Once you have some basic understanding of cryptocurrency and Bitcoin, if you aren’t skipping back to your favourite high-street bank (which for a lot of people would be a pretty long skip), your crypto-curiosity will soon have you poking around the rest of the cryptoverse. Like a lot of early stage technology, the language used wasn’t really designed with non-technical people as a priority consideration. There is an unfamiliar lexicon of jargon and token names that works like an impenetrable confusion barrier across the already complex domain. So let me try to explain what some of the more common crypto-lingo means and introduced the different types of cryptocurrency.
Altcoin
You can expect to find differing opinions on exactly the scope and meaning of altcoin. Like any of the crypto-colloquialisms – there isn’t an authoritative definition – that is the beauty of decentralization. It isn’t a technology reference, it is just a short form nickname for the more familiar phrase ‘alternative coin’ which refers to any cryptocurrency that isn’t Bitcoin. The biggest and most well-known altcoin is Ethereum. Its significance is large enough for some people to consider altcoin an insult to Ethereum’s success in its own right. If there is reader interest, we can separately demystify some of the significant and noteworthy altcoins. Altcoin is actually a pretty unhelpful term when it comes to demystifying. It should be more helpful to understand the following subcategories and types of cryptocurrency.
Coins vs Tokens
You will see the cryptocurrencies referred to as coins or tokens, sometimes interchangeably. It won’t seem immediately obvious why there are two different terms that seem to both refer to the same thing. A first encounter with a cryptocurrency is when your eyes meet with a bizarre, unfamiliar name that has an accompanying acronym-like short name following it around and then sometimes a meaningless price tag. For example: Ethereum (ETH) $2,200 or to really make my point: SHIBA INU (SHIB) $0.00000932
Quite honestly, you’re only supposed to be dipping your toe in to test the water. If you already feel like you are only just about keeping your head above water then relax, you really don’t need to understand the difference and no one is going to dunk you for using either term to refer to any cryptocurrency. If in doubt, you are less likely to be wrong or challenged if you use the term token (just say it confidently to impress others). To really understand the difference I’m going to have to start explaining the differences between blockchains (wait, what – there is more than one blockchain?) and then layer1 and layer2 concepts and suddenly this is starting to sound like a networking lesson you hadn’t bargained for. Let’s come back to these later (and only if you feel up to it)..
Different Types of Cryptocurrency
While avoiding as much of the technology layer as possible, let’s cover the different, evolving use-case categories for cryptocurrency. You’d be forgiven for assuming it is only for money-style uses but there are more nuanced use-cases that are designed to disrupt the economics of how different industries leverage the internet.
Payment Use-cases
This is the easiest to understand and also the primary use-case behind Bitcoin. It was designed and described by its creator as a “peer-to-peer electronic cash system”. You can think of it like Paypal or Venmo but without the companies to provide and make money out of the service. If you have attempted to send or receive cryptocurrency you may have noticed that the user experience design definitely didn’t follow the Apple playbook for making the complex simple. When you consider there is still a reasonable portion of the population that find smartphones ‘fandangled’, you can safely assume cryptocurrency has a long way to go before mass adoption is feasible. We will dive into this topic and explain wallets and the rest of the cryptocurrency lifecycle in the next article.
Stable-coins
The relative volatility of Bitcoin and other initial payment crypto-currencies gave rise to the creation of Stablecoins (finally, a user-friendly name). This category of cryptocurrencies have, as you would expect, more stable value over time. This is achieved through either centralized institutions (yep, already over-riding one of the foundational Bitcoin core principles) or through the inherent design of the underlying network. One example of an institution backed stablecoin is Tether (USDT) which is ‘tethered’ to the US Dollar. The goal of stablecoins is to help drive the adoption of cryptocurrency for payment use-cases by removing the volatility in value.
Using Blockchain for Different Services
It’s not all about the money. Blockchains, the technology behind Bitcoin, are being used in new and interesting ways for different ‘Services’ use cases across various industries. This typically involves creating a new type of digital coin or ‘token’ that is used for value exchange for each usage. Think of this token as game tokens, but for a specific game (which literally is one of the more common use cases). These tokens might reward people for helping out to run the game or service; other times, they’re used to pay for or reward things in the game or service directly. These tokens can either be re-used natively within that service or exchanged for other crypto or traditional currencies.
For example:
- Computing and Storage: You can ‘rent out’ your unused computer storage space to others and get paid in digital tokens. This blockchain-based service is healthy competition to challenging cloud storage companies.
- Finance: Blockchains are also changing how money is loaned or borrowed. It is well suited for funding new ventures through crowdfunding, all done securely and without a central authority like a bank.
- Gaming: Blockchain online game currencies reward people for running network nodes to operate the game or can be used to upgrade characters or unlock features of a game. Players are also rewarded in the game token for winning in the game.
These services rely on people participating and contributing resources (like their computer space), incentivized by tokens and the value attributed to them. This participation not only makes the service work but also ensures it is secure and trustworthy. In simple terms, it’s a group effort that benefits everyone involved and challenges how traditional services operate.
