Cryptocurrencies have become a popular class of digital asset that can be stored, used, and exchanged. These digital assets are not the same as traditional financial instruments such as gold or shares owned by companies. Instead, cryptocurrencies are digital currencies that use encryption to secure their value and make them difficult to counterfeit.
Cryptocurrencies are also volatile, which makes them an interesting investment option. This raises the question: what are cryptocurrencies good for? The answer depends on the type of utility you want from your cryptocurrency.
1. Store of Value Cryptocurrencies
A store of value is any item/asset that retains purchasing power into the future and can be readily exchanged for something else. In the crypto space, a couple of cryptocurrencies were designed with the main purpose of being money. Over the years, they have evolved and can be used as a store of value, just like gold or real estate. The two major cryptocurrencies that fall into this category are Bitcoin and Litecoin.
Bitcoin is currently the most popular cryptocurrency. It has been around for the longest time, and people have become used to buying it with the goal of Bitcoin rising in value.
Bitcoin has shown that it can be leveraged over time to earn better returns. With an annualized return of 230% over the last decade, it has performed ten times better than the NASDAQ 100. Bitcoin also has a limited supply of 21 million tokens which means there will always be a demand for it because of its limited supply.
Litecoin was created to complement Bitcoin by providing users with a faster means of transacting money over the internet. As a result, Litecoin is often referred to as “digital silver” compared to Bitcoin, which is regarded as “digital gold.”
Litecoin was created as a hard fork of Bitcoin’s blockchain, and it holds many similarities in how it functions, including acting as a store of value. Litecoin is a deflationary currency and has witnessed price gains over the years due to its global liquidity and finite supply.
2. Protocol/Exchange Cryptocurrencies
Protocol-level coins are cryptocurrencies that have a custom blockchain. These protocols allow the functioning of applications and provide security and access to the blockchain.
Some cryptocurrencies are just protocols, making the blockchain their only purpose, and others are exchanges that provide their tokens. Exchanges are platforms that allow users to buy or sell cryptocurrencies for fiat currencies such as USD or EUR. These protocol networks provide ways to earn returns through staking with proof-of-stake (POS) algorithms.
A key example of a protocol/exchange cryptocurrency is Build and Build (BNB), formerly called Binance Coin (and still often referred to as such). BNB is a cryptocurrency built on a custom blockchain called BNB Chain. BNB is the blockchain token that powers transactions on the BNB Chain. All actions on the blockchain require BNB tokens to be processed, making BNB an essential part of everything that happens on the BNB Chain.
Another type of protocol/exchange cryptocurrency is Cronos (CRO) which has its own custom blockchain and native cryptocurrency. Other examples in this category include Polkadot (DOT), Reef Chain (REEF), and Okex (OKB).
3. Gaming/NFT Cryptocurrencies
Gaming and non-fungible tokens (NFTs) are among the most popular cryptocurrencies today. They’re designed to be used in games and online applications. For example, a gaming NFT token can represent ownership of virtual items or digital assets within gaming applications.
These digital assets have unique characteristics and cannot be replicated or cloned. NFTs are typically minted on Ethereum, although other blockchains have also been used for this purpose—we’ve looked at the best sites for minting NFTs.
A popular case in point of a gaming/NFT token is Axie Infinity (AXS). Axie Infinity is an NFT-based game known for its in-play virtual economy. Players collect and trade digital pets known as Axies. Axie Infinity (AXS) is also tradeable on major exchanges, which makes it unique.
Other types of Gaming/NFT tokens include Enjin (ENJ), Chiliz (CHZ), Gala (GALA), The Sandbox (SAND), and Dencentraland (MANA).
4. Smart Contract Cryptocurrencies
Smart contracts are self-executing contracts that can be used to make transactions. They are a type of program code that runs directly on the blockchain, removing the need for any third party to process the contract. In this way, smart contracts allow for the automated execution of agreements between two or more parties in a transparent and verifiable way.
MakerDAO is a decentralized software platform, and its Maker (MKR) token is a perfect example of a smart contract cryptocurrency. Maker (MKR) is the governance token of MakerDAO that allows users to issue and manage the DAI stablecoin. MKR tokens are needed for voting rights in the development of the Maker Protocol.
Polymath (POLY) is another cryptocurrency making waves in the smart contract category. Polymath (POLY) offers a platform that allows verified investors to participate in securities token offerings (STOs) using the Polymath ST-20 standard.
More cryptocurrencies in this category include Miota (IOTA) and Stellar (XLM). These tokens can be used for governance protocols, automated escrow systems, and marketplaces that use smart contracts to facilitate the exchange of goods or services.
5. Privacy Cryptocurrencies
Cryptocurrencies that are privacy-focused come in various forms and shapes. Privacy cryptocurrencies enable anonymous and private transactions. These coins/tokens don’t require personal information to use or trade with.
Monero (XMR) is a decentralized cryptocurrency with privacy-enhancing technologies that mask transactions to achieve anonymity and fungibility. This makes Monero user transactions, wallet balances, and trading activity extremely hard to decipher. As a result, this cryptocurrency offers next-level privacy.
Zcash (ZEC) is another privacy-focused cryptocurrency. It uses advanced-level cryptography to provide enhanced privacy for its users. Zcash is based on Bitcoin’s codebase and shares some similarities, such as a fixed supply of 21 million tokens.
More privacy-based cryptocurrencies include Secret (SCRT), Dash (DASH), Decred (DCR), Dusk Network (DUSK), and Verge (XVG).
6. FinTech Cryptocurrencies
This final categorization focuses on cryptocurrencies that use blockchain technology to create new applications and financial products.
Ethereum, the second largest cryptocurrency by market capitalization, heads the list of cryptocurrencies in Fintech. Its blockchain has been used to create currency (Ether) and also serves as a building platform for a plethora of decentralized applications.
Solana is another blockchain with financial and technological attributes. It is a high-performance blockchain with a native currency called SOL. It supports developers around the world in creating crypto apps with its scalable blockchain infrastructure.
More cryptocurrencies in the FinTech category: Polygon (MATIC), Algorand (ALGO), Fantom (FTM), Avalanche (AVAX), Cosmos (ATOM)
Cryptocurrency Categorization Is Still Evolving
There are numerous ways to categorize cryptocurrencies, and it’s important to note that some cryptocurrencies included in these categories can fit into more than one category type. Nonetheless, as blockchain technology and cryptocurrencies evolve, and new use cases are discovered, more cryptocurrency classifications will arise.