‘Cryptography’ is the practice and study of techniques specifically for secure communication in the presence of third parties. In other words, in the face of adversaries. It is a technology that maintains the safety and security of information. Nowadays, a lot of people recognize the prefix “crypto”, thanks to its usage in the digital finance innovation, cryptocurrency. In this article we’ll give information that is key to understanding how cryptocurrencies work. Then we’ll describe in detail what the best types of cryptocurrency are today.
Cryptocurrencies are systems that allow for secure payments online. They are denominated in terms of virtual ‘tokens’ and ledger entries internal to the system represent them. “Crypto” is indicative of the encryption algorithms and cryptographic techniques that protect these entries. These techniques include elliptical curve encryption, hashing functions, and public-private key pairs.
Indeed, this innovation has permanently left its mark on the world of finances. No more are paper bills and credit cards the primary method of payment. Thanks to this new era technology we are living in, cryptocurrencies are becoming just as popular as traditional currency.
To further prove its longevity, there are new cryptocurrencies emerging in the market constantly. There was once a time when you could count the number of cryptocurrencies on one hand or both hands. In the present day, that is difficult to do because the crypto market is continuously growing. Whether the goal is to improve issues of a pre-existing cryptocurrency or because they have their own ideas, there is now a variety. There are many to choose from beyond popular names like Bitcoin and Ethereum.
That being said, what exactly are the best types of cryptocurrencies? With so many to choose from, which ones are ideal? This article will dive into that.
A brief summary
A cryptocurrency is a form of digital currency that uses cryptography to make it impossible to counterfeit or double-spend. Its creation is thanks to the technology that controls its development and protects transactions. It does so all while keeping the identities of its users confidential. For the purposes of this article, we won’t be focusing on the creation of cryptocurrency types. Instead, we will keep our attention on what it does.
Thanks to cryptocurrency, there is no longer a need for people to rely on banks to handle their money and private information. The same can be said in regards to credit card companies. There is also no need for banks to process our transactions anymore. In lieu of this, transactions in cryptocurrency go through processing on the blockchain.
The blockchain is a distributed ledger whose enforcement derives from a network consisting of diverse computers. This database is shared because those who run it are lots of different people and companies. This is in stark contrast to banks, in which one company is responsible for running them. This way, nobody has any semblance of power over the transactions or the participating cryptocurrencies. Moreover, there is no requirement for you to trust a single company (again, like a bank) to manage your money.
The number of merchants who accept cryptocurrencies as payment is gradually increasing. However, they are still very much in the minority. In order for cryptocurrencies to become more widespread, they need to gain mass acceptance among consumers.
The three types
Altogether, there are three main types of cryptocurrency and the blockchain effectively assembles all of them. Bitcoin was the first blockchain, thus it is the first of these crypto types. Following Bitcoin was the creation of a wide variety of new blockchains, which go by the name of ‘altcoins’. Some notable examples of altcoins include Litecoin, NEO, and Cardano. Last, but not least, there is the third type of cryptocurrency: tokens/DApps. A few solid examples of these include BitDegree (BDG), Civic (CVC), and WePower (WPR).
Now that we have the groundwork set up, we can take a closer look at each of these types.
1 – Bitcoin
This is most likely the first name you think of upon the mention of cryptocurrencies. The official conception of Bitcoin was back in 2008, with the publication of the whitepaper. The one responsible for writing it is a mysterious figure called Satoshi Nakamoto. To this day, no one knows for sure who this individual is.
At the time of its release, there was no indication that Bitcoin would go on to be what it is now. Very few people – if any – thought it would take off, let alone start a gigantic technological movement.
What follows would be a successful streak that had an unremarkable beginning. Several years went by where the primary use of Bitcoin was to trade goods and services on the dark web. However, from 2013 to 2014, Bitcoin would grow substantially. Its momentum slowed down slightly for a while, but in 2017, the market for Bitcoin went back up.
The fact that it’s digital is not the only thing that makes it different. It is also a decentralized creation, meaning it does not rely on a bank or third party to handle it. With Bitcoin, the execution of each transaction is directly between users. This is a peer-to-peer (P2P) network. You can thank the blockchain for making all of this possible. Bitcoin introduced blockchain technology as a way to give users the ability to send and receive Bitcoin. All without ever needing to use a third party.
It is because of the fact that you don’t need a third party that you don’t need to identify yourself. You are able to conduct payments without ever needing to disclose information about who you are.
