11 Apr Cryptocurrency for Dummies
3 Cryptocurrency Types Every Entrepreneur Must Know About
Since the invention of cryptocurrencies, the buzzword has continued to attract many people’s attention globally. Today, both business owners and investors switch preference to it as an investment opportunity and financial instruments. Besides the increasing importance, many types are popping up as market players and classified depending on its existence. And understanding the distinctions has supreme meaning because you can determine what to invest in from the start. In this article, you will find an in-depth discussion about types of the phenomenon, cryptocurrency.
What is Cryptocurrency?
Although known to many people, the importance of Cryptocurrencies is still a geeky thing not understood by banks, companies, and government. And to understand what it entails, it is necessary to remove every noise around it. That way, it can get reduced to some simple definition, like it is a limited entry market involving a database which nobody can access without meeting specific conditions. You may see this to be ordinary, but the reality is it is the best way to define what a currency is. Money indeed is about having verified entries in a list of accounts, transactions, and balances. The process can be in a bank or in any place where you do cash exchanges.
The name resulted because the process of keeping entries are usually done in decentralized databases. Every detail here is protected using strong cryptography which is where they get built. No individual or trust is involved in securing the investment but only by math. Some of the types include:
One big and better way to distinguish cryptocurrency is to know the differences between coins and tokens. Unlike tokens, the coins have blockchains with influential names including Bitcoin, Ripple, and Ethereum. The category is decentralized with peer-to-peer systems recording every transaction on its digital ledger.
Coins, therefore, make sense and serve as a currency for exchange on its network. For that reason, Bitcoin got named as a digital gold while Ripple mentioned for quick transactions. Investors find it as a source of value, similar to gold, and also enjoy cross-bank transactions facilitated. Besides, you can easily convert USD to coins rather than while exchanging token. That means the worth of tokens is slightly complicated as the release is typically in ICO, Initial Coin Offering.
On the contrary, tokens have no blockchain and the popular platform for creation being the Ethereum. Because of this, the investors use them on decentralized applications, apps. The design of the apps fit the use of smart contracts. Tokens will be categorized under the various SEC regulations following what it represents. And the currencies can be separated into two such as utility or security.
Differences between Utility and Security Tokens
Crypto market continues to grow daily, and the changes make it paramount for investors to know the distinctions. Well, the fact that security tokens are considered as digital securities, SEC sets strict regulations on it than on utility tokens. But many tokens fall under utility tokens category, and so buyers and traders can exchange cryptocurrency without becoming accredited as an investor. That said, a token utility investor gets the opportunity to access services or products. The features involved undoubtedly mean it represents an exclusive or early access, and a discounted price.
So, what makes Security Tokens different? Like other securities, this type of crypto represents part-ownership of any tradable real assets found externally to the blockchain. However because of the regulation by SEC, to participate in these, a trader must become accredited. Through the Howey Test, SEC can determine if a crypto venture is speculative or not. In that way, it is easy to tell whether the investor gets money depending on the works of another third party.
Traders find it a little challenging to invest in security tokens. One reason is that the user is mostly on issuance platforms such as Swarm or Polymath for buying and trading. Unlike what happens with Binance or Coinbase during exchanges when creating an account, the platform users must meet particular requirements. That means with the conditions you can attain the confirmed accredited capitalist status. After that, you get an adapted profile specifying ways and the extent at which you can trade.
c. Stable Coins
The truth is understanding the distinctions between different types of cryptocurrencies is unclear. Because companies or traders access a small security token investment pool, some often attempt to pass the security tokens to get utility tokens. Additionally, this has brought a heated debate about whether the category can also represent currency, as it is with the coins, instead of just being used for accessing a service. And to make things slightly clear, stable coins, often known as stable tokens got invented.
Although new to some people, Stable coins have increasingly become a favorite cryptocurrency type, especially in the Bitcoin market. The reason is that the market pegs it to traditional assets such as fiat or gold. The main advantage of opting for this in the bear sector is that crypto investors have the opportunity to transfer the unstable currencies to stable coins which is a stable asset. That cuts on the need to undergo the two-step process of converting it to USD which also involves transaction fees. Upon the return of the bull market, it is possible to move stable coin to the other forms of volatile currencies at reduced or no cost. Historically, stable coins broke its peg in either direction which highlights a unique feature.
Despite the name, stable coins, the currency is usually a form of tokens. That means, traders do not find them built on the blockchain, but the difference in platforms makes it function like currency. Thankfully, the development of new digital currencies applications makes the cryptocurrencies distinctions appear increasingly unclear. In the end, SEC regulations also become even more undefined.
Do the distinctions in cryptocurrency types matter?
With the increasing numbers of cryptocurrency traders, do you need to care whether you opt for a coin, token, utility token or even security token? Of course, the digital currency world seems new and uncertain so potential investors must understand the value of what is considered. Above all, knowing the effects of market regulations in the present and future means a lot.
The bottom line is, the distinction represents potential divides within the growth of cryptocurrency. The reality is that the innovative applications of crypto are creating headway globally.