Know The Four Types of Cryptocurrencies Based On Their Utility

The cryptocurrency market in 2021 is worth over $2.2 trillion, shows the data from Coinmarketcap.com as on December 14.

In 2011, the cryptocurrency market was only worth $10 million. According to a report published in Statista the crypto market for the first time touched a $10 million market cap on February 9, 2011.  On November 10 ,2021, the crypto market cap was $ 3048.57 billion or roughly $ 3 trillion dollars, showed the same

Only a handful of cryptocurrencies existed back then and the primary goal for most of them was to provide a cheap and fast alternative to the US dollar for cross-border payments.

As on December 13, there are more than 15,000 cryptocurrencies, according to coinmarketcap.com and more are getting added every day, though it remains to be seen how many are left finally.

Former Reserve Bank of India (RBI) governor Raghuram Rajan believes that out of the 6,000-odd cryptocurrencies in existence today, most will perish. “Only one or two, or at most a handful, would survive,” he told CNBC-TV18 last month.

But there are various kinds of cryptocurrencies. “Crypto can be classified into different categories, like DeFi, NFT, utility tokens, store of value tokens like bitcoin and litecoin, and yield farming tokens like Aave,” says Sidharth Sogani, CEO of Crebaco, a crypto research firm.

Based on their utility, we have broadly categorised cryptocurrencies into four types.

 Currency

The world’s first cryptocurrency, bitcoin, was made for this utility. The aim was to make cross-border payment transactions cheaper and faster. Over the years, it has proved to be a store of value. While in 2009, one bitcoin was roughly equal to $1, now the value has grown to $48,000, according to data from coinmarketcap.com.

 “Crypto(s) can be used on any public decentralized blockchain. It's like the Ethereum blockchain has Ether as its token. Solana Blockchain has Sol as its token. So the tokens have enabled the developers and the public to use that particular blockchain using its native tokens,” says Sogani.

 Asset

Stablecoins can be categorised as assets as the value of these cryptocurrencies is derived from the value of an external asset. For example, USDT derives its value from the US dollar. Gold GLC is tied to the value of gold. Earlier, if investors decided to exit any cryptocurrency, they could exchange it for either any other crypto (which may or may not be preferable) or fiat currency. Now due to the availability of stablecoins, they could choose to remain in the crypto ecosystem by exchanging their cryptocurrency for a more stable crypto while they decide on the next preferable choice.

 “It (cryptocurrency) includes features of a commodity as well as currency, sort of like a hybrid. Commodities can also be used to settle a transaction. They do not impact the economic structure of a country directly, so considering them as a commodity is fine,” says Sogani.

 Object

A lot of buyers think this is where the future of cryptocurrencies lies. These types of cryptocurrencies were created to finance special projects aimed at solving the problems of the world. For example, Siacoin (SIA) aims to solve the problem of expensive cloud storage. As mentioned in their official website, “Sia is the leading decentralized cloud storage platform. No signups, no servers, no trusted third parties. Sia leverages blockchain technology to create a data storage marketplace that is more robust and more affordable than traditional cloud storage providers.”

 Another example is Decentraland, which is an Ethereum-based application where users can buy virtual land (NFT-based) using its cryptocurrency (MANA). Similarly, there are many more crypto coins that provide this type of utility.

 Terra (LUNA) is working towards becoming the stablecoin provider for e-commerce payment and making decentralised finance (Defi) accessible to the common man. “Terra is a public blockchain protocol deploying a suite of algorithmic decentralized stablecoins which underpin a thriving ecosystem that brings DeFi to the masses,” says its website.

 Meme or Joke Coin

These were created strictly for fun, with no specific goal or purpose, yet they are worth millions now. For example, Dogelon Mars (ELON) was created as a joke. It is supposed to facilitate “InterPlanetary Money Transactions” when it becomes viable. Its market capitalization is over $500 million as on December 13, according to coinmarketcap.com.

 “Meme coins don’t have any purpose and are very speculative assets which work on the simple idea of community-based pumped-up trading. Most of them have no use case. Nascent investors should stay away from such risky crypto(s). They can go bust, which means their value becomes zero at any time. Like what happened recently with the Squid crypto. Its owner ran away with millions of dollars of investor’s money,” says Sogani.

 But some have stood the test of time for now. Both Dogecoin and Shiba Inu started out their journey as meme coins in their early days, but now they are part of the crypto race. “Working with Doge devs to improve system transaction efficiency. Potentially promising,” Tesla CEO Elon Musk tweeted this week. Dogecoin developers are now working to make their coin a serious contender for bitcoin.

 Shiba Inu’s founder Ryoshi recently revealed that the Shiba Inu Core Devs (SICD) is working towards developing its metaverse known as “Oshiverse”. According to a report on Yahoo Finance, the anonymous developer stated, “We are working on so many aspects of Shiba Inu, including Shibarium, Shi, Shibanet, The Decentralized Shiboshi Game, Incubator and much more that won’t become evident until the near future.”

 But like any cryptocurrency, caution is the key that investors should never ignore.