LIMITED TIME OFFER: Get a $500 cash bonus with a personal loan.
Offer ends 9/30/21. Not available to OH residents. Bonus deposited into SoFi Money. See terms

Understanding The Different Types of Cryptocurrency

September 17, 2021 · 10 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Understanding The Different Types of Cryptocurrency

When Bitcoin launched in 2009, it didn’t have much — or any — competition in the newly minted realm of digital currency. 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.

Today there are thousands of different types of cryptocurrency, and while each is designed to provide some new feature or function, most are founded on similar principles to those that established bitcoin:

•  Cryptocurrencies are not issued, regulated, or backed by a central authority like a bank.

•  They are created using a distributed ledger (blockchain) and peer-to-peer review.

•  Bitcoin and other coins are encrypted (secured) with specialized computer code called cryptography.

•  As assets, cryptocurrencies are generally stored in digital wallets, commonly a blockchain wallet, which allows users to manage and trade their coins.

As of September 2021, estimates of the different types of cryptocurrency you can trade range from nearly 6,000 coins to over 10,000, with a total market capitalization of nearly $2 trillion.

What Are the Different Types of Crypto?

Different types of crypto generally fall into one of two categories:

•  Coins, which can include Bitcoin and altcoins (non-Bitcoin cryptocurrencies)

•  Tokens, which are programmable assets that live within the blockchain of a given platform.

Though many people use the words crypto, coins, and tokens interchangeably, it’s important to understand how they differ from one another.

Crypto Coins vs. Tokens

While coins and tokens are considered forms of cryptocurrency, they provide different functions. Coins are built on their own blockchain and they’re intended as a form of currency. Ether (ETH) is the cryptocurrency based on the Ethereum blockchain, for example.

Generally, any blockchain-based cryptocurrency that is not bitcoin is referred to as an altcoin (more on those below).

Tokens are also built on an existing blockchain, but they aren’t considered currency but rather programmable assets that allow for the creation and execution of unique smart contracts. These contracts can establish ownership of assets outside of the blockchain network. Tokens can represent units of value—including real-world items like electricity, money, points, coins, digital assets, and more—and can be sent and received.

For example the BAT, or Basic Attention Token, is built on the Ethereum platform and is used in digital advertising.

What Are Altcoins?

The name “altcoin” began as a shorthand for “alternative to Bitcoin,” and most altcoins were launched to improve upon Bitcoin in some way. Some examples include: Namecoin, Litecoin, Peercoin, Ethereum, and USD Coin.

Like Bitcoin, some cryptocurrencies have a limited supply of coins — which helps create demand and reinforce their perceived value. For example, there is a fixed number of Bitcoins that can be created — 21 million, as decided by the creator(s) of Bitcoin.

Though most altcoins are built on the same basic framework as Bitcoin and share some of its characteristics, each one offers investors something different. Some altcoins use a different process to produce and validate blocks of transactions. Some might offer new features, like smart contracts or an advantage like lower price volatility.

Tokens

Tokens are usually created and given out through an Initial Coin Offering, or ICO, very much like a stock offering. They can be represented as:

•  Value tokens (like bitcoins)

•  Security tokens (which are similar to stocks)

•  Utility tokens (designated for specific uses)

Like American dollars, tokens represent value, but they are not exactly valuable themselves, in the same way a paper dollar’s value may not be $1. But tokens can be used in transactions for other things.

A token differs from a coin in the way it’s constructed within the blockchain of an existing coin like Bitcoin or Ethereum.

Ready to add crypto
to your portfolio?


The 10 Most Common Types of Cryptocurrency

Here’s a list of the 10 biggest cryptocurrencies by market capitalization, according to CoinMarketCap as of 9/14/21. Because there are so many virtual currencies at wildly varying prices, market cap helps to identify those with the highest valuation. Note that the name of the blockchain platform may be different from its digital currency.

1. Bitcoin

Bitcoin was the first cryptocurrency to be created in 2009 by a person (or possibly a group) that goes by the pseudonym Satoshi Nakamoto. As noted above, there are more than 18.8 million Bitcoin tokens in circulation as of September 2021, against a capped limit of 21 million.

Bitcoin was designed to be independent of any government or central bank. Instead it relies on blockchain technology, a decentralized public ledger that contains a digital record of every Bitcoin transaction. Bitcoin established the basic system of cryptography and consensus (i.e., peer-to-peer) verification that is the foundation of most forms of crypto today.

So-called bitcoin miners use powerful computers to verify blocks of transactions and generate more bitcoins — a complex, time-consuming process called proof-of-work (PoW). The transactions are logged permanently on the blockchain — which helps to validate and secure each bitcoin and the network as a whole. Recently, the vast amount of energy required to create Bitcoin has raised concerns about environmental pollution.

2. Ethereum

Like Bitcoin, Ethereum is a blockchain network, but Ethereum was designed as a programmable blockchain, meaning it wasn’t created to support a currency — but to enable the network’s users to create, publish, monetize, and use applications (called “dApps”). Ether (ETH), the native Ethereum currency, was developed as a form of payment on the Ethereum platform.

