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If you’re getting started with cryptocurrency, one of the first things you’ll need to understand is the difference between a crypto exchange and a crypto wallet. At first they may seem similar since both let you handle your digital assets, but they actually serve different purposes.

A crypto exchange is an online platform where you can buy and sell cryptocurrencies. A crypto wallet is where you securely store and manage the keys needed to access your cryptocurrencies. Both exchanges and wallets are essential for navigating the crypto world, but knowing how they differ is key to keeping your assets safe. This guide explains how each works, what sets them apart, and how to choose the right platforms and tools for your needs.

Why Knowing the Difference Between Crypto Wallets and Exchanges Is Essential

While the terms “crypto wallet” and “crypto exchange” are sometimes used interchangeably, they aren’t the same thing. A crypto wallet is a piece of hardware or software that enables you to access your cryptocurrencies, which are technically stored on the blockchain. Crypto exchanges, on the other hand, are online marketplaces where users can buy and sell crypto.

The idea of a crypto wallet vs. exchange can be confusing for beginners, however, because many exchanges provide wallet services to account holders — these are known as custodial wallets.

Control, Security, and Risk Management

While you can use custodial wallets (which live on an exchange) to store your crypto keys and manage your assets, the wallet itself is technically owned and controlled by the exchange. A personal crypto wallet, by contrast, puts you in charge, allowing you to store and secure your private keys independently.

Dangers of Confusing Exchanges and Wallets

Leaving assets on an exchange for long-term storage (using a custodial wallet) comes with some risks. Unlike non-custodial wallets where you control your own keys, a custodial wallet requires you to trust the exchange with the security and management of your funds. If the provider encounters technical difficulties, goes bankrupt, or restricts withdrawals, users could lose access to their assets. If the exchange gets hacked, a user’s funds could potentially be lost.

What Is a Crypto Exchange?

A crypto exchange is a marketplace for cryptocurrencies. It primarily serves as a platform where crypto prices are listed and people can buy and sell crypto. Many exchanges also provide their users with wallet services, though that is not their main purpose. Some exchanges also offer other financial services such as credit and debit cards and crypto-backed loans.

Core Functions and Services

The core function of a crypto exchange is to act as a marketplace for buying and selling cryptocurrencies and other digital assets. It facilitates transactions between buyers and sellers, matching orders based on price and liquidity, and typically charges a fee for these services.

Many exchanges also provide a platform where users can convert fiat currency (government-backed currency) such as the U.S. dollar to digital assets and swap one cryptocurrency for another.

Types of Exchanges

There are two main types of cryptocurrency exchanges — centralized and decentralized. Here’s a closer look at how each one works.

Centralized (CEX)

A centralized crypto exchange (CEX) is an online platform operated by a single, for-profit company that acts as an intermediary, facilitating the buying and selling of cryptocurrencies. Different CEXs work in different ways, but generally customers deposit assets into a custodial wallet managed by the exchange and submit their trading instructions. An internal order book tracks and prioritizes these requests, which are then automatically executed to settle trades and credit users’ accounts.^[1]

CEXs typically offer user-friendly interfaces, strong customer support, and fiat-to-crypto exchanges, making them appealing to beginners.

Decentralized (DEX)

A decentralized exchange (DEX) is a peer-to-peer crypto trading platform that operates without a central authority or intermediary. Instead of a company managing funds and transactions, DEXs use blockchain technology and smart contracts (self-executing, automated contracts) to enable direct transactions between users.

Unlike most centralized exchanges, DEX users make transactions directly from their wallets, keeping full control of their assets. Without an intermediary, however, DEXs offer little or no customer support, which means that user mistakes can result in permanent loss of funds. In addition, DEXs typically don’t support fiat-to-crypto trades and require users to know their way around wallets, private keys, and smart contracts. As a result, they generally aren’t ideal for beginners.

How Exchanges Enable Buying and Selling

Crypto exchanges match buyers and sellers of specific assets and facilitate swaps between the two. However, there’s a lot that happens in the background to enable these transactions.

Account Creation, KYC, and Regulatory Aspects

Centralized exchanges require users to complete Know Your Customer (KYC) verification, which entails submitting ID documents to comply with anti-money laundering (AML) laws. While this adds legitimacy, it reduces anonymity.

DEX users can usually remain more anonymous. These exchanges generally do not require identity verification (KYC) or personal account creation, allowing users to transact directly from their own crypto wallets.

Exchange Fee Structures and Hidden Costs

Crypto exchanges typically charge fees for their services. They are the main way these exchanges make money and can vary significantly depending on the platform and type of transaction. Common types of fees include:^[2]

•  Trading fees: These are fees charged for buying or selling cryptocurrencies (sometimes referred to as maker and taker fees).

•  Deposit fees: This is the cost of transferring funds (fiat or crypto) into your exchange account.

•  Withdrawal fees: This is a fee for transferring funds out of the exchange.

•  Network fees: These are blockchain-related fees that are not controlled by the exchange.

Security Protocols and Risks on Exchanges

Reputable exchanges will employ a variety of security features. These may include:

•  Whitelisting withdrawal addresses (this means users can only withdraw to pre-approved wallet addresses)

•  Withdrawal time delays and approval requirements

•  AI-driven transaction monitoring to flag suspicious withdrawals

•  Daily or weekly withdrawal limits

•  End-to-end encryption and secure data handling

Still, crypto exchanges remain high-profile targets for hackers. If an exchange is compromised (or were to collapse or go bankrupt), you could lose your funds. Unlike bank deposits, cryptocurrency holdings in wallets are not covered by Federal Deposit Insurance Corporation (FDIC) insurance.

What Is a Crypto Wallet?

A crypto wallet is a tool — digital or physical — that stores your cryptocurrency keys and allows you to send and receive funds securely.