Bitcoin is often referred to as digital gold, however, one might argue why bitcoin isn’t digital gold based on the fact that the last few weeks of performance hasn’t been holding up very well.
How it works
Whenever someone sends Bitcoin to another person, the transaction receives the proper verification. It then goes into storage on the blockchain. The information residing on the blockchain is encrypted. Basically, everyone can see it, but only one who can decrypt it is the owner of each bitcoin. Each bitcoin owner will acquire a ‘private key’. With this key, they have the ability to decrypt their Bitcoin.
However, after learning this a question remains. If the banks are not the ones to verify/process the transactions, then whose job is it?
As you may recall, blockchains are run by an array of different people and companies. No single company or person runs it. Therefore, the people and companies that are actually running the blockchain do so by utilizing computer power. They operate special software on a computer that processes any and all transactions on the blockchain.
The fact of the matter is, properly running this software requires the use of an excessive amount of electricity. With that in mind, how do the people and companies who are running the nodes pay their electricity bills? This is where the process of ‘mining’ comes in.
The nodes receive a reward in exchange for verifying transactions. That reward is brand new bitcoins. In actuality, this is the process that creates new bitcoins. In a way, you can compare it to the likes of gold mining, in which the miners receive gold as a reward. In terms of bitcoin mining, the nodes are the miners and their job is to mine for new bitcoin. Whenever a new block containing transactions is sent to the blockchain, the miners/nodes will validate the block. They do this by using a specific algorithm, which is Proof-of-Work (PoW). In PoW, the first miner who is able to verify the block gets the reward of new coins.
If you want to learn more, read “What is Bitcoin Mining?”
2 – Altcoins
Altcoins are a simple concept to explain. At its core, these are the other cryptocurrencies whose launch came after the incredible success of Bitcoin. Generally speaking, they sell themselves as better alternatives to Bitcoin; alternate versions with minor changes. Hence, the origin of the name ‘altcoins’. As of early 2020, the rough estimation is there are over 5,000 of these alternative cryptocurrencies.
There is something important about altcoins that you should keep in mind. Despite being alternatives for Bitcoin, not all altcoins are merely alternate versions of Bitcoin. In fact, there are some that are quite different from Bitcoin and have their own goals and purposes.
There are some altcoins that utilize an array of algorithms for Bitcoin. A good example of this is Factom. This is an altcoin that uses Proof-of-Stake (PoS). In the PoS algorithm, there are no miners. In their place, there are stakers.
‘Stakers’ are people with the job of verifying the transactions for rewards; not that different from the role of miners. But unlike miners, stakers do not race to see who can verify a block first. Instead, they each take their turn following a one-by-one selection. This harnesses comparatively less electricity because they aren’t hundreds of miners using their electricity trying to validate the same block. Rather, there is only one staker per block.
To reiterate an earlier point, not all altcoins are alternate versions of Bitcoin. For that matter, not all of them are super similar to Bitcoin. Two notable examples of this are Ethereum and NEO. These are a couple of altcoins that are vastly different from Bitcoin. It’s common knowledge that Bitcoin is primarily a form of digital currency. Well, in the case of Ethereum and NEO, their design does not necessarily allow them to be a digital currency. In lieu of this, their designs function mainly as huge platforms for the purpose of building apps on a blockchain.
On Ethereum and NEO, you have the ability to build your very own applications. This is arguably the most common method of creating brand new cryptocurrencies. Their construction occurs primarily on blockchains that permit app building, such as Ethereum and NEO.
How is this all possible? Well, that’s because, during Ethereum’s 2015 launch, it introduced the crypto world to a new piece of technology. This technology is what the community recognizes as a ‘smart contract’.
A smart contract is a self-executing contract with the terms of agreement residing in the lines of code. It can automatically execute transactions whenever certain things happen. These “things” (aka. the conditions) are written into the smart contract upon the time of its creation. An example of a condition could be something like this:
“WHEN Person A sends 100 Ether into the smart contract, THEN Person B’s house will be sent to Person A”.
The primary goal of these contracts is to boost the overall transparency of the transaction. All the while it reduces fees and mitigates any potential for conflict over a lack of performance.
Bitcoin means there is no need for third-party involvement in direct payments. Smart contracts, on the other hand, mean that there is no need for a third party to do a variety of things. Examples of this include the sale of a house, of electricity, or of a stock on the stock market.
Obviously, you are unable to actually put electricity into a smart contract. So, instead of this, you simply put a token into the smart contract. One that is legally representative of the electricity. This right here is undoubtedly one of the best things about smart contracts on Ethereum and NEO. You are able to tokenize real things and then put them on the blockchain.