As of September 2021, Ether was the number two virtual currency, behind Bitcoin. ETH is also generated using a proof-of-work system. But unlike Bitcoin, there is no limit to the number of ETHs that can be created.

Ethereum has helped fuel many initial coin offerings, since many of the ICOs used Ethereum blockchain. Ethereum has also been behind the boom in non-fungible tokens (NFTs) — digital versions of art or collectibles that are linked to a blockchain and made one-of-a-kind.

3. Cardano (ADA)

Cardano bills itself as a third-generation blockchain platform, to cast itself as a next-level player. Cardano relies on proof-of-stake (PoS), meaning that the complicated PoW calculations and high electricity usage required for mining coins like Bitcoin aren’t necessary, potentially making its network more efficient and sustainable.

Its cryptocurrency is called ada, after Ada Lovelace, a 19th-century mathematician.

Cardano’s main applications are in identity management and traceability. The first application can be used to streamline the collection of data from multiple sources. The latter can be used to audit a product’s manufacturing path, and potentially prevent fraud and counterfeit goods.

Cardano is being built in five phases toward achieving its goal of developing the network into a decentralized application (dApp) platform with a multi-asset ledger and verifiable smart contracts. Each phase, or era, in the Cardano roadmap is anchored by its research-based framework and peer-reviewed insights, which have helped establish its scholarly reputation.

4. Binance Coin (BNB)

Binance is one of the world’s biggest cryptocurrency exchanges, and Binance Coin (BNB) is a cryptocurrency token that was created to be used as a medium of exchange on Binance. It was initially built on the Ethereum blockchain, but now lives on Binance’s own blockchain platform.

BNB was created as a utility token in 2017 that allowed traders to get discounts on trading fees on Binance, but now it can also be used for payments, to book travel, for entertainment, online services, and even financial services.

BNB was created with a maximum of 200 million tokens, about half of which were made available to investors during its ICO. Every quarter, Binance buys back and then “burns” or permanently destroys some of the coins it holds to drive demand. In July 2021, Binance completed its 16th burn, of about 1.29 million BNB, roughly equal to $394 million at that time.

5. Tether

Tether was the first cryptocurrency marketed as a “stablecoin” — a breed of crypto known as fiat-collateralized stablecoins. The value of the tether is pegged to a fiat currency — in this case, the U.S. dollar.

Like other stablecoins, the tether is designed to offer stability, transparency, and lower transaction charges to users. Tether is not a speculative investment like some cryptocurrencies; rather it can be used by investors who want to avoid the extreme volatility of the crypto market. As of February 2021, 57% of bitcoin trading was conducted using tethers.

Tether is pegged to the U.S. dollar (which is why the ticker is USDT), and it allegedly maintains a 1:1 value with the dollar, although this claim has come under some scrutiny. According to the company, there is no guarantee provided by Tether, Ltd. for any redemption of tethers; i.e., tethers cannot be exchanged for U.S. dollars.

6. Solana

Solana is a blockchain platform that generates the cryptocurrency known as Sol. One of the more volatile currencies of late, the Sol was trading at about $191.00 on Sept. 10, 2021 — and one year ago it was worth $3.42. What accounts for its growing presence in the land of crypto?

Solana has made strides in decentralized finance (a.k.a. DeFi) and specifically its smart contract technology, which are programs that run on the platform according to preset conditions (like paper contracts, but without the middlemen). Solana was also behind the “Degenerate Ape Academy,” a non-fungible token (NFT) that was launched in August 2021.

7. XRP

XRP was developed by Ripple Labs, Inc. And while some people use the terms XRP and Ripple interchangeably, they are different. Ripple is a global money transfer network used by financial services companies. XRP is the crypto that was designed to work on the Ripple network. You can buy XRP as an investment, as a coin to exchange for other cryptocurrencies, or as a way to finance transactions on Ripple.

Unlike Bitcoin and many other cryptocurrencies, XRP can’t be mined; instead there is a limited number of coins — 100 billion XRP that already exist. Also, XRP doesn’t rely on a complex digital verification process via blockchain the way Bitcoin and others do. The Ripple network employs a unique system for validating transactions in which participating nodes conduct a poll to verify transactions. This makes XRP transactions faster and cheaper than Bitcoin.

8. Dogecoin

Dogecoin (pronounced dohj-coin) is widely known as the first joke cryptocurrency; it was launched in 2013 as a way to poke fun at Bitcoin. Nonetheless, the currency captured people’s attention and a fair amount of investment. In April of 2019, a tweet from Elon Musk indicated he had a positive view of Dogecoin, which further raised Dogecoin’s profile as a legitimate cryptocurrency.

Dogecoin is similar to Bitcoin and Ethereum in that it’s run on a blockchain network using a PoW system. But the number of coins that can be mined are unlimited (versus the 21 million-coin cap on Bitcoin).

Dogecoin is also associated with some headline moments in crypto; investors paid the equivalent of about $30,000 in Dogecoin to help send the Jamaican bobsled team to the Winter Olympics in 2014.