Main Purpose and How Crypto Wallets Work

The term “crypto wallet” is somewhat misleading because it doesn’t hold your digital assets. Instead, a wallet securely stores the private keys that prove your ownership of cryptocurrency on the blockchain. When you make a transaction, your wallet uses your private key to sign and authorize the transfer.

Types of Crypto Wallets

Crypto wallets generally fall into one of two categories: software wallets (or hot wallets) and hardware wallets (cold wallets). Software wallets can be further subdivided into custodial and non-custodial. Here’s a closer look at the different types of crypto wallets.

Hardware Wallets (Cold Storage)

Hardware wallets are small, physical devices (resembling USB sticks) that hold a user’s private keys offline or in “cold storage.” By keeping private keys separate from the cloud and connected computers, hardware wallets protect them from online threats like malware and hacking. However, hardware wallets have an upfront cost and are less convenient for making frequent transactions. They also carry physical risks like being lost, stolen, or damaged.

Software Wallets (Hot Wallets)

A software wallet, also known as a hot wallet, is a digital wallet that is constantly connected to the internet. These wallets are designed to store private keys on internet-connected devices like smartphones, desktop computers, or through web browser extensions. Hot wallets can be custodial (part of an exchange) or non-custodial, where you have control over your private keys.

Hot wallets allow for easy and quick access to your crypto, but are more vulnerable to cyberthreats, such as hacking and malware. Due to the higher security risk, they are generally best for holding small amounts of crypto.

Paper Wallets

A paper wallet is a physical document where a user writes or prints out their public and private keys. This method keeps keys away from online threats like hackers but carries risks of physical damage or loss. If you lose your keys, you may lose access to your holdings.

Custodial vs Non-Custodial Options

In a custodial wallet, a third party service holds and manages your private keys. This offers convenience and easy recovery but requires you to trust them with your assets. In contrast, a non-custodial wallet gives you complete control and ownership of your private keys. This offers more privacy and potentially higher security, but makes you fully responsible for their safekeeping and recovery.

Understanding Private Keys and Public Addresses

There are two main parts to a crypto wallet: the private key and the public key. The private key is a secret, unique code that gives you the ability to access and spend your cryptocurrency. If someone gets access to your private key, they have full control of your funds, so it must be kept highly secure.

The public key is mathematically linked to the private key but does not compromise your security when shared. The public key is used to generate a public cryptocurrency address, which is a shorter, more convenient version of the public key for sending and receiving funds. This public address is like a bank account number that anyone can use to send cryptocurrency to your wallet.

Security Features and Backup/Recovery Methods

Crypto wallets can have a number of security features, depending on the type of wallet. A software wallet will typically require two-factor authentication (2FA) for access. A hardware wallet might have biometric authentication features, so you can’t physically get into your wallet unless you can scan your fingerprints, for example.

Non-custodial wallets typically generate a seed phrase, which is also known as a recovery phrase. A seed phrase is a randomly generated list of words (typically 12 to 24) words that acts as a master key for your cryptocurrency wallet. It provides a backup mechanism that allows you to restore access to your private keys if you lose your device, forget your password, or need to restore your wallet on a new device.

Privacy and Anonymity Considerations

The type of crypto wallet you choose plays a major role in determining your level of privacy and anonymity.

Custodial wallets, such as those offered by exchanges, require users to complete identity verification (KYC), meaning your transactions are tied to your real identity and stored by a third party. Non-custodial wallets, on the other hand, give you full control over your private keys, allowing for greater privacy since no personal information is required to create or use them. However, even with non-custodial wallets, transactions on blockchains are publicly viewable, which means they generally don’t guarantee complete anonymity.

Wallet Fees and Transaction Costs

Hot wallets, which are software-based and connected to the internet, are typically free. Cold wallets, which are physical devices that store crypto offline, have an upfront cost.

Using your wallet to buy and sell cryptocurrencies will come with some transaction fees. Crypto exchanges charge fees whenever you buy or sell digital currencies on their platforms. In addition, you may be charged fees by the blockchain network to process transactions.

Crypto Exchange vs Crypto Wallet

While crypto wallets and exchanges are two different things, they do have some overlap. Here’s a closer look at how they compare.

Transaction vs Storage Functions

In simple terms, wallets are for storage, while exchanges are for buying and selling. Wallets may have some transaction features, and exchanges may have some storage features, but broadly speaking, those are the two main functions of each.

Who Controls Your Crypto? (Custody and Access)

As mentioned, custody is important to understand. If you own your wallet and your holdings are in that wallet, you are the sole custodian. If you’re using a hot wallet supplied by an exchange, a third party holds your private keys for you.

When using a custodian for your cryptocurrency, you are entrusting your assets to a third party’s honesty, competence, and financial health, rather than maintaining absolute control yourself.

Security Levels and Risk Exposure

Exchanges are online and connected to the internet. Many private wallets are, too, but not all. Cold storage or hardware wallets are the most secure, as they’re offline and untouchable by hackers or bad actors (unless, of course, someone steals the physical device). Overall, exchanges can be inherently less secure than private wallets, depending on the wallet type.

Private Key Access and Responsibility

If you store your crypto keys on an exchange (in a custodial wallet), you access your wallet and funds through an account, using credentials like a username and password.

If you’re using your own private wallet, you’re responsible for keeping it safe and keeping track of your private keys and seed phrases. If you lose those, you could lose access to your holdings — and there may be no way to get help regaining access.

Connectivity: Online (Hot) vs Offline (Cold) Storage

Crypto exchanges are always online (hot), whereas wallets can be hot (software) or cold (hardware/paper).

Regulatory Compliance and KYC Requirements

Exchanges (and custodial wallets) typically must comply with KYC/AML laws. Non-custodial wallets typically do not require submitting any personal data.

