A Newcomer’s Guide to Digital Coins

21 Jul, 2020

If you’re like most people, when you think of digital assets you probably think of Bitcoin. But the truth is, Bitcoin with a big “B” is just one of the thousands of digital coins — which people generally call “bitcoins” — that are now available. Here’s a rundown on the three most popular types of digital assets: bitcoins, stablecoins, and utility tokens.

Bitcoins. Inspired by the 2008 Whitepaper “Bitcoin: A Peer-to-Peer Electronic Cash System” (by the name de plume Satoshi Nakamoto), “bitcoin” is a category of digital assets that can be used to make payments or send others money directly without the need for a third-party, such as a bank. The transactions are “decentralized” and recorded on a digital blockchain which ensures the correct amount of funds sent are delivered.

Bitcoin (BTC), which was launched in 2009 maintains its first-place position in terms of market capitalization despite its widely fluctuating price. Its popularity stems in part from the speculative nature of its value which is based on changing supply and demand. Newcomers to the digital coin market are often cautioned to be aware that when buying Bitcoin, they can lose value as easily as gain it.

Based on the success of Bitcoin, many new coins entered the market and are known as alternative or “altcoins” which offer different features that make them unique, including transaction speed or price. Top altcoins include Ether (ETH), Litecoin (LTC), and EOS.

Stablecoins are a specific type of altcoin that is meant to do what the name says — maintain a stable value much like fiat currencies. A stablecoin’s value can be based on three different methods or protocols. The first pegs the value of the coin to a traditional “fiat” asset such as the U.S. Dollar or gold. The second method uses a “basket” of other cryptocurrencies to determine value. And the third, called “non-collateralized” stablecoins use an algorithmic mechanism to determine value.

Stablecoins have gained popularity as they combine the speed and privacy of a digital transaction with the relative stability of traditional currencies. Tether (USDT) is the most popular stablecoin and maintains about 90% of the supply currently in the market. TrueUSD (TUSD), DAI, and Paxos Standard Token (PAX) are some of the top stablecoins in the market today.

Utility Tokens are digital assets or units of value that are issued by a crypto network to fund the development of its services. They are typically issued during an “ICO” or initial coin offering to raise funds for the network. Utility tokens can later be used to purchase goods or services from that network. The majority of utility tokens are built on the Ethereum and Ripple platforms and include Basic Attention Token (BAT), Chainlink (LINK), Huobi Token (HT), and USD Coin (USDC).

As you can see, each of the three types of digital assets is designed to address specific needs of the market. No matter which digital asset you choose, their common ground lies in the use of a blockchain to verify the transaction. Once you create an order to buy or sell a digital coin, your request is picked up by a “miner” who will solve a complex math problem to verify the transaction. This transaction becomes a block on a “blockchain.” Once recorded the block is immutable, which means that it cannot be changed. And that’s the true value of cryptocurrency — providing people a way to send and receive assets that is private, secure, fast, and fixed — peer-to-peer. Just as Satoshi Nakamoto dreamed, it’s now a reality.

Joyce Pavia Hanson