In this article we are looking to cover the following questions: What is cryptocurrency? Why are there so many coins? Are they all competing?
The questions above are often asked regardless of whether you’re sitting on the sidelines waiting for the right time to invest in bitcoin or whether you’re balls deep in the latest Dogecoin clone. It’s a question that I passively asked before I bought my first bitcoin and it’s also a question that people far smarter than me have asked. Funnily enough, I was watching an episode of UpOnly¹ where a multiyear hodler couldn’t even get his head around why there are so many different cryptocurrencies. So basically, it’s a question that a lot of people are asking.
I think the reason a lot of people ask this question is because it’s hard to get a thorough answer without going down a never ending rabbit hole filled with weird terminology and maximalists² who think their chosen coin has the answer to all of mankind’s problems. For the rest of this article I’m going to try and give an overly simple answer to the above questions.
What is cryptocurrency?
Overly simple answer: A digital dollar. I.e. A means of payment that lives on the internet with no physical form.
A bit more depth: a digital form of payment where cryptography and blockchain technology is used to verify funds have been sent/received. With cryptography a transaction can be validated without the need for a third party (i.e. a bank).
Why are there so many?
Not every coin you can buy on Coinbase is meant to be a “digital dollar”. Some are definitely intended to be used as alternative payment methods to normal fiat currencies (e.g. £ / $ / € ). Others are utility tokens which have very specific use cases, meanwhile some are literally digital dollars (stablecoins i.e. USDT).
Coins can typically be categorised into one of the following groups:
Payment Coins: Coins which simply serve as a means of payment. They typically compete on the speed and security of their own network (each determined to be the fastest and most secure coin to use). e.g $ZEC (Zcash), $XMR (Monero) and $LTC (Litecoin).
Stablecoins: These are coins that are pegged to an existing fiat currency, usually the US Dollar but there are also coins for other fiat currencies including GBP and EUR. These assets enable you to hold fiat money but on the blockchain. This can come in handy for people who are using decentralised crypto exchanges which do not accept fiat money but want to limit their exposure to the volatility of cryptocurrencies. Examples include $USDT (Tether), $TGBP (TrueGBP), $EURS (Euro stablecoin).
Utility Tokens³ : These come in many shapes and sizes. They can be known as Governance tokens, Discount Tokens, Work tokens and more. This can get very technical, so I will provide links below for those keen to find out more. To provide a few simple explanations:
- Governance tokens provide holders with voting rights for a particular project — similar to holding shares of a public company. E.g. $DAO, $1inch, $YFI
- Discount tokens provide holders with discounts for particular products or services. E.g. $UDT, $BNB
Memecoins — mainly clones of established coins like BTC which are completely centred around memes — it might be easy to overlook these as there are a lot of other interesting things happening in the crypto space. However, when a project that was intended to be nothing more than a joke has a market cap of $70 billion it becomes a bit hard to ignore. E.g. $DOGE $SHIB $ELON
NFTs — Non fungible tokens — owning an NFT is essentially giving you sole ownership of a piece of digital art (yep an online picture, video, gif or song). The dynamics of NFTs are very different to other coins/tokens so I will keep this part light and include some further reading.
Are they all competing?
I think if any of the above has been vaguely coherent, it’s pretty obvious that, no, they are not all competing. There are several verticals that exist in the crypto space and within these there is healthy competition for each project3 to emerge as the dominant player. Lastly, if you ever hear the narrative that “XYZ” coin is going to be the next bitcoin it’s simply just not true and more often than not it doesn’t even make sense.
Footnotes:
- https://www.youtube.com/c/UpOnly
- A maximalist in crypto is someone who believes a certain coin is the only one worth holding i.e. A bitcoin maximalists would typically only own bitcoins
- Tokens / Coins / Projects are often used interchangeably but there is a subtle difference between them. According to blockgeek.com a coin is independent of any platform (e.g. $BTC or $ETH) but a token can only exist on top of an existing platform such as $UNI on Ethereum or $SRM on Solana. A project refers to the team that built these coins or tokens.
Further reading:
Detailed breakdown of Utility tokens (specifically work and discount tokens):
https://medium.com/amazix/work-tokens-as-a-breakthrough-in-financial-instrument-design-e7d3ad805ee6
Comprehensive classification of cryptoassets:
Even more comprehensive classification of cryptoassets:
https://messari.io/article/messari-classifications
Simple classification of cryptoassets:
https://www.kraken.com/en-gb/learn/types-of-cryptocurrency
The hype that NFTs have seen this year:
https://www.linkedin.com/pulse/why-2021-year-non-fungible-tokens-nfts-ruben
Difference between coins and tokens:
https://blockgeeks.com/guides/utility-tokens-vs-security-tokens/