Exchange vs Wallet Comparison Table

Here’s a side-by-side comparison of crypto exchanges vs. wallets:

How to Move Crypto From an Exchange to a Wallet

If you want to move your crypto from an exchange (where it’s held in a custodial wallet) to a personal wallet, here’s a look at how the process works.

Setting Up and Securing Your Wallet

The process for setting up a wallet will depend on the type of wallet. Generally, you’ll need to:

•  Download or purchase a reputable wallet

•  Download the official wallet software or app (if applicable)

•  Create a “new wallet”

•  Set up a strong password to protect your wallet

•  Securely back up your recovery (or seed) phrase offline

Step-by-Step Guide to Transferring Cryptocurrency

The steps for transferring your cryptocurrency from an exchange to a personal wallet will vary depending on the exchange and type of wallet you’re using, but these are often the steps involved:

1.   Log into your exchange account

2.   Navigate to “Withdraw” or “Send”

3.   Copy your wallet’s public address for the specific crypto

4.   Paste it carefully in the withdrawal form

5.   Choose the correct blockchain network

6.   Confirm and send

Tips for Smooth Transfers

For safe and secure transfers, you’ll want to:

•  Avoid public Wi-Fi when transferring

•  Keep devices malware-free

•  Never share your private key or seed phrase

•  Bookmark official sites to avoid phishing

Common Mistakes to Avoid With Exchanges and Wallets

There are a number of common mistakes people make when using crypto exchanges and wallets. Here are some to be aware of and try to avoid.

Leaving Assets on Exchanges for Too Long

It can be easy to make a transaction on an exchange and then simply leave your holdings in the hot wallet supplied by that exchange — and in the exchange’s custody. While that’s not necessarily unsafe, it could mean that your holdings may be less secure than they would be in your own private wallet.

Failing to Back Up Seed Phrases

Failing to properly back up a seed phrase is a critical mistake in crypto that can lead to permanent loss of funds. A seed phrase is the master key to your wallet, and without it, there is no way to regain access to your assets if your device is lost, stolen, or damaged.

To backup your seed phrase, you’ll want to write it on durable, offline materials like paper or fireproof metal plates and store multiple copies in separate, secure locations.

Falling Victim to Phishing and Scams

Phishing and other crypto scams involve being tricked into revealing personal wallet information or sending cryptocurrency to fraudsters. To avoid this mistake, be wary of unsolicited offers of free tokens or guaranteed high returns; avoid clicking on links in questionable emails/texts; and always check the exact URL of any website to ensure it’s legitimate.

Recommended: How to Report Crypto Scams & Seek Recovery 2025

Overlooking Two-Factor Authentication (2FA)

Having to take extra extra steps to get into an account is a hassle, but neglecting to set up 2FA can be a costly mistake. This leaves your accounts vulnerable to unauthorized access and potential loss if your password is compromised.

Forgetting to Test Small Transfers First

Cryptocurrency transactions are irreversible. Once confirmed, funds sent to a wrong address or on an incompatible network are generally lost forever. Sending a trivial amount first can save you from a potentially expensive mistake. Once the test is confirmed, you can proceed with confidence and send the full amount of crypto.

The Takeaway

Crypto wallets and exchanges are different entities. Crypto wallets can be software or hardware based. And while you don’t technically hold actual crypto in a cryptocurrency wallet, these wallets are specially constructed so you can send and receive crypto via different blockchain platforms using private and public keys.

Crypto exchanges are like online marketplaces where people can buy, sell, and swap crypto. You can use a centralized exchange, which is a third-party platform that acts as an intermediary for cryptocurrency transactions, or a decentralized exchange, which allows users to buy and sell cryptocurrencies directly with each other without an intermediary.

Soon, SoFi members will be able to buy, sell, and hold cryptocurrencies, such as Bitcoin, Ethereum, and more, and manage them all seamlessly alongside their other finances. This, however, is just the first of an expanding list of crypto services SoFi aims to provide, giving members more control and more ways to manage their money.

Join the waitlist now, and be the first to know when crypto is available.

FAQ

Is it better to keep your crypto in a wallet or an exchange?

It is generally safer to store your crypto in a private wallet rather than on an exchange. A private wallet gives you full control of your private keys and complete autonomy over your assets. In contrast, exchanges use custodial wallets, where the exchange holds the private keys for your assets. This means you do not have full control, and your funds are vulnerable to exchange-specific risks, such as hacking, account freezes, or platform bankruptcy. For frequent traders, exchanges may be convenient, but for long-term storage, a hardware or software wallet may be the more secure option.

Should I move my crypto from an exchange to a wallet?

If you have crypto on an exchange, it’s technically in a custodial wallet, where the exchange holds your private keys on your behalf. You must trust the exchange to keep your keys secure, manage your funds, and grant access when you need to make a transaction.

It’s a good idea to move your crypto to a personal wallet, especially for long-term holdings. Exchanges can present risks like hacks and mismanagement, whereas a personal wallet gives you sole control over your private keys and, therefore, your assets.

What should I do if I lose access to my wallet or exchange account?

If you lose access to your private wallet, recovery depends on whether you saved your seed phrase — this is essential for regaining control. Without it, your funds may be unrecoverable. For exchange accounts, contact the exchange’s customer support immediately, verify your identity, and request an account recovery.

Should beginners use an exchange or a wallet?

Beginners often start with an exchange because they offer user-friendly interfaces, built-in wallets, and simple buying and selling options. However, exchanges control your private keys, acting as a custodial third party. Once you become familiar with crypto, you may want to transition to a personal wallet, which can offer greater security.

Do wallets charge transaction fees like exchanges?