3 – Tokens (for DApps)
The third and final main type of cryptocurrency is a token. Out of the three main cryptocurrency types, these are the ones that many find to be the most interesting. This is especially true when it comes to its unique design. When you compare it to the other main crypto types, tokens are one-of-a-kind in that they do not have their own blockchain.
They are used on decentralized applications (in other words, DApps). They are a relatively new concept when it comes to controlling our online data. These are the apps that, as mentioned before, can be built on blockchains such as Ethereum and NEO. The design of the DApps allows them to employ the use of smart contracts, which is why they use tokens.
It is not necessary for their tokens to be representative of a physical object like electricity or a house. Instead, one can use them as a means to purchase things on the DApp. Alternatively, we can use them as a way to gain access to certain types of advantages. Such benefits include lower fees and voting fees.
Tokens always have a price that they can sell for, which is the main reason why several people purchase them. There are some who buy tokens to sell them later on for a higher price, rather than buy them to use on the DApp.
The construction of DApps is typically on other blockchains like Ethereum and NEO. Because of this, a token transaction still receives its verification from the nodes on these platforms’ blockchains. What this basically means is the payment of the transaction fee is still with Ether or NEO. Put simply, the payment is not with the token.
The top cryptos
At this point, the different types of cryptocurrency should be crystal clear. With that out of the way, we can now move on to covering the top cryptocurrencies. There are four in total that we will go over: Bitcoin, Ethereum, Ripple, and Litecoin. There will be a list of the pros and cons that come with each one, thereby providing more insight. With this, you will be able to determine which one(s) you prefer.
We have already gone over Bitcoin extensively, so repeating what we already know would be redundant. Therefore, we will skip the description and go right to the strengths and weaknesses of this digital currency.
- There will only ever be 21 million bitcoins. The fact is, users have already mined a majority of these bitcoins. At this point in time, there are close to 3 million bitcoins that remain to be mined. The considerably low limit for bitcoin is very good for the price. Let’s assume that a lot of people want bitcoin, but there are not many bitcoins available. If that’s the case, then the people that want Bitcoin will ultimately pay more for it. That, in turn, will result in the price going up.
- Bitcoin is a lot easier to liquidate in comparison to rival cryptocurrency types. This means that it is easier for a Bitcoin to cash conversion. Due to Bitcoin being so popular, it’s easy to exchange your Bitcoin for fiat currency, such as USD and EUR. Furthermore, Bitcoin is available on almost every functioning crypto exchange on the Internet. Taking that into account, the trading volume is incredibly high; the highest of all cryptocurrencies, in fact.
- More stores accept bitcoin as a form of payment than other cryptocurrency types. You are able to purchase almost any item using bitcoin through many online sellers that accept the cryptocurrency. This is an additional way in which you can liquidate your Bitcoin. Instead of converting it back into cash, you can simply spend it just like you normally would with cash.
- Bitcoin is inarguably the biggest cryptocurrency. Bitcoin was the first crypto, so it only makes sense that it would also be the biggest. It is the dominant force in the market. Despite its occasional rough periods, people believe that Bitcoin will always be the biggest. This is, of course, an opinion and cryptocurrency markets are nothing if not unpredictable.
- Bitcoin has a habit of fluctuating a lot. To put it bluntly, the overall price of Bitcoin tends to frequently change pretty much every day. As a matter of fact, the collapse of the Mt. Gox platform would result in Bitcoin’s price to fall. Specifically, the drop led to the price being 50% below what it was the day before. There are some investors who find fluctuations appealing. However, people will often lose money because of fluctuations, so evidently, many don’t like them.
- A better cryptocurrency could replace Bitcoin in the future. As you may recall in the section focusing on altcoins, there are hundreds of variations of the Bitcoin cryptocurrency today. Bitcoin is almost a decade old at this point. Any of these brand new coins in the market has the potential to replace Bitcoin. Not only are they new, but they are also more state-of-the-art.
- It is not uncommon for people to still use bitcoin for a crime. The reputation of Bitcoin has seen improvements since its early days on the dark web. Still, though, it is not as flawless as we like to believe. The number of stories we hear about people using bitcoin illegally are few and far between. However, it is likely that there are a lot more people that use it illegally and get away with it. These often include such things as scams and completely avoiding taxes.
