As I said in the intro to the guide, there are over 1500 different cryptocurrencies out there, and there are dozens of different ways you could categorize them. But I think it’s easiest to break down the world of digital assets into a few main categories. As you read through, take note that many of their uses extend beyond merely being currencies.
Main Cryptocurrency Categories
Some cryptocurrencies are designed to be used as money. They can be used for transactions, as a store of value, or as a hedge against other currencies. Numerous currencies already exist and they can be surprisingly different from each other depending on their intended use. The most notable example is the first crypto most people hear about, Bitcoin.
Platforms or Ecosystems
Other cryptocurrencies, such as Ethereum, are actually complex platforms that run other applications. You can think of the Ethereum network as roads, the applications built on top of Ethereum as cars, and ether (Ethereum’s tradable asset) as the fuel required to use the network. The other applications built on Ethereum can vary widely in use, from currency or stock exchanges, identity verification services, fantasy sports apps, and much more.
Specific Use (or Utility) Tokens
Often, applications or services have their own unique coin or token that is used in their application. For example, you would need an XYZ token to use features in the XYZ app. Some such applications allow the use of tokens to rent hard drive space, to get paid for viewing advertisements, or to gamble on fantasy football. Applications with specific use tokens may run on top of a platform (such as Ethereum) or they may run on their own independent network.
Some tokens can be directly backed by assets. A few examples include tokens that represent shares in a business, tokens that represent a US dollar, or tokens backed by gold. Ownership of almost any asset could easily be traded around the world via asset-backed tokens.
Most cryptocurrencies out there fall into one of the above four categories, so to keep things simple, we’ll lump any other cryptocurrencies into a single category. One example here is a token used in a Ponzi scheme (yes, really).
As you can see, not all cryptocurrencies are actually currencies. This is why some prefer to call the broad crypto asset class cryptoassets (I see what they did there).
In our next section, I will walk you through buying your first cryptocurrency.
Continue the guide with Part 4: How to Buy Cryptocurrency