Once seen as a gimmick investment, cryptocurrency is becoming more and more mainstream with each passing day. There are now also a range of different types of cryptocurrency one might choose to invest in.
Even with its gaining popularity, many people, including those investing in it, don’t truly understand what it is or how it works. Typically, that’s not a great way to invest.
If you’re interested in investing in cryptocurrency but want to learn a little more about it first, you’ve come to the right place. Let’s dive in to understand the different types of cryptocurrencies and the technology behind them.
What is Cryptocurrency?
In its most general sense, cryptocurrency is a virtual or digital form of currency or money. Basically, it’s a way to pay someone without having a tangible item to hand over.
This may seem like a strange concept to most people, but if you think about how little of our earnings we touch because of direct deposit and the dozens of money transfer apps and websites out there, it makes a little more sense. Like the US Government printing more money, people can “mine” more of these coins.
What is Blockchain?
Another term most people here when it comes to cryptocurrency is “blockchain.” Blockchain is the technology most cryptocurrencies are based on.
The easiest way to define a blockchain is as a list of transactions that anyone can view and verify. The blockchain for each type of cryptocurrency will have a record of anyone sending or receiving that coin. Think of it as an ever-growing book or “chain,” if you will, of transactions. Each time a coin is sent or received, it’s written into the book or added to the chain.
Using blockchain technology has a few advantages. The transparency of having all the transactions viewable by anyone means they are constantly being verified by tons of computing power. If anyone were to try to manipulate it, every computer on the network would see that and immediately correct the transaction. It also allows for a more decentralized transfer of payment. Two people can exchange coins without knowing any personal information about each other and without using a third-party intermediary like a bank. The transactions can also be more secure than a traditional credit or debit card transaction due to the lack of identifying information being passed along when transactions are made.
What Are Altcoins?
Altcoins are any cryptocurrency other than Bitcoin.
Long before it became as popular as it is today, Bitcoin was the one and the only cryptocurrency out there. Eventually, others started using the technology and tried to improve upon it. Hence, altcoins were born.
Today there are thousands of different cryptocurrencies you could potentially use or invest in. Most are based on the same blockchain technology as the original but have characteristics that make them different.
Proof of Stake Altcoins
One of the most significant differences between bitcoin and several altcoin coins is the idea of proof of stake (POS).
Bitcoin is based on the Proof-of-Work system, which is why you hear that it takes a ton of computer power and energy to “mine” a bitcoin. Proof of Work coins requires you to solve arbitrary mathematical puzzles to “prove the work.” That is where the intense amount of computer and power usage comes in.
Proof of Stake works a bit differently. Proof of Stake means that you can only mine or validate block transitions based on the number of coins you currently have. Again, that’s a bit confusing. In layman’s terms, it means the more of a certain altcoin you own, the more of them you can make, very similar to gaining interest on a bank account.
9 Popular Types of Cryptocurrency
Bitcoin is the original and most widely known cryptocurrency. It was created in 2009 as open-source software by a source whose true identity is still unknown to this day. All we have is the pseudonym Satoshi Nakamoto.
Litecoin is one of the first altcoins and was created in 2011. Litecoin is also an open-source currency. Its global payment network is entirely decentralized, meaning there are no central authorities. Litecoin was made to have faster transaction times and is run on a different algorithm than the original bitcoin.
Ethereum was created in 2015 and is also run on open source code using blockchain technology. Ethereum added Smart Contracts and decentralized applications to the crypto resume.
Bitcoin Cash (BCH) is one of the earliest and most successful hard forks of the original Bitcoin. Think of it as a fork in the road; at one point, everyone is on the same path. The users of one coin want to take the path on the left, others the path on the right. When this happens, the original coin heads in one direction, and a new coin is created by those heading in the other. The main changes made to create Bitcoin Cash revolved around created faster transaction times.
While using the same technology as other coins, Stellar has positioned itself as an enterprise blockchain for institutional transactions. The system allows for cross-border transactions between any currencies. Stellar’s native currency is Lumens (XLM). The network requires users to hold Lumens to be able to transact on the network.
