Bitcoin may be the top cryptocurrency by notional value, but other types of cryptocurrencies are gaining traction among users and investors. Here's a rundown.
Bitcoin tends to hog the spotlight on the cryptocurrency stage. But the global crypto show features a cast of thousands—more than 4,400 cryptocurrencies were trading in early 2021, according to CoinMarketCap. Ethereum, litecoin, tether, and XRP are just a few of many crypto tokens and coins (often referred to as “altcoins”) changing hands every day, and one cryptocurrency isn’t always like another.
Before diving in to different types of cryptocurrency, let’s start with a basic question: What is cryptocurrency? Cryptocurrencies are computer-based money that can be exchanged for goods and services. They’re secured by cryptography and are often based on so-called distributed-ledger technology, namely blockchain. Unlike “fiat” currencies like the U.S. dollar or the euro, bitcoin is not tied to a single government or banking system, and it’s this “decentralization” that appeals to many crypto aficionados.
Bitcoin and other cryptocurrencies are still relatively new, and the crypto market is evolving rapidly. Investors seeking a better grasp of crypto can start with a few basics of bitcoin and other top cryptocurrencies. They should also understand how cryptocurrencies trade and the risks involved. Here’s a rundown.
Before exploring the topic, it’s important to note that, as of this writing, bitcoin futures are the only cryptocurrency product available to qualified TD Ameritrade clients on the thinkorswim® platform, and not all clients will qualify. Visit the Bitcoin Futures page for more information.
The number of cryptocurrencies and tokens soared in recent years, but bitcoin, launched in 2009 by a person or group operating under the pseudonym Satoshi Nakamoto, still dwarfs most of its counterparts in terms of market capitalization and trading activity.
As of March 2021, bitcoin’s market cap was slightly more than $1 trillion, compared to $197 billion for the number two cryptocurrency, ethereum, according to CoinMarketCap. About $62 billion of bitcoin was changing hands each day, trailing only ethereum’s daily trading volume at about $94 billion (also in March, bitcoin climbed to a record high above $60,000).
Bitcoin is among a “core group” of 20 cryptocurrencies tracked by CoinDesk. The “CoinDesk 20,” which also includes ethereum, litecoin, tether, and XRP, comprises about 99% of the overall crypto market trading volume at eight of the “largest and most trustworthy” exchanges, according to CoinDesk.
The term “cryptocurrency” can be misleading, some market professionals argue, because it doesn’t necessarily capture differences in technology, incentives, and structure among various coins and tokens. “Cryptocurrency” may convey certain broad attributes that define some coins—such as a means of storing value and paying for things—but the term doesn’t always fully reflect the capabilities or uses for other coins or tokens.
Among different types of cryptocurrencies, top categories include the following:
These cryptocurrencies, likely the most familiar of the crypto categories, are used as a means of exchange for goods and services. They’re similar to the dollar and other traditional fiat currencies, in that their price at any given moment reflects the value people attribute to it, but there’s a key difference: Many see transactional cryptocurrencies as a way to eliminate the need for government-issued currency.
Utility cryptocurrencies are designed for a specific task, with the underlying infrastructure providing a means of storage or verification.
For example, ethereum allows users to facilitate transfer of ownership through “smart” contracts, in which a token is attached to and thus verifies legal documents and other agreements. Another utility cryptocurrency, filecoin, creates a decentralized storage network, providing users a new way to store and retrieve data.
These cryptocurrencies are designed for specific applications—to eliminate intermediaries or create markets—and are often built on top of utility cryptocurrencies (some consider ethereum a platform cryptocurrency). Augur, for example, is a decentralized prediction market built on top of ethereum where users can find and place bets on elections or sports outcomes.
Some market professionals break down cryptocurrencies into additional categories, including “privacy” cryptocurrencies, fintech cryptocurrencies, and application-specific “coins.”
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There are several thousand digital or online platforms on which people buy and sell bitcoin and other cryptocurrencies. Top-rated cryptocurrency exchanges, according to CoinMarketCap rankings, include Binance, Coinbase Pro, Kraken, and Bitfinex. On Binance, for example, nearly $25 billion of cryptocurrency was trading per day in March 2021.
To trade on these exchanges, you typically need to set up a “wallet” (similar to an account) where you store your cryptocurrency. Payment options include credit and debit cards, wire transfers, and hard cash, which means you can buy bitcoin with a credit card or through an online payment system, and you can sell bitcoin for cash.
But whichever exchange or method investors may choose for buying and selling crypto, they should proceed with caution. It’s a good idea to know where an exchange is based, how long it’s been around, and what kind of security it has in place.
Unlike stocks, bank accounts, and credit cards, cryptocurrency markets are largely unregulated, and there’s little, if any, safety net for investors if scammers or fraudsters strike. Nothing exists yet to backstop investors like the Federal Deposit Insurance Corporation does for U.S. bank customers.
In recent years, the Securities and Exchange Commission (SEC) has filed numerous cases alleging cryptocurrency or digital-currency-related Ponzi schemes or other forms of fraud, but the SEC does not yet have rules in place specifically addressing cryptocurrencies. SEC leaders have said they consider bitcoin a “store of value” and not a security like stock.
The regulatory landscape could change. But in the meantime, for any investors considering cryptocurrencies, here’s perhaps the primary takeaway: Buyer beware. Before you buy something with cryptocurrency, it’s a good idea to know a seller’s reputation, where the seller is located, and how to contact someone if there’s a problem.
Additionally, cryptocurrency prices can be volatile, and it’s possible to lose the entire value of your investment. If you don’t think you can handle the price swings—financially or emotionally—you may want to steer clear. Investors considering cryptocurrencies would be wise to proceed with caution and study these markets carefully before taking any positions. The buck, whether digital or paper, stops with you.
Virtual currencies like bitcoin experience significant price volatility, and fluctuations in the underlying virtual currency’s value between the time you place a trade for a virtual currency futures contract and the time you attempt to liquidate it will affect the value of your futures contract and the potential profit and losses related to it. Be very cautious and monitor any investment that you make. Like all futures products, speculating in these markets should be considered a high-risk transaction.
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