Despite its place as one of the biggest coins by market cap, it trades at one of the lowest prices: about 24 cents, as of Sept. 10, 2021.

9. Polkadot (DOT)

Polkadot was co-founded by Gavin Wood, also a co-founder of Ethereum, to take the capabilities of a blockchain network to another level. The blockchain’s cryptocurrency is called dot.

In fact, Polkadot operates using two blockchains — the main “relay” network, where transactions are permanent, and a parallel network of user-created blockchains, called “parachains.” Parachains can be customized for myriad uses like building apps (they can even support other coins), and they benefit from the security of the main blockchain.

What differentiates Polkadot from other blockchains is its core mission to solve the problem of interoperability by building so-called bridges between blockchains. Polkadot is not the only system trying to act as a translator to help blockchains talk to one another, but since it was established in 2020, it has become one of the bigger networks in a relatively short time.

10. USD (USDC)

USD Coin (USDC) is a stablecoin that runs on the Ethereum blockchain and several others. It is pegged to the U.S. dollar. Meaning that, like the stablecoin tether (USDT) described above, a USDC is worth one U.S. dollar — the guaranteed 1:1 ratio making it a stable form of exchange.

The goal of having a stablecoin like USDC is to make transactions faster and cheaper. While there are questions about whether the tether stablecoin is fully backed by U.S. dollar reserves, some investors believe that USDC is more transparent: its reserves are monitored by the American arm of Grant Thornton, LLC, a global accounting firm. On March 29, 2021, Visa announced the use of USDC to settle transactions on its payment network. As of June 2021 there were 24.1 billion USDC in circulation.

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, by buying it on an exchange like Coinbase (or using your SoFi Invest® account). You can also trade crypto on an exchange for other types of crypto (for example, using tethers to buy bitcoin). Some blogs and media platforms pay their content providers in crypto.

Then there are the miners. Miners usually don’t pay directly for their crypto; they earn it in various ways: e.g., through a painstaking, high-tech process of verifying transactions on a blockchain network.

Sounds sweet, but mining isn’t cheap. It requires powerful, expensive hardware and lots of electricity, and the competition can be fierce.

Hard Forks vs. Soft Forks and Why They Matter

Sometimes, a cryptocurrency — whether Bitcoin or an altcoin — forks. The concept is similar to reaching a literal fork in the road, where you have to pick one direction or the other. But with crypto forking is more complicated (of course), as it involves the nodes or computers that store, maintain, and validate the blockchain. Also, there are hard forks and soft forks.

In simplest terms, a fork creates a divergence in the blockchain protocol. A fork typically happens when the blockchain needs an upgrade or update; there’s evidence of hacking or fraud; or a large enough group of miners decide to change the network’s protocol.

Hard Forks

Developers might implement a hard fork for a variety of reasons, like correcting security risks found in older versions of the software, to reverse transactions, or add new functionality. For example, in September 2021 the Cardano blockchain forked in order to allow more smart-contract capabilities.

Some memorable hard forks include several on the Bitcoin platform that led to the creation of new crypto (e.g. Bitcoin Cash, Bitcoin Gold), and one on the Ethereum platform that addressed a massive crypto heist by reversing the fraudulent transactions on the old blockchain by forking to create a new blockchain.

Typically, a hard fork requires all miners on the platform to agree to the new update, which in effect creates a new branch of the blockchain.

Soft Forks

Soft forks are different from hard forks in that they are “backwards compatible.” This means that the change to the software protocol only makes previously valid transactions invalid. Old nodes will still recognize the new blocks as valid.

Soft forks don’t require any nodes to upgrade to maintain consensus, since all blocks with the new soft forked-in rules also follow the old rules, therefore old clients accept them.

The Takeaway

While Bitcoin launched the crypto craze a little more than a decade ago, today there are thousands of different cryptocurrencies that investors may want to learn about and invest in.

But cryptocurrencies aren’t like other real-world, fiat currencies, like the dollar, euro or yen. Those are tangible currencies, governed by central authorities, and they all operate in the same way as a store of value. Meaning: You can exchange any fiat currency for goods and services. Cryptocurrencies — which can include different types of coins (e.g. stablecoins, utility coins) and tokens (programmable assets) — serve many purposes.

As an investor, the guide to the top 10 different types of cryptocurrency above provides a grounding in what the biggest currencies are, but how and why they differ from each other. This can help you decide how best to invest in crypto. And what better place to start than by opening an account with SoFi Invest®? SoFi Members can manage crypto investments in the SoFi app, with the peace of mind of knowing their crypto is in a secure platform.

Find out how SoFi Invest can help you with your investment goals.


SoFi Invest®
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 . 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.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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.
SOIN19040

All your finances.
All in one app.

SoFi QR code, Download now, scan this with your phone’s camera

All your finances.
All in one app.

App Store rating

SoFi iOS App, Download on the App Store
SoFi Android App, Get it on Google Play

TLS 1.2 Encrypted
Equal Housing Lender