We’ve been hearing from Addition Financial members asking for more information about cryptocurrency and the various types, along with how these digital coins can be used. With that in mind, here are eight popular types of cryptocurrency and their uses.
Traditional Coins
Let’s start with traditional cryptocurrency. In the world of crypto, here’s what traditional means:
- A currency that is truly decentralized, meaning that it isn’t linked to any standard or backed by a governing authority. This distinguishes cryptocurrency from fiat currency such as the United States dollar.
- A currency that derives its value from buyers. What we mean by that is that a traditional cryptocurrency has value because people are willing to pay for it. The amount of its value can vary greatly depending on the demand.
Now let’s look at some of the most popular traditional coins and how they can be used.
#1: Bitcoin
Bitcoin was the world’s first digital currency and it is still the most popular. While its value has fluctuated wildly over the years, overall, it has been on an upward trajectory. When the first Bitcoin was minted in early 2009, its value was negligible – probably less than a penny. As of April 29, 2022, Bitcoin was trading at $39,070.70.
The first and most obvious use of Bitcoin – and the original intention of crypto – is for spending. It has long been used for peer-to-peer spending. Some large retailers, including Amazon, Microsoft, Starbucks and Overstock.com, now accept Bitcoin as payment.
Two countries, El Salvador and the Central African Republic, have adopted Bitcoin as legal tender. The jury is still out on whether this experiment will work, with El Salvador’s adoption looking rocky at best.
The second potential use of Bitcoin is as an investment. Anybody who got in early with Bitcoin could sell it and realize significant capital gains as a result. Bitcoin is not a good choice for a short-term investment because of its volatility but we think it can be a decent choice for a long-term investment provided that you don’t invest more than you can afford to lose.
#2: Ethereum
Like Bitcoin, Ethereum is a traditional, decentralized cryptocurrency. Its value is not as high as that of Bitcoin. As of April 29, 2022, Ethereum is trading at $2,854.61. It reached a high of $4,426.74 in November of 2021.
Ethereum may be used for peer-to-peer spending as well as for purchases with companies including Shopify and Overstock, and there are talks in progress with Home Depot and Bed Bath & Beyond.
Ethereum may also be viewed as an investment. What it has in common with Bitcoin is an overall trajectory of growth.
One area where Ethereum and its blockchain technology differ from Bitcoin is that the Ethereum blockchain can be used to mint non-fungible tokens, or NFTs.
An NFT is a token that represents something else, such as a song or a piece of digital artwork. The term non-fungible means that unlike a traditional currency or digital coin, it is unique and can’t be swapped for another digital asset in a like-kind transaction. If you swapped one Ethereum coin for another, you would retain the same value that you had originally, but the same would not be true with an NFT.
#3: Litecoin
Another traditional crypto coin that has been popular is Litecoin. Litecoin was created as a fork from the Bitcoin blockchain and was intended to slow what some people saw as the inevitable takeover by large crypto mining firms.
While Litecoin has not been able to avoid the influence of large scale crypto mining operations, it has become popular in its own right. Like Bitcoin and other virtual currencies, it may be used for peer-to-peer transactions.
Many online retailers now accept Litecoin. Even with those that don’t yet accept direct payments of Litecoin, there’s an option to pay using Litecoin through a third party service such as NOWPayments.
It may also interest you to know that, in 2019, the Miami Dolphins named Litecoin as the team’s official crypto and now accepts it as payment for both tickets and merchandise.
#4: SolarCoin
The last traditional coin we want to mention is SolarCoin. It’s an example of how cryptocurrency could be used to incentivize environmental initiatives. Anybody who produces solar energy can claim one SolarCoin for each megawatt hour of verified electricity production.
SolarCoin will reward the coins after verifying energy production and store them in an Ethereum-compatible cryptocurrency wallet. People can save SolarCoins as an investment, spend them on goods and services, or exchange them for US currency or other digital currencies.
We should mention that SolarCoin has a low value as of this writing. However, we anticipate that it will get more attention because of the rising focus on the exorbitant energy consumption required to mine Bitcoin and other types of cryptocurrency.
Stablecoins
The second part of our list is dedicated to stablecoins. A stablecoin is a type of digital currency that, unlike Bitcoin and other traditional types of cryptocurrency, is backed by a standard. In theory, stablecoins offer the best of both worlds: the anonymity and security of crypto combined with the stability and predictability of fiat currency such as the U.S. dollar or the British pound.
It makes sense that stablecoins are getting attention. The one thing that drives some investors away from crypto trading is its extreme volatility. While the value of the dollar does rise and fall, it does so within relatively small parameters. Most people can look at the balance in their savings account at night and go to sleep secure in the knowledge that they’ll have the same net worth when they awaken. That’s not the case with Bitcoin and other traditional digital currencies.
Stablecoins don’t offer the same excitement or potential of big earnings, but they do offer predictability and stability.
#5: USD Coin
USD Coin (USDC) is a stablecoin that’s locked at a 1:1 ratio with the United States dollar. That means that one USD Coin is equal to $1 and always will be.
It’s important to note that USDC is not issued by the U.S. government nor is it backed by the government. Instead, it is backed by a reserve that’s held in U.S.-regulated accounts.
The primary thing that makes USDC different from Bitcoin is that its value is stable – as the word stablecoin suggests.
Like other digital currencies, USD Coin can be spent at retailers who accept it or through a third-party vendor. Where it differs from traditional crypto is that it can be purchased by non-US-based investors as a hedge against inflation in their local currency. It can also be useful as a hedge against the volatility of other cryptocurrencies. For example, a crypto investor who owned Bitcoin and Ethereum could balance their portfolio by adding USD Coin to the mix.
#6: Tether
Tether was the world’s first stablecoin and is the third most popular cryptocurrency in the world behind Bitcoin and Ethereum. Like USDC, its value is pegged 1:1 to the United States dollar.
There has been some controversy surrounding Tether, with some of its detractors claiming that Tether couldn’t provide proof that it had enough money in reserve to cover all the coins in circulation. However, the company says that it has enough in traditional money plus cash equivalents to ensure the value of all coins.
Like USDC, Tether can be used on cryptocurrency exchanges and as payment to retailers who accept it. It can also be useful to crypto investors who want to round out a portfolio that includes more volatile cryptocurrencies such as Bitcoin.
#7: Dai Coin
Dai Coin is another popular stablecoin with $9 billion in market capitalization, making it one of the more popular options. One of the things that sets it apart from USDC and Tether is that, while it is pegged to the U.S. Dollar, it is pegged to other currencies as well, including Ether and USDC.
The ability to use multiple currencies as collateral has been touted as something that makes Dai Coin more stable than other stablecoins. It may be more useful to crypto investors because it can easily be traded on a cryptocurrency exchange for other cryptocurrencies.
#8: Binance USD
Binance USD is the proprietary stablecoin of the Binance network, one of the world’s largest and most popular centralized cryptocurrency exchanges. Like the other coins we have mentioned, it is pegged 1:1 to the U.S. dollar.
One of the benefits of Binance USD is that it can be used to speed transactions on a crypto exchange. Users can easily navigate between crypto transactions without the long wait times that may be associated with other currencies.
Both traditional cryptocurrencies and stablecoins are likely to increase in popularity as people become more educated about how they work and more comfortable with the idea of money that is digital instead of being printed or minted. The eight types of cryptocurrency we’ve mentioned here are some of the most popular and may be a good jumping-off point for anybody who wants to get their feet wet with cryptocurrency trading.
Do you need assistance managing your crypto investments? Click here to learn about the MEMBERS Financial Services Program and book an appointment today.
Posted on May 14, 2022
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