Yes, both cryptocurrency wallets and exchanges charge transaction fees, but they are for different purposes. Wallets primarily charge network fees, which compensate the miners or validators who process and secure transactions on the blockchain. In contrast, exchanges typically charge fees for executing buy-and-sell orders. They may also charge withdrawal and deposit fees.

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About the author

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Article Sources

1. changelly. Centralized Exchange (CEX) vs Decentralized Exchange (DEX): What’s The Difference?.
2. Meegle. Crypto Exchange Fees Comparison.

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Photo credit: iStock/AndreyPopov

Cryptocurrency and other digital assets are highly speculative, involve significant risk, and may result in the complete loss of value. Cryptocurrency and other digital assets are not deposits, are not insured by the FDIC or SIPC, are not bank guaranteed, and may lose value.

All cryptocurrency transactions, once submitted to the blockchain, are final and irreversible. SoFi is not responsible for any failure or delay in processing a transaction resulting from factors beyond its reasonable control, including blockchain network congestion, protocol or network operations, or incorrect address information. Availability of specific digital assets, features, and services is subject to change and may be limited by applicable law and regulation.

SoFi Crypto products and services are offered by SoFi Bank, N.A., a national bank regulated by the Office of the Comptroller of the Currency. SoFi Bank does not provide investment, tax, or legal advice. Please refer to the SoFi Crypto account agreement for additional terms and conditions.

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When Bitcoin launched in 2009, it was the only digital currency of its kind. By 2011, though, new types of cryptocurrency began to emerge as competitors adopted the blockchain technology Bitcoin was built on to launch their own platforms and currencies. Suddenly, the race to create more crypto was on.

Read on to learn more about the seven main types of cryptocurrency, from proof-of-work to proof-of-stake cryptocurrencies, to utility tokens, stablecoins, and more.

Understanding the Cryptocurrency Landscape: More Than Just Bitcoin

Bitcoin (BTC) may be the most recognized cryptocurrency, but it is one of thousands. It’s difficult to pin down an exact number for how many cryptocurrencies exist, since new coins continue to be developed while others become obsolete.

By some counts, close to 37 million unique cryptocurrencies have been created over time, with more on the way.1 While cryptocurrencies have been largely unregulated for much of their history, that’s been changing in recent years. A regulatory framework has begun to take shape as the Securities and Exchange Commission (SEC), U.S. Congress, and other agencies in the U.S. and abroad have passed crypto-related regulations and laws.

What Is Cryptocurrency and Why Do Different Types Exist?

Cryptocurrency is a type of digital asset that’s created, validated, and exchanged through the blockchain, without the need for any type of central clearing intermediary. What this means is that cryptocurrencies operate on decentralized networks that may be transmitted without having to go through a third party.

Transactions are publicly viewable on the blockchain, but the identities of those exchanging cryptocurrencies are not transparent (though not always untraceable), adding to its appeal for some.

Why are there so many different types of cryptocurrency? Innovation, a push towards decentralized finance, and increased market interest all play a part.

Developers have created different types of cryptocurrencies largely to support and expand the capabilities of blockchain networks. Cryptocurrencies such as Bitcoin and Litecoin were developed to support peer-to-peer payments, for example, while others, such as Ethereum and Solana, were designed to support blockchain-based decentralized apps (dApps).

Utility tokens were developed to provide access to services or functionalities on a blockchain network — governance tokens, for instance, allow users to vote on decisions being made by a certain network.

Blockchain technology is also being actively explored in areas outside of finance, such as health care, supply chain management, real estate, and art.

The Fundamental Difference: Coins vs Tokens

Although some people use the terms crypto, coins, and tokens interchangeably, they’re not the same. To gain a basic understanding of cryptocurrency, it’s important to understand how these terms differ from one another.

Cryptocurrency may broadly refer to coins or tokens, but the two have different meanings:

•   Coins: Crypto coins are native to their own blockchain network, and provide a means of exchange. They’re strings of computer code that can represent an asset, concept, or project — whether tangible, virtual, or digital — intended for various uses and with varying valuations. Examples include Bitcoin and Ethereum.

•   Tokens: Tokens are programmable assets that are created on an existing blockchain network, and allow users to access certain services or features. They’re usually created and distributed through an initial coin offering (ICO), much like an initial public offering (IPO) for stock.

While crypto coins operate on their own independent blockchain and offer a broader medium of exchange for that network, tokens are built on top of an existing blockchain and have any number of uses, such as representing an asset — a stake in a precious metal, for example — or facilitating a transaction on the blockchain. Both could potentially be bought or sold through a crypto exchange.

Crypto coins are created, tracked, and verified by their native blockchain network and essentially power the blockchain by serving as payment for the transactions that create and secure new blocks. While crypto coins are fundamentally different from fiat currencies, like the dollar, euro, or yen — fiat money is tangible, and it’s governed by central authorities — they also have some similarities, since both are designed to be a medium of exchange and a unit of value.

Tokens, meanwhile, can be used as part of a software application, such as granting access to an app, verifying identity, or tracking products moving through a supply chain. They can represent units of value, too, including for real-world items, like real estate, points, or commodities. They can also represent digital art — as with non-fungible tokens (NFTs). There have even been experiments using NFTs to represent physical assets, such as real-life art and real estate.

Numerous crypto coins and tokens have been introduced at a rapid pace since Bitcoin was launched in 2009, and while this can drive innovation, it’s important to remember that cryptocurrencies come with high risk, as well, such as from scammers counterfeiting tokens or from the high level of volatility these assets experience.

Type 1: Proof-of-Work (PoW) Cryptocurrencies – The Originals

Proof-of-work is the original framework Bitcoin was built upon, and it represents the mechanism by which new blocks are added to the blockchain. In a proof-of-work system, “miners” compete to solve complex mathematical puzzles and earn cryptocurrency.3

What Is Proof-of-Work?

