Types of cryptocurrencies
There are literally thousands of cryptocurrencies with strong potential use cases available to trade in but as a general rule all of them can be classified within six key categories:
Currency Coins
Currency coins are designed to function similarly to fiat money and are used as a store of value or to make payments. They tend to use proof-of-work (PoW) consensus mechanisms, which require significant computing power, and correspondingly higher energy costs, to validate transactions.
On the plus side, this process does provide strong network security, making these coins popular with traders interested in decentralised value transfer or trading price movements without relying on traditional banks. For context, some currency coins are already accepted by various retailers, demonstrating ongoing real-world adoption.
Bitcoin, often referred to as ‘digital gold’ is the best-known currency coin due to its limited supply, though Litecoin has been noted for its relatively faster transaction times and lower fees.
On the risk side, currency coins are vulnerable to price volatility and regulatory scrutiny, especially given the environmental concerns associated with PoW models.
Smart Contract Platforms
Smart contract platforms are not just currencies but can function as platforms for building decentralised applications – known as dApps. Ethereum was the first cryptocurrency to introduce smart contracts, which are self-executing agreements with no need for a middleman.
Since then, Avalanche, Solana and Cardano among others have been launched, in an attempt to provide similar capabilities but with improvements in scalability and speed.
Smart contracts are key to many decentralised finance (DeFi) services, games and NFT marketplaces – including the Metaverse. They allow developers to launch tokens, applications and protocols that operate autonomously, making them essential to the growth of Web3.
If you’re considering trading in a smart contract platform, it’s important to analyse its developer ecosystem, scalability, transaction fees and long-term vision, because platforms with growing user bases and continued development could offer greater trading potential.
Key risks include bugs, hacks and network congestion issues, with each platform’s performance typically tied to adoption and scalability.
Stablecoins
Stablecoins are different to other crypto assets as they are pegged to real-world resources like the US Dollar or gold and are specifically designed to hedge against volatility. For instance, one USD Coin (USDC) is always meant to equal $1. These coins are commonly used to hedge against market swings or transfer value between platforms without converting back to fiat.
Stablecoins come in different types, including directly fiat-collateralised (like USDC), crypto-collateralised (like DAI, which is on the Ethereum blockchain and is also pegged to USD), and algorithmic.
Fiat-backed stablecoins are generally considered the most stable, while algorithmic versions can be viewed as riskier. Stablecoins are also critical to DeFi protocols, serving as liquidity and collateral in trading platforms. Understanding how a specific stablecoin maintains its peg is perhaps the most important consideration.
Perhaps the most important risk with stablecoins is the potential for a peg failure or collateral mismanagement, which can cause a rapid loss in value, especially for algorithmic projects.
Utility Tokens
Utility tokens are designed for a specific use within a blockchain ecosystem. For example, Binance Coin is used to pay trading fees on the Binance exchange, Chainlink provides data to smart contracts and Filecoin is used to pay for decentralised data storage.
In addition, these tokens often grant access to exclusive features or services, with the value of utility tokens closely tied to the demand for the services they provide.
Before trading in a utility token, it’s important to look for strong partnerships, integration with other platforms and a sustainable business model. The more widely used the service, the more potential value the token can have. If usage is low, then it can indicate a problem.
Utility token value is highly dependent on platform usage, if adoption remains weak then token value can erode quickly.
Governance Tokens
Governance tokens give holders voting power over protocol decisions like upgrades, fee structures and treasury allocations. Examples include Uniswap and MakerDAO.
For CFD traders, what matters is understanding that these tokens’ value is closely tied to protocol adoption and governance activity. Strong community engagement and active development can drive price movements, while tokens with weak governance models or low participation may see limited price action.
When trading governance token CFDs, focus on the protocol’s user base, development activity and community sentiment rather than the voting mechanics themselves.
Meme Coins
Meme coins are cryptocurrencies inspired by internet jokes, trends or online communities rather than being based on any specific use case or technological innovation. They usually begin as funny or speculative projects but can sometimes gain traction if they go viral, or their community grows quickly or perhaps through a celebrity endorsement.
The most famous meme coin is inarguably Dogecoin, which was originally created as a crypto parody, though it was swiftly followed by the nearly equally popular Shiba Inu (named after the dog breed and parroted as the ‘Dogecoin killer’).
Despite their unserious origins, both have now established significant trading volumes, with the latter even introducing decentralised exchanges and NFT integrations.
Meme coins are generally seen as extremely high-risk because their value relies primarily on hype or social media sentiment rather than any real fundamentals or potential long-term utility. However, they have historically shown extreme volatility with both significant gains and losses.
Many crypto traders allocate a very small percentage of their trading activity to this segment of the market.