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Understanding The Different Types of Cryptocurrency

June 19, 2019 · 8 minute read

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Understanding The Different Types of Cryptocurrency

Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. For more information, see FINRA , SEC , and CFPB public advisories concerning digital asset risk.

Cryptocurrencies can act like real money—in a sense, they are real money —but they take the form of digital, or virtual form and are not managed or governed by any central authority. A true product of the digital age, no banks, governments, or any middleman need be involved.

What provides security is that they are encrypted (secured) with specialized computer code called cryptography. They’re designed like a complicated puzzle on purpose so that they’re hard to crack (and hack).

In 2017, there were 2.9 to 5.8 million unique users of a type of cryptocurrency, and most of them were using Bitcoin, according to research by The University of Cambridge.

The cool kids call it “crypto,” so you know that’s what we’ll be calling it going forward.

Crypto Tokens vs. Coins

All coins and tokens can fall under the heading of crypto, and they generally go into one of two specifically named categories: Alternative Cryptocurrency Coins (Altcoins) or Tokens.

Alternative Cryptocurrency Coins (Altcoins)

It usually refers to any coins that are not Bitcoins, for example Peercoin, Litecoin, Dogecoin, Auroracoin and Namecoin. In fact, the name “Altcoin” actually means “alternative to Bitcoin.” Namecoin is considered the very first Altcoin, created in 2011.

Most crypto like Bitcoin have a limited supply of coins, to keep the balance in check and to reinforce its perceived value. There are only 21 million Bitcoins that can be used, and once they are tapped, that’s it. The only way to bring in more is for Bitcoin’s protocol to allow for it.

Many Altcoins claim to be better versions of Bitcoin, but most of them are built upon the same basic framework as Bitcoin. Still, each system often differs from another, as they’re created to serve various purposes and applications, and identified in different ways. And some coins don’t work with the same open-source protocol that Bitcoin does. For example, currencies like Ethereum, Ripple, Omni, Nxt, Waves, and Counterparty have created their own separate system and protocol—and are self-supporting.

Tokens

Unlike Altcoins, tokens are created and given out through an Initial Coin Offering, or ICO, very much like a stock offering. They can be represented as value tokens (Bitcoins), security tokens (to protect your account), or utility tokens (designated for specific uses).

They are not so much meant to be used as money as they are used to describe a function. Like American dollars, they represent value but they are not in themselves of value. Tokens are a type of encryption, specifically referring to the long lines of numbers and letters representing the crypto used in a transaction, such as a money transfer or bill payment. In short, tokens cover a number of meanings.

For instance, both Bitcoin and Ether (from Ethereum) are considered crypto tokens.

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The Role of Miners In Cryptocurrency

How exactly do you get your virtual hands on different types of cryptocurrency? You can buy it the old-fashioned way, or you can trade it on an exchange using other crypto (for example, using Bitcoin to buy NEO). Some blogs and media platforms pay its content providers in crypto.

Then there are the miners. Miners usually don’t pay directly for their crypto; they earn it with their smarts. These tech savvy investors can be compared to the prospectors of the Old West, panning for gold in 1848.

The gold is already there—it’s just up to the compex computers to dig it up by cracking codes and solving complicated puzzles. A lot of it is guesswork, but once the “block” (of the blockchain) is solved, the other miners drop what they’re doing and go on to the next block. No parting gifts—the contestants just turn their attention to the next game round.

If the puzzle is solved, the reward is a certain amount of crypto, and sometimes even voting power on the platform. As of May 2019 , one bitcoin is worth $5,719. Sounds sweet, but mining ain’t cheap.

It requires powerful, expensive hardware and lots of electricity. Also, the number of awarded crypto will be going down, usually by halves every four years or so. Unfortunately, that might not do your utility bill any favors.

The Most Common Types of Cryptocurrency

The following cryptocurrencies represent the most widely popular industry projects (so far):

1. Bitcoin

Possibly the “Kleenex” or “Coca Cola” of all crypto, in that its name is the most recognizable and the most closely associated with the cryptocurrency system.

There are currently more than 17.6 million Bitcoin tokens in circulation, against a present capped limit of 21 million.

2. Bitcoin Cash

Introduced in 2017, Bitcoin Cash is one of the most popular types of cryptocurrency on the market. Its main difference with the original Bitcoin is its block size: 8MB. Compare that to the original Bitcoin’s block size of just 1MB. What that means for users—faster processing speeds.

3. Litecoin

Litecoin is increasingly used in the same breath as Bitcoin, and it functions practically the same way. It was created in 2011 by Charlie Lee, a former employee of Google. He designed it to improve on Bitcoin technology, with shorter transaction times, lower fees, more concentrated miners.

4. Ethereum

Unlike Bitcoin, Ethereum focuses not as much on digital currency as it does on decentralized applications (phone apps). You could think of Ethereum as an app store.

The platform is looking to return control of apps to its original creators, and take away that control from middlemen (like Apple, for instance). The only person who can make changes to the app would be the original creator. The token used here is called Ether, which is used as currency by app developers and users.

5. Ripple

Ripple is a type of cryptocurrency, but it is not Blockchain-based . It’s not meant so much for individual users as it is for larger companies and corporations, moving larger amounts of money (its coinage is known as XRP) across the globe.

It’s more well-known for its digital payment protocol more than for its XRP crypto. That’s because the system allows for transfer of monies in any form, be it dollars or even Bitcoin (or others). It claims to be able to handle 1,500 transactions per second (tps). Compare this with Bitcoin, which can handle 3-6 tps (not including scaling layers). Ethereum can handle 15 tps.

