It has become more widely accepted the past 12 months that cryptocurrency will play a pivotal role in the future. However many people are not familiar with the different types of cryptocurrency, and what different functions each serve.
Definition of Cryptocurrency
Before we get into the different types of cryptocurrency, let’s start with the basic definition. Cryptocurrency is a digital or virtual currency that uses cryptography for security. It is difficult to counterfeit and isn’t controlled by a central authority.
There are two main categories of cryptocurrencies: Coins and tokens. We will explain the primary differences between them below.
Coins are cryptocurrencies that operate independently from any other platform. Bitcoin, Litecoin, Dogecoin are all examples of a coin. As you probably know, Bitcoin is the largest and most well known cryptocurrency in the world. The “coin” inserted into the cryptocurrency name is there for a reason. It may seem obvious for some but many have not made these distinguishments between coins and tokens like Ethereum and Ripple.
The term altcoins is often used incorrectly, and is somewhat misleading. The term is used to refer to all cryptocurrencies that are not Bitcoin, but not all cryptocurrencies that are not Bitcoin are not technically coins.
Altcoins (actually referring to non-Bitcoin coins) are based on Bitcoin’s open-sourced, original platform with changes to its underlying codes, therefore creating a brand new coin with a different set of features. Coins will typically differ in block production speed, the total supply of coins in circulation, transaction processing speed, and other features.
Tokens are cryptocurrencies that have their own native blockchain. The most well-known examples of tokens are Ethereum, Ripple, and Cardano. Tokens will operate on top of their native blockchain in order to facilitate the creation of decentralized applications.
A good description of Tokens: “Tokens provide a way not only to define a protocol but to fund the operating expenses required to host it as a service. Tokens can represent basically any assets that are fungible and tradable, from commodities to loyalty points to even other cryptocurrencies”. Tokens are distributed through an ICO process.
If you want to learn more about the token creation process, we recently interviewed the founder of the token Verge. Check out the full interview and recap here.
What Characteristics To Look For in Longer Term Investments
Now that you understand the two main different types of cryptocurrency, you are probably wondering what is the best for a longer term investment?
The answer depends on a few different factors:
- Does the coin or token have real-world utility in a growing market
- Who is on the team behind the coin or token
- How is it being marketed
- Technical Analysis: Daily & Weekly Trend
Utility and The Team Behind The Cryptocurrency
The cryptocurrency you are looking to invest in needs to fulfill a niche that is in a non-saturated marketplace. However, you don’t want something that has zero competition, because that means it likely there is no proven demand. Common sense goes a long way to detmerining the potential of a token or coin. Can you see a group of people using this crypto on a frequent basis at some point in the future?
You want to see a team behind a coin that has extensive experience in the field of the coin or token. This exactly who you want to see behind the cryptocurrency you are looking to invest in. If any of the team members has no track record or even a criminal record, you should be very cautious about investing.
Check out the BAT token project for example.
You can see they have a team with an extensive background in browser development, and they are also in market that is not too saturated, but not completley devoid of competition.
Legitimate projects do not DM you on Instagram asking for you to send ETH to some random address. Pay attention to how a cryptocurrency or ICO you are looking to invest in is marketing themselves. Legitimate projects have a professional manner of marketing their coin or token . They have a way of verifying individual investors and have a secure system set up for taking your cryptocurrency payments.
This is the least subjective part of investing in my opinion. A lot of cryptocurrency trading is based on technical analysis. Technical analysis shows you where buyers and sellers might be at certain levels, and a strong understanding allows you to know at what levels to buy and sell at to maximize profit. Understanding technical analysis is crucial in my opinion to be able to consistently profit from cryptocurrencies, no matter what type of investor you are.