Proof-of-work is a consensus mechanism, which is a standard that governs how cryptocurrency transactions are validated and information is added to a blockchain network. It allows crypto miners to compete for an opportunity to add a block to the blockchain, and receive a reward for their efforts.

With proof-of-work, crypto miners use powerful computer systems to race to solve an encryption puzzle. The winner creates a new block that contains transaction information, which is verified by the entire blockchain network as it’s added to the chain.

The rewards earned by winning miners are typically a certain number of newly minted coins, though that number varies between cryptocurrencies.

Examples of PoW Coins

Proof-of-work coins are represented by some of the most well-known types of cryptocurrency. Some of the most popular PoW coins by market cap include:

•   Bitcoin (BTC)

•   Dogecoin (DOGE)

•   Bitcoin Cash (BCH)

•   Litecoin (LTC)

•   Ethereum Classic (ETC)

Bitcoin is the largest PoW coin by market cap, with $2.34 trillion worth of coins in circulation. As of August 2025, there were just over 19 million Bitcoins being held or exchanged, out of a total distribution cap of 21 million. The last Bitcoin is expected to be mined sometime in 2140.5,6

Type 2: Proof-of-Stake (PoS) Cryptocurrencies – The Evolution

Proof-of-stake cryptocurrencies were developed as an alternative to proof-of-work coins, which are viewed as having scalability limitations given the vast amounts of power required to mine them. A proof-of-stake system relies on crypto staking, rather than mining, but it serves a similar function.

What Is Proof-of-Stake?

Proof-of-stake is a consensus mechanism that’s used to reward participants who validate transactions that are added to the blockchain.

Here’s how it works:

•   Stakers agree to lock away some of their cryptocurrency on a blockchain network through a process called staking.

•   The blockchain network can use the holdings to create a new block and validate transactions.

•   The staker with the largest “stake” has a higher probability of being chosen to validate transactions.

•   Validated transactions earn the staker a reward; stakers who violate protocols, however, could face a penalty.

Proof-of-stake is considered by some to be an upgrade from proof-of-work. It requires much less computing power, reducing strain on the energy grid, and it also allows stakers an opportunity to potentially earn passive income while holding cryptocurrency. That said, stakers face the risk that their coins could lose value while they’re locked up for staking.

Examples of PoS Coins

Compared to Bitcoin, proof-of-stake coins claim a smaller share of the market. However, the numbers are growing, and these coins represent some of the biggest movers in terms of market cap:

•   Ethereum (ETH)

•   Solana (SOL)

•   Cardano (ADA)

•   Toncoin (TON)

•   Algorand (ALGO)

Ethereum has the largest market cap overall of these, at $430.88 billion, as of August 2025. This coin has seen a 911% increase in the last five years.

Type 3: Utility Tokens – The Keys to a Network

Utility tokens, or user tokens, are a type of cryptocurrency that serves a specific purpose inside a decentralized network. They’re built on an existing blockchain and grant their holders access to distinct functions, features, or services.

What Are Utility Tokens?

A utility token is a digital asset that grants holders access to a certain product or service for a given cryptocurrency. They’re typically developed using smart contracts and may be programmed for a range of uses, such as to access storage space or to bring external data onto a blockchain network. Or, as with a governance token, they may give holders the option to vote on changes to a blockchain network.

More broadly, utility tokens can help encourage participation in and support of the crypto ecosystem they were designed for. They may serve as a loyalty bonus, for example, provide access to exclusive features, or other incentives for interacting with the network, all of which may help foster the growth of that crypto community.

Unlike other types of tokens that may confer a stake in an asset or a physical entity, utility tokens serve primarily as a key to various features offered by a cryptocurrency.

Examples of Utility Tokens

Utility tokens are designed with specific use-cases in mind. Their value is typically measured more in terms of what they allow you to do, versus what value they represent.

Here are some examples of utility tokens:

•   Ether (ETH): Ether is the native token of Ethereum, which is the second-largest blockchain network. Ether is used to pay the Ethereum “gas fee” required to process transactions on the blockchain. Given its reach, however, it’s sometimes seen as a currency (having a store of value) in its own right.

•   Chainlink (LINK): Chainlink is a decentralized oracle network that acts as a bridge between smart contracts and real-world data. Tokens are used to pay for data services and incentivize the production of accurate data feeds.

•   Basic Attention Token (BAT): BAT is an Ethereum-based token that’s used within the Brave browser ecosystem. Browser users earn tokens by opting into ads; they can use their tokens to unlock premium content.

•   Golem (GLM): Golem is a decentralized supercomputer that lets users rent their computing power to others. Tokens are used to pay for services through the platform.
9,10

•   The Sandbox (SAND): SAND is the utility token for the community-driven blockchain gaming platform, The Sandbox. Players can earn SAND and use it to purchase virtual assets, access exclusive interactions, and take part in governance, among other things.

Type 4: Stablecoins – The Price Stability Anchor

Stablecoins are digital assets whose value is tied or “pegged” to another asset. Of the $250 billion in stablecoins currently in circulation, 99% of them are pegged to the U.S. dollar. Stablecoins are an alternative to Bitcoin and other cryptocurrencies whose value may fluctuate widely due to changes in supply and demand, or market sentiment.11

What Are Stablecoins?

Stablecoins are cryptocurrencies that are stored on the blockchain, but whose value is tied to an underlying currency or commodity. For example, stablecoins may be pegged to the U.S. dollar, the Euro, or gold. Because they’re tied to underlying assets, stablecoins can be redeemed for those assets.^[1]

Stablecoins are designed with the goal of maintaining a stable price relative to the asset they’re pegged to, and in comparison to the high price volatility of cryptocurrencies in general. That said, stablecoin stability may depend on a number of factors, such as the stablecoin’s level of liquidity, market volatility, and transparency around reserves.