Ethereum is a popular software platform that is open-source, blockchain-based, and decentralized. The most common use of this platform is for its cryptocurrency, Ether. The use of Ether is primarily for two purposes:
- It is tradeable as a digital currency exchange, similar to other cryptocurrencies
- It is a useful tool inside Ethereum for running applications and even monetizing work.
In stark contrast to Bitcoin, Ethereum is a platform that allows people to build various systems and applications. These typically include DApps, tokens, and smart contracts. We went over the general significance of smart contracts in an earlier section. We already know that there are many possibilities they could unlock in the future. For now, we need to bring attention to the pros and cons pertaining to Ethereum.
- Users of DApps deriving from Ethereum will always need Ether. They need Ether if they want to pay for transaction fees on the DApps. The reason for this is that the DApps typically operate on the Ethereum blockchain. So, like other enduring inventions that we are still using today, Ether is timeless and will never go out of style.
- The construction of a lot of new projects is on Ethereum. A large chunk of these projects will take years to receive proper development. However, a lot of them have the potential to become huge as soon as they reach completion.
- Incredible speed. Ethereum is capable of processing transactions in a matter of seconds. This is quite a notable difference from Bitcoin, where those transactions often take approximately 10 minutes to process.
- There are comparatively more Ether coins than there are bitcoins. As mentioned before, a substantial part of Bitcoin’s value stems from the fact that there’s a limit on the supply. The same cannot be said for Ethereum. There are roughly 100 million Ether coins in circulation and the creation of more coins will never stop. Be that as it may, the rate at which they are being generated will slow down considerably. In the eyes of many, that is not much of an issue. Really, this con is subjective in terms of whether you see it as a problem or not.
Ripple is a technology that acts as two things: a cryptocurrency (XRP) and a digital payment network for financial transactions. Its operations are on an open-source and peer-to-peer decentralized platform that facilitates a seamless transfer of money in any form. Fiat, digital, it doesn’t matter.
Ripple is a blockchain whose design allows banks to use it as a way to make their payments faster. Many refer to it as the banker’s coin and there are lots of partnerships with global banks currently in development.
- Big and popular companies, such as global banks, are backing Ripple. There are plenty of huge financial organizations like banks and governments that are partnering with Ripple. There are still many more that have yet to partner with them, but there are plans. As an alternative to fiat currency, Ripple may be the ideal option for you in the world of finance. It’s working with governments, after all, so the power it has to become widespread might be the reason it succeeds.
- Unlike other cryptocurrencies, Ripple is not decentralized. This may be the deal-breaker for some people: Ripple is actually centralized. The company responsible for Ripple, Ripple Labs, owns a majority of the XRP tokens. Therefore, if they want to, they could sell all of their tokens. As a result, the price of XRP would experience a significant drop. The likelihood of this is small because they wouldn’t want to sell all of their tokens. However, it is worth mentioning because it is still frighteningly plausible.
The initial launch of litecoins was out of a desire to be the “silver” to Bitcoin’s “gold.” Since then, it would gain an ample amount of popularity in the world of crypto. It is a peer-to-peer internet currency, as well as a fully decentralized open-source global payment network.
The best way to look at Litecoin is as a fork of Bitcoin because that’s what it is. Basically, the blockchain of Litecoin was once a part of Bitcoin’s blockchain. However, at some point during a system update that was offered, it split. It shares some similarities, but it ultimately consists of different features in comparison to Bitcoin. Its original concept was to improve upon what Bitcoin was creating.
Litecoin is making headlines because it will be the first cryptocurrency to utilize the ‘Lightning Network’. The Lightning Network provides a solution to a lot of problems with cryptocurrencies. One of these issues includes scalability. With the help of the Lighting Network, Litecoin will be able to process more transactions per second than before.
- Litecoin is faster and costs less than Bitcoin. Litecoin transactions take mere seconds to process, like Ethereum transactions, and are faster than Bitcoin. Moreover, bitcoin transactions are prone to being quite costly, which effectively makes it pointless to send small amounts. Since Litecoin transactions are cheaper, Litecoin is a lot more suitable for small payments (micropayments). This explains the origins of the name “Lite” coin.
- Litecoin is nothing more than a slight improvement over Bitcoin. If Bitcoin is able to make improvements regarding its scaling and offer cheaper and faster transactions, where does that leave Litecoin? If these advancements happen, then there might not be a need for Litecoin.
After reading this article, you should have a better understanding of the most popular cryptocurrencies. Moreover, you should now be fully aware of the different types of cryptocurrencies. They have their own strengths and weaknesses and whichever you decide to invest in is up to you.