Similar to Lumens, Ripple is more than just an exchange of value. Its main goal is to help make financial transactions between users in different countries much faster. Ripple works with financial institutions and can provide much lower transaction fees and real-time exchange rates. It can accomplish this by eliminating the middle man of any transaction using the decentralized network.
Tezos (XTZ) is a popular proof of stake coin. One of the unique elements of Tezos is its governance. Most early cryptocurrencies use development teams and miners to determine new design choices. Tezos attempts to build the decision-making process into the network of users itself.
This essentially means that the Tezos network remains decentralized. While this is not unlike other cryptocurrencies, Tezos also allows for collective decision-making by allowing token holders to vote on pending protocol developments.
Algogrand was created in 2019 by computer scientist and MIT professor Silvio Micali. Algorand is another proof of stake coin, distributing validation rewards to all holders of its native ALGO cryptocurrency, which aims to achieve high speed, security, and decentralization all at the same time.
Algorand also allows developers to use the Algorand Standard Asset (ASA) protocol to create new coins or transfer existing coins to the Algorand network. For example, stablecoins like USDT and USDC also exist as ASAs on the Algorand blockchain and enjoy much faster transaction speeds and much lower transaction fees than other coin networks.
It’s hard to talk about cryptocurrency today without at least bringing up Dogecoin. Dogecoin is an altcoin with roots in both Litecoin and Luckycoin. Creating in 2013 by two software engineers, Billy Markus and Jackson Palmer, the coin was inspired by a popular internet meme of a Shiba Inu dog. Dogecoin uses cryptography known as scrypt, which is a password-based key derivation function making it purposely costly to hack the algorithm at a large scale.
Typically seeing a value between 1-2 cents per coin, there have been several times crypto investors have tried to rally around the lovable coin. Gaining interest from various celebrities such as Snoop Dogg and Gene Simmons has boosted the popularity. Elon Musk tweets have sent the coin soaring and dropping in price and groups like WallStreetBets on Reddit have sparked wild speculation surrounding the coin. Being a bit more of a joke coin, any investor looking to buy Dogecoin should be more than ready to see it lose most or all of its value overnight based on a random tweet.
Should I invest in Cryptocurrency?
Now that you understand a bit more about cryptocurrency and what coins are out there, you might be wondering if you should invest in some. Well, the answer is the same as with any other investment; it depends.
Cryptocurrency no longer feels like a fad that will be going away, leaving people empty-handed. However, they are still considered a risky investment. The wrong altcoin could become completely worthless, but it would also increase in value tenfold.
Although not going to disappear off the face of the planet, the more established coins are still subject to incredible volatility. One tweet from Elon Musk can send your coin through the roof or the floor and back again. Only invest what you are comfortable with losing. Start investing simply with some more established coins, and as you gain more knowledge, you can venture out from there.
How to Invest
In my opinion, the best way to invest in cryptocurrency is through Coinbase.com. There are other sites out there that will give you access to more coins, but for the safest and most stable platform, Coinbase is the way to go. You’ll have access to all the major currencies and altcoins out there. You can enable two-factor authentication and know you’ll have a safe and effortless way to trade your coins.
There are more traditional ways to invest in Bitcoin and altcoins as well. As they become more mainstream, big firms and other investment avenues are making different types of cryptocurrency part of their investment strategies and investment portfolios. You can invest in companies with crypto holdings or in funds that are solely dedicated to cryptocurrency itself. Both methods can help spread your investment across many coins reducing the risk of the investment.
Cryptocurrency is a new and exciting way to invest your money, but you should understand the technology behind it first. Blockchain technology allows hundreds of thousands of users to verify every transaction, reducing fraudulent transactions constantly. It also creates a more secure and decentralized way of making payments from one person to another.
Investing in cryptocurrency is becoming more accessible and more mainstream every day. As with any investment, make sure you understand the risks involved and only invest what you can afford to lose. Hopefully, with this insight and some research of your own, you’ll find the coin or other investment avenue right for you.
Now that you know a bit about cryptocurrency and the different types of cryptocurrency, will you be investing?