The regulatory landscape for stablecoins is quickly evolving, such as with the recent passing of the 2025 Genius Act, which provides oversight for issuers of payment stablecoins and rules focused on consumer protection.^[2] The European Union’s Markets in Crypto-Assets (MiCA) regulation also went into effect in 2025. Under MiCA, stablecoins issuers are regulated like financial institutions and must meet certain EU reserve requirements. Some stablecoins are choosing not to seek EU compliance, however, such as Tether (USDT), which keeps much of its reserves in U.S. Treasurys.^[3]

As the industry shifts, there are still risks to be aware of, such as a stablecoin losing its peg value, technology or operational risks, or the potential for scams or fraud.

Common uses for stablecoins include:

•   Paying for goods and services

•   Making cross-border payments

•   Offering potential protection against price instability in cryptocurrency markets

Crypto users may use stablecoins to buy other cryptocurrencies in lieu of cash, and more payment processors are allowing the use of these coins to pay for transactions online.

Examples of Stablecoins

Stablecoins represent a growing share of the total cryptocurrency market. Some of the most well-known stablecoins by market cap include:

•   Tether (USDT)

•   USDC (USDC)

•   USDS (USDS)

•   Dai (DAI)

•   PayPal USD (PYUSD)

The total market cap of stablecoins was $268.27 billion as of August 2025. With a few exceptions, stablecoins have a relatively low price point compared to other types of cryptocurrency.

Type 5: DeFi Service Providers – The Future of Finance

DeFi service providers represent a subset of the cryptocurrency landscape. They operate on decentralized, blockchain-based frameworks in order to offer services that allow individuals to conduct transactions directly. For example, a DeFi coin is similar to a physical coin in that it transfers value, but it does so without going through a central intermediary.

What Is Decentralized Finance (DeFi)?

Decentralized finance, or DeFi, describes financial services that are executed through the blockchain. By allowing for direct, peer-to-peer transactions, DeFi advocates note that it could help reduce barriers to entry for those who traditionally have a harder time accessing financial services, and allow for potentially faster, cheaper transactions.

Some of the top providers building out the decentralized finance landscape are developing decentralized peer-to-peer exchanges, borrowing and lending protocols, data services through decentralized oral networks (DONs), and stablecoins, which may help provide a bridge between blockchain systems and traditional assets.

Most, though not all, DeFi protocols and applications are built on Ethereum. DeFi tokens can be used to access services and goods through decentralized apps. Though DeFi tokens represent a smaller share of the cryptocurrency market, their popularity is growing.

DeFi, of course, is in its early stages, and while the blockchain technology itself helps to safeguard information, the other apps, systems, and entities that interact with the network could pose risks. It’s important to be cautious when considering options, especially as crypto regulations continue to develop.

Examples of DeFi Tokens

Here are some of the largest DeFi tokens by market cap:

•   Stellar (XLM)

•   Hyperliquid (HYPE)

•   Uniswap (UNI)

•   Polkadot (DOT)

•   Aave (AAVE)

The total DeFi token market was valued at $111.94 billion as of August 2025. It’s essential to distinguish between DeFi tokens and DeFi coins. The difference, again, between tokens and coins is how they relate to the blockchain.

Type 6: Privacy Coins – The Anonymous Transactions

Privacy coins offer anonymity by obscuring certain details about their users. These coins can be sent and received anonymously, without disclosing the location of the parties involved in the transaction.

What Are Privacy Coins?

Privacy coins enable the secure transfer of cryptocurrency without revealing either its origin or destination. This is a key departure from the more public nature of transactions conducted on the blockchain. Public blockchains were designed with the idea that information be transparent and immutable, allowing participants to view and validate the data. With Bitcoin, for example, Bitcoin users can access transaction data (though not identity information) through public Bitcoin addresses used to make payments.

A privacy coin blocks certain information from view through the use of different strategies, including:

•   Protocols that generate stealth addresses

•   Mixing of transactions to make the routing of coins more difficult to trace

•   Tools that allow for the validation of transactions without requiring the disclosure of any identifying information

Privacy coins aren’t accessible in every country or crypto market. Some countries have banned them outright, while others have taken steps to remove some of the secrecy surrounding them.15
For example, recent anti-money laundering regulations passed by the European Union will, starting in 2027, ban financial and credit institutions as well as crypto-asset service providers from managing cryptocurrencies that offer anonymous accounts.

Examples of Privacy Coins

The market for privacy coins is smaller than other types of cryptocurrencies, and your ability to buy them may depend on where you live. Examples of popular privacy coins include:

•   Monero (XMR)

•   Zcash (ZEC)

•   Beldex (BDX)

•   Decred (DCR)

•   Dash (DASH)

As of August 2025, the privacy coin market was valued at $7.16 billion. A glance at pricing charts shows that privacy coins have the potential to be exceptionally volatile.

Type 7: Meme Coins – The High Risk, High Reward Speculation

Meme coins are a type of cryptocurrency whose popularity is driven by memes or trends.

What Are Meme Coins?

Meme coins are coins that gain attention because they align with a trend or newsworthy event. Any coin can become a meme coin if someone or something pushes it into the spotlight. Some of the most popular meme coins can develop cult-like followings, which can help drive demand.

Compared to other types of cryptocurrency, meme coins tend to be more volatile because their value is often tied to their popularity. A coin that’s hot today may not be tomorrow, and its value could quickly fizzle if the trend dies down, or the meme that the coin is associated with loses popularity.

