More than 21,000 cryptocurrencies are currently available, but only a few dominate the market. Despite the many tokens, they share similar traits while having differences that distinguish them. So, while there is some diversification, it’s less extensive than expected.

Different cryptocurrencies have different purposes and usages, which makes them unique from one another. 

Utility Tokens

Utility tokens are a type of cryptocurrency commonly used in the market. These tokens are designed to complete specific tasks within a network or project. For instance, Ethereum is a utility token that enables users to carry out various operations on the Ethereum blockchain, such as paying gas fees. The price of utility tokens is highly dependent on the success and popularity of the network or project they are associated with. As more people use the network, the demand for these tokens increases, increasing their value. This is why Ethereum, the world’s largest utility token, is the second-largest cryptocurrency globally, just behind Bitcoin.

Security tokens

There are two types of cryptocurrencies, one of which is security tokens, also known as governance tokens. These cryptocurrencies are similar to blockchain ecosystem stocks and offer different ownership rights to users. Most security tokens are associated with DAOs or similar projects where no single entity holds the top position, and everything is decentralized. When you own a governance token of a specific blockchain, network, or project, you also own part of that blockchain. For instance, suppose there are 100 security tokens of a particular blockchain, and you own 10. In that case, you own 10% of the blockchain.

Our share in this particular blockchain is 10%, which means we have been granted voting rights proportional to our share. Each security token represents a voting right on the associated blockchain. This implies that if any voting is related to changes or additions to the blockchain, individuals who own the governance token will be eligible for these voting rights. The value of their vote will depend on the number of tokens they possess.

Stablecoins

Stablecoins are a very popular type of cryptocurrency. They are like fiat currencies but are on the blockchain. These cryptocurrencies always maintain their value, hence the name “stablecoins.” For instance, one stablecoin is usually equal to 1 USD. Stablecoins are like the forex of crypto and are mostly pegged to the USD. Their value is maintained by having an equal amount of USD in reserves as the number of tokens in circulation. Stablecoins are commonly used to make crypto purchases and trading since most cryptocurrency trading pairs have stablecoins as quota currencies. The great thing about stablecoins is that they can operate on different blockchains simultaneously without wrapping them. For example, USDT, which has its original Tether network, can transact on Ethereum, EOS, Bitcoin, and other blockchains.

Meme Tokens

Meme tokens can be classified as utility and security tokens, but they are more commonly known as meme tokens. These are cryptocurrencies created for amusement and mockery without any serious value. However, a couple of exceptions, such as Doge and Shiba Inu, have managed to defy expectations and become some of the most valuable cryptocurrencies available, ranking in the top 20.

Meme tokens are created to poke fun at something. If that something is trending and the token gains slight popularity, people buy these meme tokens, causing their value to increase significantly. However, once the price reaches a certain point, people start selling to make profits, quickly rendering these tokens almost worthless again. These tokens are often used for pump-and-dump schemes.

Wrapped Tokens

Wrapped tokens are clones of the original tokens that share the same value and characteristics. However, they operate on a different blockchain than the original ones. These tokens are usually referred to as “wrapped,” followed by the name of the cryptocurrency that has been wrapped. 

For instance, if you want to make transactions on the Binance chain but want to use Ethereum, you can wrap your Ethereum into Wrapped Ethereum (WETH) and use it to make transactions. This is the only way to make large-scale cross-blockchain transactions while avoiding unoptimized third-party services. 

Wrapped tokens have the same value as the original tokens and can be considered a form of stablecoin. However, instead of being pegged to USD like most stablecoins, they are pegged to other cryptocurrencies.

Which of these tokens is the best type to use or trade with?

It’s important to consider your needs when deciding which token is the best for you. Utility tokens are the way to go if you want to trade with cryptocurrencies and prefer to use larger ones. This is because almost every major cryptocurrency is a utility token.

On the other hand, if you’re interested in blockchain technology and want to have a say in what happens to different blockchains and networks, then governance tokens are the best option. Meanwhile, stablecoins are mostly beneficial for businesses and people who purchase crypto.

It’s important to note that it’s generally advised to focus on more than one crypto token, as each has unique uses. However, diversifying your assets can be difficult since these tokens share many similarities. The only way to do so is to deal with multiple types of cryptocurrencies.

FAQs on different types of cryptocurrencies

What is the most common type of cryptocurrency?

Utility tokens are the most commonly used cryptocurrency. Most blockchain and network systems require utility tokens to perform specific functions, so they are the most frequently used and created type of cryptocurrency. Examples of utility tokens include Ethereum, Solana, and BNB. Each of these tokens is capable of performing different tasks.

Is Bitcoin a utility token?

Bitcoin is not a utility token but rather a payment coin. It cannot be categorized as a utility token as it does not have a specific purpose other than to challenge traditional banking systems and fiat currencies. Being the first cryptocurrency created, Bitcoin was not initially defined for any particular purpose. It is important to note that Bitcoin is not a token but a coin.