, the volatility of crypto should not be underestimated, as even Bitcoin is capable of enormous price swings. As a result, careful research and analysis is crucial to making sure you pick the right cryptos, or crypto, for you.
Limited though it may be, the history of crypto thus far shows a general correlation between Bitcoin and Altcoin prices. This is no doubt due to the highly speculative nature of the market, which makes both panic and excitement highly contagious. As other Altcoins become more established, however, it will be interesting to see if they start to hold their value independently of Bitcoin. When the whole crypto market stops moving in parallel, we will be able to pick out the long-term contenders more clearly. Additionally, we’ll see whether any can knock Bitcoin off the top spot.
What Are The Different Types of Cryptocurrency?
Cryptocurrencies are split into three major categories: Bitcoin, Altcoins, and tokens.
Bitcoin is the most famous, “original” cryptocurrency, designed as an international peer-to-peer digital payment.
Altcoins comprise other currencies that have followed Bitcoin’s example for blockchain-based finance. Altcoins vary in their capabilities, applications, and underlying blockchain algorithms.
Tokens are technically still Altcoins, but do not have their own blockchains and instead function on top of an existing crypto blockchain.
Will Bitcoin Continue To Dominate The Crypto Market?
At present, Bitcoin holds the greatest share of market capitalisation among all cryptos. Its status as the blockchain pioneer has made it a favorite amongst investors and institutional supporters, but this doesn’t mean it always will be. As a payment system, the Bitcoin blockchain has conspicuous drawbacks, and this incentivizes Altcoin competitors to produce more efficient and effective solutions.
Over the past decade, Bitcoin’s dominance has gradually decreased. Still, there is no Altcoin that poses an immediate threat to its place at the top of the market.
Why Trade Altcoins?
On the one hand, Altcoins allow crypto-enthusiasts to diversify their market exposure beyond Bitcoin. There is a general correlation between Bitcoin and Altcoin price movements, to traders can amplify their exposure to overall crypto trends by trading collections of cryptos.
On the other hand, plenty of Altcoins specifically address Bitcoin’s flaws and offer better cryptocurrency options, so traders can cash in on the competition within the market. As Altcoins become more established, they may well start to hold their value independently of Bitcoin and offer even greater growth potential.