Non-Fungible Tokens (NFTs)
No prizes given to the creators of this catchy term. Some people will argue that it is a descriptive name. I’d argue it is an overly complex description. I’ve managed to make it through my life until now without encountering or using the word fungible, let alone its negative counterpart. I find it particularly curious that no one actually refers to the non-non-fungible tokens as fungible tokens – they are just tokens.
Obviously it helps if you know what fungible means. Fungible means equivalent or interchangeable. Traditional currency is fungible in that all $10 notes are equal and and always worth the same as each other. See – you know what fungible is and have utterly relied on it without ever having to use the word. Bitcoins are fungible tokens. Even though the value of Bitcoin changes constantly (and sometimes significantly), each Bitcoin is worth exactly the same as another Bitcoin.
Conversely, non-fungible means it is unique. In cryptocurrency non-fungible tokens represent a one-of-a-kind digital ‘thing’. The things might be pieces of digital art or other collectible items. Digital artists may release a limited series of digital art images as an NFT or series of NFTs. This works similar to in the real world when an artist releases an original painting and sometimes limited individually numbered reproduction prints of a piece of art. Each piece of art will have its own unique value and the price will change depending on demand over time for that specific original or its limited reproduction prints.
Much like art in the real world, each NFT art project’s pricing can take on a life of its own. One of the more successful NFT projects is the Bored Ape Yacht Club (BAYC) series of digital art. These can most simply (and a bit cynically) described as a set of cartoon monkey pictures. They were initially sold at a price of around $200. They obviously got their marketing right as they sold out quickly. Ownership of one puts you in a somewhat exclusive club that does now come with some member-only benefits such as parties and events that extend into real life. As of early 2024 the lowest price NFT from the series is selling at around $65,000. If nothing else, it is a quite fascinating crypto-story to observe.
Meme Coins
Now, if you think NFTs sound a bit sketchy then wait until you hear what Meme Coins are all about! In contrast to service tokens that serve some usage based purpose (or utility) , Meme coins generally offer nothing other than the joy of speculative ownership. They are more closely comparable to NFTs in that their traded value is entirely born out of viral speculation and hype based marketing that create a community of followers that go along for the ride. Unlike NFTs there is nothing of value that comes with the token, owners just have some amount of tokens. Like NFTs there are some examples of surprisingly successful Meme coins. Meme coins are usually created with some fun, satirical or ironic intent to capitalize on a viral online topic. The most famous example being Dogecoin created in 2013 as a satire on the proliferation of speculative crypto projects, yet it unexpectedly soared in value, thanks in part to social media buzz and endorsements from high-profile figures like Elon Musk. Once a community of ownership is established, some meme coins have gone on to create services to support and attempt to retain interest and a market for their tokens. These are one of the most volatile of cryptocurrencies due to their heavy use of social media networks. Prices can move very fast.
Continuing down the sketchy-scale we get to Dark Coins
Dark coins (also referred to as privacy coins) are a bit of a different beast in the cryptoverse. Flying in the face of the original Bitcoin principle of transparency, they have been developed for private payment uses. They use security techniques to hide transaction details from the shared ledger. For obvious reasons, dark coins have attracted attention from regulators and law enforcement because of their potential to be used when people really need to hide what they are involved with.
Right at the bottom end of sketchy-street we arrive at Scam Coins
It should come as no surprise that the cryptoverse has attracted some bad actors. What easier way to make money than when you have an industry whose growth is being consistently fueled by large numbers of investors putting their money into investments and assets they don’t really understand. I’d suspect most holders of cryptocurrency have not read a single whitepaper related to that cryptocurrency but rather been hooked into a curious or convincing piece of online marketing that gives them the idea that they can get in early on the next big thing . This is certainly what scam coin creators are feeding off.
Scam coins is the name given to an intentionally malicious token creation where the primary objective is to make money for the creators. It is surprisingly easy to do and surprisingly hard to detect or prevent. They follow a simple formula: create a set of tokens; create an initial buzz and market for their token through social media channels; sell an initial set of tokens to unsuspecting consumers, take the money and shut down the project. Scam coin projects can make hundreds of thousands of dollars in a few hours before going offline and leaving investors with useless tokens. Be extremely cautious when looking at early stage coin offers as an investment.
Reasons to be cheerful
I don’t like to leave you on such a downer. It may be comforting to reflect that a lot of important inventions and innovations in history have had their fair share of misuse by bad actors, before maturing into transformative technologies.
The early days of the automobile saw reckless driving and vehicle theft as new problems. Airplanes enabled new criminal transportation methods before regulations caught up. Even the internet continues to be a battleground between criminal activity and regulators as methods of hacking and fraud advance alongside new technologies .
With any of such new technology, regulators and watchdog measures eventually catch up, education within society improves and better safeguards measures are put in place. Misuse is never fully eliminated but the benefits of adoption eventually far outweigh the risks involved.
Though still in its infancy, cryptocurrency will similarly see more oversight instituting guardrails against illicit exploitation, allowing the potential benefits of decentralization and financial access to elevate society responsibly. There are always growing pains with groundbreaking advances. But by learning about crypto properly (as you’ve started reading this) we can start contributing to steering towards the positive outcomes and benefits. The future of cryptocurrency remains intriguingly bright.