Examples of Meme Coins

Meme coins can sometimes be some of the most recognizable cryptocurrencies if they grab the attention of the broader population. Examples of popular meme coins include:

•   Dogecoin (DOGE)

•   Shiba Inu (SHIB)

•   Pepe (PEPE)

•   Pudgy Penguins (PENGU)

•   Bonk (BONK)

Meme coins often have lower prices than other cryptocurrencies. As of August 2025, meme coins had a market cap of $76.2 billion.

The Critical Impact of Tax Treatment

The IRS treats cryptocurrency and other digital assets as property, meaning that any gains you generate from them are taxable. If you have digital asset transactions during the year, you’re required to report them on your tax return.

The sale of digital assets, including cryptocurrency, can trigger capital gains if you sell at a profit, or capital losses if you sell for less than the original purchase price. Selling off crypto assets after seeing huge gains in value could significantly increase your tax liability for the year.

You can offset gains with losses through a process known as tax loss harvesting. That can reduce what you owe in federal taxes for the current year.

Income earned through cryptocurrency activities, such as from mining rewards, is considered ordinary income. Depending on your circumstances, the tax rules applying to your digital assets could get complicated. You may want to talk to a certified public accountant (CPA) or another tax professional about how crypto assets could affect your overall tax picture.^[4]

The Takeaway

Cryptocurrencies are all digital assets built upon a distributed network and, likewise, upon the principle of decentralization. It’s important to remember, however, that there are several types of cryptocurrencies, and each one — be it proof-of-work, proof-of-stake, stablecoins, DeFi, or utility tokens — has myriad options within it.

Different cryptocurrencies have different goals, functionalities, markets, and prospects. By the same measure, cryptocurrencies are also not created equally in terms of risk, both in their own right, and in terms of how they may align with your financial goals. Understanding the different types of cryptocurrencies can help you better understand the role they may play in crypto markets and potentially in your portfolio.

Soon, SoFi members will be able to buy, sell, and hold cryptocurrencies, such as Bitcoin, Ethereum, and more, and manage them all seamlessly alongside their other finances. This, however, is just the first of an expanding list of crypto services SoFi aims to provide, giving members more control and more ways to manage their money.

Join the waitlist now, and be the first to know when crypto is available.

FAQ

How many types of cryptocurrencies are there?

Broadly speaking, cryptocurrencies can be grouped into coins and tokens. Beyond those two main types, there are millions of different types of crypto being exchanged, with new currencies entering the market regularly.

What is the most common type of cryptocurrency?

Bitcoin is likely the most common type of cryptocurrency, or at least the one people are most familiar with. It’s also the crypto asset that holds the lion’s share of market capitalization. As the first blockchain coin, Bitcoin opened the door for the introduction of other cryptocurrencies, including Ethereum and Litecoin.

What is the difference between a coin and a token?

The main difference between a coin and a token is their relationship to the blockchain. Coins are the native digital currency of their blockchain, while tokens sit on top of an existing blockchain. Tokens are often associated with digital currencies, but they can also represent other digital assets, like NFTs, or something intangible, like voting rights.

Are NFTs a type of cryptocurrency?

NFTs or non-fungible tokens are not a type of cryptocurrency, but they share space with crypto on the blockchain. An NFT represents ownership of a unique digital or physical asset, such as a drawing, image, or piece of artwork.

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About the author

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Article Sources

1. U.S. Securities and Exchange Commission. Statement on Stablecoins.
2. Congress.gov. S.1582 – GENIUS Act.
3. World Economic Forum. The GENIUS Act is designed to regulate stablecoins in the US, but how will it work?.
4. Intuit Turbotax. Your Crypto Tax Guide.

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Cryptocurrency and other digital assets are highly speculative, involve significant risk, and may result in the complete loss of value. Cryptocurrency and other digital assets are not deposits, are not insured by the FDIC or SIPC, are not bank guaranteed, and may lose value.

All cryptocurrency transactions, once submitted to the blockchain, are final and irreversible. SoFi is not responsible for any failure or delay in processing a transaction resulting from factors beyond its reasonable control, including blockchain network congestion, protocol or network operations, or incorrect address information. Availability of specific digital assets, features, and services is subject to change and may be limited by applicable law and regulation.

SoFi Crypto products and services are offered by SoFi Bank, N.A., a national bank regulated by the Office of the Comptroller of the Currency. SoFi Bank does not provide investment, tax, or legal advice. Please refer to the SoFi Crypto account agreement for additional terms and conditions.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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This article is not intended to be legal advice. Please consult an attorney for advice.

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Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

Implied volatility (IV) is a metric that describes the market’s expectation of future movement in the price of a security. Implied volatility, also known by the symbol σ (sigma), employs a set of predictive factors to forecast how volatile a security’s price may be.

Some investors may use implied volatility as a way to understand the level of market risk they may face. Implied volatility is often calculated using either the Black-Scholes model or the Binomial model.

What Is Volatility?

Volatility, as it relates to investments, is the pace and extent that the market price of a security may move up or down during a given period. During times of high volatility, prices experience frequent, large swings, while periods of low volatility see fewer and smaller price changes.

What Is Implied Volatility?

Implied volatility is, in essence, a metric used in options trading that reflects the market’s anticipation of a security’s future price movements, rather than its historical performance. While it informs the price of an option, it does not guarantee that the price activity of the underlying security will be as volatile, or as stable, as the expectation embedded in its implied volatility. While implied volatility isn’t a window onto the future, it can often correlate with the broader opinion that the market holds regarding a given security.

To express implied volatility, investors typically use a percentage that shows the rate of standard deviation over a particular time period. As a measure of market risk, investors typically see the highest implied volatility during downward-trending or bearish markets, when they may expect equity prices to go down.

During bull markets on the other hand, implied volatility tends to go down as more investors may believe equity prices will rise. That said, as a metric, implied volatility doesn’t predict the direction of the price swings, only that the prices are likely to swing.

