Cryptocurrency or crypto in simple terms is a digital or virtual currency. While cryptographic encryption ensures safety, the use of distributed networks make them decentralized.
The encryption renders cryptocurrencies nearly impossible to counterfeit and the decentralised control makes it true people’s money.
Additionally, the supply is limited, for e.g., Bitcoins have a max supply of only 21 million. Thus, Cryptocurrencies have a lot of unrealised value and you can benefit from investing in cryptocurrencies.
As the use cases evolve solving real problems their value will increase further.
Central Banks vs Cryptocurrency
Let’s start with the current currency system, i.e., Fiat currency, which is government-issued currencies like USD which are not backed by commodities such as gold.
With Fiat currency, central banks have control over how much currency to be printed and thus control over the economy.
A recent example is during last year only, that is in 2020, around 20 per cent of all US dollars were created with a value of around 3 trillion dollars and pumped in to support the economy stricken by the Coronavirus.
Data published by the Federal Reserve shows that a broad measure of the stock of dollars, known as M2, rose from $15.34 trillion at the start of the year to $18.72 trillion in September 2020.
The increase of $3.38 trillion equates to 18 per cent of the total supply of dollars. It means almost one in five dollars was created in 2020.
Now there is one potential danger that if too much is printed it can result in hyperinflation. Meaning, accelerating inflation in the prices of goods and services starts eroding the real value of the local currency at a rapid pace.
Can Cryptocurrencies Defuse This Risk?
Let’s understand the complete world of money in perspective. As per the 2018 analysis done by “howmuch.net” the complete cryptocurrency market cap, i.e., 233 billion, which is very little as compared to the potential it has.
Now, as of Aug 26, 2021, the market cap as per the latest yahoo finance is 2 trillion, approx. 10X growth from the year 2018.
Types of Cryptocurrencies & Their Uses
Let’s discuss cryptocurrencies in detail and how it’s broadly classified:
Cryptocurrency can be majorly classified into 2 parts based on functionality – Coins and Tokens.
These are the crypto that is built on their own blockchain and intended as a form of currency.
Major Example other than Bitcoin is Ethereum, or Ether (ETH) crypto, based on the Ethereum blockchain.
These coins are popular as Bitcoin or Altcoins (All other coins except bitcoins) which is any blockchain-based cryptocurrency that is not bitcoin.
Ethereum has now found a lot of use cases as a platform too.
There is one more classification based on the digital representation of the currencies and called StableCoins and have 3 groups
- Fiat Centralized: Cytpo backed by fiat currency (govt-issued currency) for example USD, Tether or BUSD
- Crypto-collateralized: Backed by cryptocurrency thus provides a buffer against price fluctuations caused by the underlying collateral. Few such examples are MakerDAO and Havven
- Non-Crypto-collateralized: They rely on smart contracts to buy and sell tokens. Relying on the algorithm generated mechanically to have dynamic supply volume to maintain the token price which is pegged to an asset like fiat currency ( US dollar ) or a real asset like gold.
Tokens are programmable assets, or simply digital assets with value, that live within the blockchain of a given platform. The process they use is tokenization.
This process has been present in the financial services industry since 1970, where cryptography protects client’s confidential information.
Blockchain technology provides more security and flexibility with faster cheaper transactions.
You should not consider Tokens as currencies, but programmable assets created or executed over smart contracts. These contracts establish the ownership of the assets outside the blockchain.
They represent value for real-world items, e.g., Digital Advisement, Basic Authentication Token (BAT) or Decentraland (MANA, a virtual reality platform powered by the Ethereum blockchain that allows users to create, experience, and monetize content and applications.)
Classifying Crypto Tokens
Tokens primarily represent assets (having value) like:
i. Tangible Assets: Gold, Real-estate, or art
ii. In-Tangible Assets: Ownership rights, voting rights
And they are classified as
1. Security Tokens
Embodied as a particular investment like share/stocks in an organization or its voting rights having some digital value
These tokens allow programming with unique characteristics and ownership. The key is to establish ownership rights.
2. Utility Tokens
They represent the access to a given product or services hosted on the blockchain network.
i. Power blockchain consensus mechanism
ii. Operations in blockchain
iii. Granting holder rights to submit and vote on a new deployment
Ethereum Platform is commonly used to launch such Initial Utility Tokens/Coins such as VET, FIL, etc.
3. Currency Tokens
These tokens especially enable spending and trading. These tokens are primarily based on the underlying assets or linked with their distribution mechanism and blockchain network.
4. Fungible Tokens
Identical tokens and can replace one or another on another hand
5. Non-Fungible Tokens
Unique tokens and their transaction histories can be traced down to individual levels. Thus, NFTs may have a lot of use cases in the digital art form or buying/winning a simple tag/tool collectable in online games.
Few examples are Decentraland, Crytokitties, and platforms like Enjin which offers integrated products for NFTs.
These are now very popular, in fact, Decentraland has entered a deal with Coca-Cola to release NFT.
It’s now been quite celebrated in the digital world and Bollywood biggest celebrity Amitabh Bachchan is coming with his own NFT.
Whenever you need to understand a cryptocurrency project, you should find if that is a coin or a token and what is the purpose of the project. The better the use-case the better value it will deliver.