6. Stellar

Stellar focuses on money transfers, and its network is designed to make them faster and more efficient, even across national borders. It was designed by Ripple co-founder Jed McCaleb in 2014 and is operated by a non-profit organization called Stellar.org .

Its goal is to assist developing economies that may not have access to traditional banks and investment opportunities. It doesn’t charge users or institutions for using its Stellar network, and covers operating costs by accepting tax-deductible public donations.

7. NEO

Formerly called Antshares and developed in China, NEO is very aggressively looking to become a major global crypto player. Its focus is smart contracts (digital contracts) that allow users to create and execute agreements without the use of an intermediary.

It’s going after its main competition, Ethereum, but NEO lead developer Erik Zhang mentioned on a Reddit AMA that NEO has three distinct advantages—better architecture, more developer-friendly smart contracts, and digital identity and digital assets for easier integration into the real world.

A NEO white paper explained that developers can develop smart contracts using common programming languages (such as Java or C#). Ethereum, on the other hand, uses its own programming languages that developers must first learn before creating smart contracts on its platform.

8. Cardano

Cardano aka ADA is used to send and receive digital funds. It claims to be a more balanced and sustainable ecosystem for cryptocurrencies, and the only coin with a “scientific philosophy and research-driven approach.”

That means that it undergoes especially rigorous reviews by scientists and programmers. It was founded by Charles Hoskinson, who is also the co-founder of Ethereum.

9. IOTA

Launched in 2016, IOTA stands for Internet of Things Application. Unlike most other Blockchain technologies, it doesn’t actually work with a block and chain; it works with smart devices on the Internet of Things (IoT).

All you need to do to use it is to verify two other previous transactions on the IOTA ledger, which is called the Directed Acyclic Graph (DAG), but IOTA creators call it The Tangle.

According to Coin Central , this means the devices need to be able to purchase more electricity, bandwidth, storage, or data when they need them, and sell those resources when they don’t need them.

Of course, different types of cryptocurrency don’t operate in a vacuum—they need a little human help to keep them on course. When systems need an upgrade or update, or occasional steering, there are two ways to do this—hard forking and soft forking.

Forks, Hard Forks and Soft Forks

You could think of a fork like an actual fork, the kind you eat with. Each prong represents a different open-source code modification, but the prongs are designed to work together to assist in the main function.

Sometimes, forks happen by accident when nodes start making copies or if they do not recognize conflicting or unfamiliar information or characteristics. This is what leads to the difference between hard forks and soft forks.

Hard Forks

If a protocol is changed so that the old protocol version is no longer valid, call that a hard fork. This could be problematic, because if the older, now-invalid protocol is still running, it could lead you to scratch your head and say, “what the fork?” It could cause confusion and even possibly a loss of funds, because the old and new protocols running together are butting heads and making mysteries.

An example of a hard-fork problem—with Bitcoin, for instance, a hard fork is a must when making changes and protocol updates to the Blockchain. The new protocol is cool with the changes, but the old protocol becomes a hot mess, not understanding the new activity going on.

Since the old protocol rejects the new changes because it doesn’t recognize them, that causes a traffic jam or worse. The old protocol will claim that the changes and updates are not valid, even if they are. What you then get are two blockchains, one old and one new. As these chains grow, so can your problems.

The hard-fork challenge, then, is to get all the nodes on the old protocol to switch to the new protocol all at once, and at the same time. This sounds easy, but technically it’s easier said than done.

Soft Forks

Unlike a hard fork, a soft fork is totally cool with the new changes and keeps working. The old version accepts the newer version. Harmony! The newer, updated blocks become longer, and it becomes obvious that the older (shorter) blocks are obsolete and unusable. This recognition eliminates confusion over which protocol is now the real deal (it’s the newer, valid one.)

When a soft fork is implemented, there has to be a “majority vote ” on whether to accept it into the established fold. If not, the new soft fork fails, and the rest of the chain simply goes on it with its life with no interruption.

Hard-and-soft forking can cause all kinds of unintended consequences. When members of the Ethereum community rejected a hard-fork change and decided to keep going with the non-forked version of Ethereum, that old-school system was renamed Ethereum Classic.

When Bitcoin hard-forked in order to add more functionality, a portion of the Bitcoin Cash community was left behind and was cut off from the rest of the network.

The Current View of Crypto

Three words—wait and see. And add two words to that—be careful. A recent Bloomberg report claims that a growing number of cryptocurrencies are nearly worthless.

Dead Coins lists 820 digital currencies and initial coin offerings (ICO) as either “deceased” or a “parody.” Coinopsy lists more than 1,000 coins as nearly worthless.

It’s possible that a good number of those failed cryptos were scams, and the authentic, true-quality systems remain in place.

Furthermore, from a perception perspective, Bitcoin and other crypto have recently come under fire for their ability to be involved in illegal transactions, thefts, and scams. That’s just one of the reasons that cryptocurrency is still such a significant risk. Crypto has also been suspected as being a part of an economic bubble that is about to burst.

About SoFi Invest®

Looking to create a financial plan? If your curiosity about cryptocurrency is fueled by your desire to start investing, SoFi financial planners can be a great place to start. Our planners can help you develop some overarching investment goals.

Ready to learn more? Speak with a SoFi financial planner about your investment goals and open an investment account.


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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
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