What You Need to Know Before Investing in Cryptocurrency
Surely you have heard about bitcoin or cryptocurrencies, or how good of an investment they can be. But the blockchain world is full of different nuances of coins and tokens as well as projects and coin offerings. Knowing the subtle differences between these terms separate a novice investor from a savvy one. Next, you will learn about some investing terms: types of cryptocurrencies, payments, dApps, security tokens and tokenized securities, but also ICOs and STOs.
The Main Types of Cryptocurrency
Blockchain technology has spanned many types of cryptocurrencies. The first blockchain and cryptocurrency was Bitcoin.
Newer blockchains were then created, which resulted in the birth of altcoins. Most cryptocurrencies that we see today have resulted from forks of Bitcoin and Ethereum. A fork is an update of the underlying code of a cryptocurrency giving the new coin a distinct purpose from its parent coin. Based on these purposes, we can categorize some of the coins and tokens in today’s market.
Payment cryptocurrencies are digital coins that are used to make payments. Such cryptos can be used to purchase goods or services, or they can be converted into fiat currencies via exchanges.
This type of crypto is the most popular in terms of adoptions, as more and more online merchants accept crypto payments for their merchandise.
Popular payment cryptocurrencies are Bitcoin (BTC), Litecoin (LTC), and Bitcoin Cash (BCH).
Privacy coins are cryptos that were designed to allow their users to transact anonymously. These coins have a particular protocol implemented so that only the sender and receiver know how much they transacted. The balance of a wallet that holds the privacy coins is only known by the user.
There are also privacy coins that make it harder for the transactions to be tracked by encrypting user and transaction details, and implementing ring signatures and stealth addresses.
Payment cryptos, however, show how much was transacted in a transfer as well as wallet address balances.
The most known privacy coins are ZCash (ZEC), Monero (XMR), Dash(DASH), Verge (XVG)and PIVX (PIVX).
Utility tokens are tokens that give users access to a product or service on a blockchain platform. They are part of a Blockchain Economy as they are issued by their native platform.
Most of the utility tokens in the crypto space are based on Ethereum’s ERC20 protocol, but there are several other platforms that have launched their own protocols, such as TRC10 and TRC20.
Golem (GNT), Basic Attention Token (BAT), Civic (CVC), OmiseGo (OMG), and 0x (ZRX) are examples of utility tokens.
Stablecoins are a type of cryptocurrencies that have their value tied to that of a fiat asset which is prone to fewer fluctuations. Another reason why stablecoins were created was to prevent any losses caused by a crash in crypto prices. Stablecoins are pegged to different assets, some are tied to the USD, gold, Euro, etc.
Popular coins are Tether (USDT), USD Coin (USDC), Paxos (PAX), Gemini (GUSD), TrueUSD (TUSD), and Dai (DAI).
Several blockchain platforms focus on other functionalities aside from payments.
These platforms allow the development and deployment of digital assets (tokens) and decentralized applications (dApps), smart contracts, etc.
Cryptocurrencies are, in essence, decentralized protocols where the network is hosted between miners. A dApp (decentralized application) is a decentralized protocol with an interface attached to it which allows users/miners to perform certain functions.
Currently, the most popular platform for dApp development is Ethereum. Its protocol was created specifically to allow developers to create such applications.
Other popular dApp platforms are Ethereum Classic (ETC), EOS (EOS), NEO (NEO), and Tron (TRX).
Security tokens do not have any utility on a certain platform. They represent a share in the company that issued it. They are like stocks that offer partial ownership of a company. Security tokens are usually issued in ICOs by startup companies that are looking to raise money to launch their business.
Tokenized securities represent the price of traditional financial assets such as securities, commodities, or bonds in a digital form.
Similar to other types of tokens, tokenized securities can be purchased by accessing a Tokenized Security Exchange that specializes in offering this type of cryptos. While the market is not yet that developed for this sector, you will find a handful of platforms that offer this service.
ICOs vs. STOs
An ICO, or initial coin offering, are like IPOs but with tokens. ICOs are a way of raising funds for a new company looking to launch a new product or service. Investors purchase the token in hope that the price of the token will increase from its initial price once the underlying project starts gaining traction. They can then exchange the token at a higher value with other tokens or fiat currencies on exchanges.
ICOs are a way of attracting funds and investors, that does not involve strict the regulatory procedures applied to traditional fundraising methods.
STOs (Security Token Offering) are held by established companies that want to get more investors in order to use the funds for their latest goals and developments. STOs issue tokenized securities which entitle their investors to have access to the company’s profits, dividends, and interest rates.
But STOs have different legal requirements compared to ICOs. They have to invest money before the offering and STOs have to always be backed by an asset that has intrinsic monetary value. As STOs are classed as securities, they must be compliant with the exchange commissions and financial regulatory authorities of the country in which they launch their offering.
The blockchain space is very diverse in terms of cryptos, applications, and platforms. Learning all the terms and differences can seem a bit overwhelming at first, but getting to know them is important for an accomplished investor.