How Implied Volatility Affects Options

So how does implied volatility affect options? When determining the value of an options contract, implied volatility is a major factor. Implied volatility can help options traders evaluate an option’s price and also evaluate whether the option may be a good fit for their strategy.

An investor buying options contracts has the right, but not the obligation, to buy or sell a particular asset at an agreed-upon price during a specified time period. Because IV helps estimate the extent of the price change investors may expect a security to experience in a specific time span, it directly affects the price an investor pays for an option. It would not help them determine whether they want a call or a put option.

It may also be used by some traders to help them determine whether they want to charge or pay an options premium for a security. Options on underlying securities that have high implied volatility tend to come with higher premiums, while options on securities with lower implied volatility typically command lower premiums.

Recommended: Popular Options Trading Terminology to Know

Implied Volatility and Other Financial Products

Implied volatility can also impact the prices of financial instruments other than options. One such instrument is the interest rate cap, a product aimed at limiting the increases in interest charged by variable-rate credit products.

For example, homeowners might purchase an interest rate cap to limit the risks associated with their variable-rate mortgages and adjustable-rate mortgage (ARM) loans. Implied volatility may be a consideration in the prices that borrowers may pay for those interest rate caps.

How Is Implied Volatility Calculated?

There are two implied volatility formulas that some investors typically use to estimate fair option pricing based on market conditions.

Black-Scholes Model

One of the most widely used methods of calculating implied volatility is the Black-Scholes Model. Sometimes known as the Black-Scholes-Merton model, the Black-Scholes model is named for three economists who published the model in a journal in 1973.

It can be a complex mathematical equation investors use to project potential price changes over time for financial instruments, including stocks, futures contracts, and options contracts. Investors use the Black-Scholes Model to estimate the value of different securities and financial derivatives. When used to price options, it uses the following factors:

•  Current stock price

•  Options contract strike price

•  Amount of time remaining until the option expires

•  Risk-free interest rates

The Black-Scholes formula takes those known factors and effectively back-solves for the value of implied volatility.

The Black-Scholes Model offers a quick way to calculate European-style options, which can only be exercised at their expiration date, but the formula is less useful for accurately pricing American options, since it only considers the price at an option’s expiration date. With American options, the owner may exercise at any time up to and including the expiration date.

Binomial Model

Many investors consider the binomial option pricing model more intuitive than the Black-Scholes model. It also represents a more effective way of calculating the implied volatility of U.S. options, which may be exercised at any point before (and on) their expiration date.

Invented in 1979, the binomial model uses the assumption that at any moment, the price of a security will either go up or down.

As a method for calculating the implied volatility of an options contract, the binomial pricing model uses the same basic data inputs as Black-Scholes, along with the ability to update the equation as market conditions change or new information becomes available. In comparison with other models, the binomial option pricing model is very simple at first. It can become extremely complex, however, as it accounts for many time periods and supports early exercise for pricing American-style options.

By using the binomial model with multiple periods of time, a trader can use an implied volatility chart to visualize potential changes in implied volatility of the underlying asset over time, and evaluate the option at each point in time. It also allows the trader to update those multi-period equations based on each day’s price movements and emerging market news.

The calculations involved in the binomial model can take a long time to complete, which may make it difficult for short-term traders to use.

💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

What Affects Implied Volatility?

The markets fluctuate, and so does the implied volatility of any security. As the price of a security rises, that can change its implied volatility, which can influence changes in the premium it costs to buy an option.

Another factor that changes the implied volatility priced into an option is the time left until the option expires. An option with a relatively near expiration date tends to have lower implied volatility than one with a longer duration. As an options contract grows closer to its expiration, the implied volatility of that option tends to fall.

Implied Volatility Pros and Cons

There are both benefits and drawbacks to be aware of when using implied volatility to evaluate a security.

Pros

•  Implied volatility can help an investor quantify the market sentiment around a given security.

•  Implied volatility can help investors estimate the size of the price movement that a particular asset may experience.

•  During periods of high volatility, implied volatility can help investors identify potentially lower-risk sectors or products.

Cons

•  Implied volatility cannot predict the future.

•  Implied volatility does not indicate the direction of the price movement a security is likely to experience.

•  Implied volatility does not factor in or reflect the fundamentals of the underlying security, but is based primarily on the security’s price.

•  Implied volatility does not account for unexpected adverse events that could affect the price of the security and its implied volatility in the future.

The Takeaway

Some investors use implied volatility to assess expected price movement and evaluate option value. It can be a useful indicator, but it has limitations. Investors may want to use it in connection with other types of analysis to better contextualize risk and potential price behavior.

That said, having a basic understanding of implied volatility can be a helpful foundation for nearly all investors.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

Explore SoFi’s user-friendly options trading platform.

FAQ

What is implied volatility?

Implied volatility measures the extent and frequency that the market expects a security’s price to move. Options traders may use it to evaluate whether premiums are relatively expensive or inexpensive, and to help them gauge strategy timing.

Is high IV good for options?

High implied volatility can work in favor of option sellers, since they may collect a higher premium for those options. Option buyers typically pay more upfront for an option with high implied volatility, but the potential for bigger price swings may increase the likelihood that the option will move into the money, though this comes with higher risk, as well.

How can I try to profit from implied volatility?

Traders may try to profit by buying options ahead of events that are likely to trigger sharp price moves, hoping the option’s value rises. Others may sell options when IV is high to collect larger premiums, expecting volatility may drop. Both strategies hinge on timing and carry risk.

What is the function of implied volatility?

Implied volatility reflects how much price movement the market anticipates for a given security. It helps determine options pricing and offers a snapshot of perceived risk, but it doesn’t predict the direction that the security’s price may move.

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SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
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Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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